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Credit Trends in 2012: A year for more

March 9, 2012

by Gen Merritt-Parikh

Predicting the trends for tomorrow is not always as easy as it may appear. Today, we live in an environment where companies are working on predictive models for how we shop, what we buy, where we buy, how businesses can gain a marketing advantage, and of course which companies will prevail where others may fail. Historical patterns can drive these trends. Further, when evaluating debtor credit, these trends can be helpful. Staying on top of the current data and statistics still remains essential though.

I would equate this to the underwriting versus the ongoing credit monitoring process. They are both necessary to appropriately set and manage credit risk and exposure. Debtor credit begins on the front end but never ends. Successfully reviewing the risks up front is part of a factor’s business model, even more so in today’s economic environment. As Tolbert Marks, owner of Dallas based Landry Marks Partners, LP, noted, “This is no different than any other business cycle experienced – good or bad. I believe that diversification and diligent underwriting can overcome any of the conditions that exist today.”

As we discussed last year, staying on top of debtor credit more frequently is necessary. The days of evaluating debtor credit are no longer limited to an annual or semi-annual review. Many factors are and continue to identify new methods to receive and review data almost instantly. Factoring companies are looking to broaden their available data resources and credit tools. They are not just relying on one credit reporting resource, or even one type of credit resource. For example, we are looking at credit reports from multiple credit reporting agencies (i.e., Ansonia, Cortera, Dunn & Bradstreet, Experian, and Smyyth just to name a few) in addition to credit insurance recommendations and credit rating agency briefings. More credit tools equates to more data availability.

This is one of the reasons more and more commercial finance companies are also reporting their own data to credit providers. These credit reporting companies will provide email updates on customer credits and offer discounted costs for those factors who report their own information. It also adds value to understand where the actual data stems from when reviewing credit reports. Some credit companies allow debtors to self report credit and trade information. Others do not. In a time when we are all looking to gain access to more data while also looking to reduce our costs, understanding the reporting and gaining access to more information more often can be invaluable.

Factors have also been seeking new ways to create trend models, not just for clients but also for debtors. How are debtors paying now compared to how they historically paid, are we seeing changes in their payment patterns, are they requiring longer payment terms, etc.?

Gaining access to more resources and getting this data faster, especially in today’s technology-driven environment, will continue to help credit departments better manage their portfolios. And, fully understanding the data is critical. These trends will continue in 2012. More tools. More data. More monitoring. More of the time.

Finding more efficient ways to review debtor credit and predict trends seems to be becoming the norm, as many factors and lenders continue to streamline their administrative functions to reduce costs as price compression occurs within the marketplace.

What else have we been seeing and what do we expect to see in the next year? Well, in my discussions with other factors out there, we all have seen a general slowdown in payments over the past year. Mr. Marks shared these remarks, “We were fortunate during 2011 that we did not have to deal with any significant debtor bankruptcies. The challenge we did experience, however, was a general, across the board, slowdown in payments. We spent more time chasing payments than any year I can recall. From a risk management perspective, a slow paying debtor does not always indicate a credit problem, but it can, and often does, alter the yield on a factoring relationship and it almost always increases the factor’s capital needs. We dealt with both of these issues last year.”

Stewart Chesters, Managing Member and COO of Louisiana based Republic Business Credit, also saw a slowdown in debtor payments over the past year but did note that the last few months of 2011 remained steady. One of the challenges they faced, as many of us, was evaluating the outcome for certain household names such as American Airlines, Hostess, and the continuing review and determination on Sears. As credit became more rigid and scarce for these types of credits, more vigilance was needed in evaluating the overall risk associated with the debtors and the clients. Chesters went on to say, “For each of these [situations], we saw the usual facilities with high concentrations being presented… Catching these debtor credits at underwriting and protecting our portfolio has been the key.”

As we have all seen more of these concentrations within our portfolios overall or within individual debtors for a particular client, this has prompted an increase in participations as well as credit insurance requests or reliance. Sometimes, this information from the credit insurance company is utilized just to help evaluate the credit being extended. However, when these insurance companies hit capacity levels for certain debtors, there are still puts and other credit guarantees that can be purchased from third parties to help mitigate credit or concentration exposure.

Yet, the economy is expected to improve. With this slight recovery, many believe credit demand is sure to increase as well, making monitoring just as important if not more for this next year. Rob Flowers, Partner at New York based Atalaya Capital Management, LP, noted this same trend stating, “… Overall, credit quality has held although credit demand has been muted. We believe debtor credit will be relatively stable, but we would not be surprised to see credit demand pickup to the extent that the economy becomes more robust. Businesses have mostly gone through the deleveraging process. Once the economy and sales pickup, loan demand should follow.”

As noted above, though the economy is expected to improve, many feel that it will be at a gradual pace and not much better than 2011. However, even with this minor improvement, many also believe that the payment patterns will not reduce back to prior levels. Debtors will continue to pay more slowly than years’ past, as they look to utilize their own capital more efficiently. As Chesters said (and I liked the analogy), “The psyche of ‘cash is king’ and credit lines being protected like a hoard of Mayan treasure will not recede quickly…”

So, what are the takeaways for what we should expect to see for 2012?

Concentrations are still a big deal.
More tools and resources will be critical to stay on top of debtor credit management.
We need to review credit more often and using technology can help.
We are all looking for more ways to improve our capital positions, reduce costs and get more ‘bang for our buck’ essentially – factors and debtors alike.
The slowdown in debtor payments we saw in 2011 is not likely to reverse as the economy only somewhat improves in 2012.

We are all trying to do more with a variety tools and resources but for less money, all in an effort to reduce risk while maximizing revenue.

Of course, not many of us can truly predict where we will be or what we will see. Uncertainty still exists which is one of the causes for the slower recovery. Part of this may be political since it is an election year as well. In any case, predicting trends for the next year is much like evaluating credit itself. It is based on reviewing our own historical data and trends and trying to stay on top of new information as it arises.

Welcome to 2012. The year for more.

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How to turn fuming customers into lifelong fans

January 25, 2012

Posted at 09:57 AM ET, 01/19/2012

By J.D. Harrison

What the —-!? We placed our order six —- weeks ago and it didn’t arrive until —- today! On top of that, you sent us the wrong —- thing! How do you sleep at night!? —-!!!

One expert says small business owners are the worst at handling conversations with irate customers, whether they take place on the phone, in person or online. (Michael Probst – AP) Not many moments are as miserable for business owners as those spent on the phone with a furious customer. Head buried in one hand, the other hand holding the receiver several inches away from your ear – there’s really nothing left to do except endure the wrath and shake it off later.

Not so fast, according to one customer service expert. On the contrary, when handled wisely, those interactions can actually turn fuming critics into loyal customers.

“Even something as simple as acknowledging the problem and admitting your company is at fault, that might be enough to give your customer a heart attack right there,” said John Tschohl, a customer service consultant and educator for more than three decades and author of a handful of best-selling books on the subject. “Customers don’t hear that sort of admission very often. Whether it’s on the phone, in person or online, you can quickly turn an irate person into an advocate for your business.”

Small business owners are “the worst offenders” when it comes to mishandling customer service problems, he said, namely because they pinch pennies when it comes to training employees on how to approach disgruntled customers – and as a direct result, many small businesses either stay small or go out of business entirely.

“One of the most important parts of providing great service is teaching people how to handle difficult situations with angry customers,” he said. “Because now matter how good your business is, mistakes happen from time to time.”

So when that angry customer does call, here are Tschohl’s six steps for difusing the situation and gaining a new advocate for your company.

1. Listen carefully: Most business owners and managers don’t actually listen to the customer, as some get lost in “all the screaming and hollering” and others simply ignore the complaints altogether. “Listening doesn’t mean completely shutting up,” Tschohl said. “It means responding with ‘aha’ and ‘okay’ and ‘I understand’ now and then, so they know you are really paying attention.”

2. Apologize, don’t blame: Your goal is to solve the customer’s problems, not enter into a debate over which party is to blame for the situation at hand. “Simply acknowledge that your company made an error and that you regret the inconvenience,” he said. “Most people never apologize because they’re afraid they’re going to lose face or because they don’t believe they were the one at fault. But that’s not the point.”

3. Express empathy: Customers will respond well to signs that you understand and care about how it must feel to be in their shoes. “A line like ‘I can understand how angry you must be that the pizza didn’t come on time, I would be pretty angry too’ can go a long way to calm the customer down and give you a chance to fix the problem,” Tschohl said.

4. Ask specific questions: Before you begin trying to solve the problem, be certain you know exactly what the problem is – the last thing you want to do is spark yet another miscommunication. “Ask the customer to go over everything with you one more time, detail by detail,” he said. “Check at the end to make sure you’ve covered all of their problems so you don’t forget to address anything they’ve mentioned.”

5. Propose alternatives: If possible, give the customer several choices when proposing solutions, allowing them to pick which option would best remedy their particular grievances. “Nearly all companies have things of high value and low cost that they can give away to the customer to make up for mistakes,” Tschohl said. “But companies don’t always take that option, and they rarely give their employees the power to offer that sort of compensation.”

6. Solve the problem quickly: Once you have come to an agreement with the customer, follow through on your part of the deal quickly and accurately. “Offer them wings right now to make up for their late pizza, or offer them a round of drinks right this second while they wait for their table,” he said. “Make an empowered decision and make it quickly.”

Follow On Small Business and J.D. Harrison .

By J.D. Harrison | 09:57 AM ET, 01/19/2012

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Four tricks — and treats — for small businesses

October 31, 2011

By Abha Bhattarai

Running a successful seasonal business, Lorenzo Caltagirone says, takes a year-round effort. As the owner of Total Fright, a specialty Halloween shop in Georgetown, he says he’s learned to plan ahead for the sudden influx of business in October.

Here are four tips he’s picked up during his six years in business.

Halloween season can bring in big bucks for specialty costume shops, as long as they are well-prepared for the sudden influx of business. (Tim Sloan – Getty Images)

1. Listen to your customers.

“You absolutely have to listen to your customers and know what they’re looking for,” Caltagirone says. “This is the biggest advantage small businesses have over large corporations. As a small business, we can change from one day to the next. We can add inventory, we can improve our service, we can do anything we need to without dealing with red tape and corporate rules. We constantly ask our customers if they’re finding what they’re looking for. Sometimes, they’ll come up to us and say ‘you should carry this costume, or this mask’ — and so we do.”

2. Be prepared.

This is perhaps more true for specialty seasonal shops than it is for any other kind of retailer.

Caltagirone begins leafing through catalogues for next year’s costumes in December. By January, much of the store’s Halloween inventory has already been finalized.

Half of the store’s annual business is conducted in the month of October. And of that, 80 percent of sales take place in the week before Halloween.

“We rely very heavily on Halloween,” Caltigirone says. “We have a lot to lose if we’re not completely prepared. People are last-minute shoppers, and they expect the world of you.You have to be patient — everything that can go wrong, often does.”

3. Be adaptable.

Caltigirone’s shop is called Total Fright during Halloween season. During the rest of the year, it transforms into Total Party.

“We metamorphosize,” he said. “If you step in here today, you wouldn’t even know that we’re a general party store 11 months out of the year. You have to be able to change depending on your needs, your customer’s needs, and you need to be able to make that change fully.”

Before he realized this, Caltigirone says he was maintaining two stores — a Halloween store and another party store. “It was a complete mess,” he says. “A real pain.”

Now that he’s merged the stores, he says he’s been able to better utilize the space, his staff and other company resources.

4. Stay in control.

“You have to maintain order,” Caltigirone says. During Halloween season, Caltigirone only allows about 10 customers into the store at a time. The rest wait in a line that stretches far down the hallway and is manned by a security guard.

“People get into a frenzy,” he says. “It becomes impossible to maintain the store if we allow massive amounts of people to run wild. It ruins the shopping experience, too, when there are so many people in your way that you can’t see the products.”

As an added bonus, he says having control over the number of customers in the store also helps deter shoplifting.

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As disruptions rise, companies must do more to safeguard business continuity

June 7, 2011

by Catherine Bolgar / 8 December 2010

What’s likely to be your biggest obstacle in keeping your company moving? The weather.

Bad weather was the top cause of business disruption in the past year, cited by 53% of the 310 companies from around the world that responded to a survey by the Business Continuity Institute, a Caversham, U.K.-based professional organization for business resilience and risk management.

Fully 83% of respondents said they had some kind of supply-chain disruption in the past year; the average was five disruptions.

“Most organizations had some interruptions last year, and some were reporting an average of more than one a week,” says Lyndon Bird, BCI’s development director. “That would suggest a problem in the supply chain.”

After weather, the next most common reasons for disruption were IT and telecommunications outages, cited by 43% of respondents, and failure by outsourcers to deliver, at 34%.

Over half of the companies said the problems resulted in lost productivity, while 20% said their brand or reputation took a hit from the incidents. That translates to the bottom line: nearly half of the respondents said supply-chain disruptions cost between €10,000 ($13,680) and €500,000 in the past year, and another 10% said the costs exceeded €500,000.

“The fact that 10% of companies say they increased costs as a result of disruption of €500,000 or more has to be a message that it’s worth investing resources in this area,” says Nick Wildgoose, London-based supply-chain product manager for Zurich Financial Services, which sponsored the survey for BCI. It’s difficult to completely assess all the costs related to a disruption — for example, pinpointing the cost of lost sales when a disruption makes a customer go elsewhere — so the survey numbers probably underestimate the extent of the problem, he adds. “It shows that we can’t just say we will carry on. Risk should be in our decision-making process.”

Supply-chain disruptions have been rising as companies have pursued outsourcing, low-cost suppliers and just-in-time and lean manufacturing techniques, BCI’s Mr. Bird says. Half of those surveyed said they use these techniques, and they are more likely to experience disruptions — 83% of those using low-cost countries reported a supply-chain problem. The sectors most likely to use these practices are retail (100% use just-in-time and 83% consolidate suppliers), and manufacturing (73% use just-in-time and lean manufacturing). Those sectors also reported high levels of disruptions: 100% of retailers experienced disruptions, with an average of 10 a year, while 64% of manufacturers had at least one disruption and 45% had between one and five incidents.

Retail and manufacturing have different relationships with suppliers, explains Mr. Bird. Retailers have few critical suppliers; if a store runs out of one brand of beans or gadgets, it will sell another. Customers might be annoyed but are unlikely to refuse to ever come back. On the other hand, the supplier of a store’s refrigeration equipment might be more critical than the suppliers of the foods inside the freezers. “Retailers need to look closely at those suppliers they think are critical,” he says.

In manufacturing, spare parts, tools or factory capacity are viewed as too expensive, Mr. Bird continues. Thus, more so than in other industries, manufacturers are on a high wire, relying on their suppliers as a safety net. Yet, 27% of manufacturing respondents never review business-continuity plans with key suppliers, and 73% haven’t ensured that any such plans would really work. Among all sectors, 15% of respondents never review business-continuity plans with key suppliers and 50% didn’t make sure that any suppliers’ plans actually would work.

Mr. Bird thinks it’s because manufacturers continue to take a traditional IT-focused view of business continuity, in which backing up data is sufficient. Indeed, the financial-services industry is the most focused on business continuity, possibly because of its dependence on information technology, and because its suppliers are more obviously linked to IT, where the business continuity practice was born.

“Many companies miss the point, which is how important the supply chain is to business continuity and to your mission and if they [suppliers] can stop you from doing your mission. It’s not just what they are supplying and at what price,” he says. “You have to say to suppliers, ‘How do you guarantee that the contractual agreement we have will be met in event of an interruption?’”

The move toward lean organizations and lean supply chains has become “slightly infectious,” says Mr. Wildgoose of Zurich. “If your competitors are doing it, you feel like you have to do it. But you have to strike a balance. If you have a disruption through logistical or other issues, the shutdown in production will be costly. There’s been a blind spot to this potential risk.”

And although the weather and natural catastrophes may be unpredictable, he disagrees that it is not possible for companies to look at their critical suppliers in terms of data that show areas susceptible to calamities like floods, hurricanes and earthquakes. “For a chief financial officer or somebody to stand up and say we couldn’t have foreseen this disruption to a critical supplier, I don’t think that’s true if it’s in a place that is prone to volcanic eruptions or hurricanes or the like.”

He points out that business continuity isn’t meant to predict or completely avoid disruptions but to make sure that business keeps running despite them, without scrambling frenetically in a crisis. “Maybe you don’t know that there will be a flood cutting off a key supplier factory in France, but you have a plan for if there’s a strike, and you can use that to continue operations,” he says.

Top executives might not even be aware of all the disruptions that have hit their businesses, because managers maintain silos and may not want to admit their failings, Mr. Wildgoose says. Sometimes the whole company turns a blind eye: 41% of respondents to the survey said their organizations did not record, measure or report on supply-chain disruptions that incurred unexpected costs, hurt revenue or reduced productivity.

The problem with that is that “there is always some kind of lesson to be learned from a disruption,” he says. “The best companies do record their disruptions and try to learn from them.”

Disclaimer: The information on Supply Chain Insurance in this publication was compiled from sources believed to be reliable for informational or educational purposes only. It is not an insurance contract. The insurance policy is the contract that specifically and fully describes coverage. The description of the policy provisions gives a broad overview of coverages and does not revise or amend the policy. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication including any information, methods or suggestions contained herein. Please contact your local Zurich office for details about the relevant products and services in your country.

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Tips for Dealing With Slow-paying Customers

June 1, 2011

By Don Sadler, originally published in the Costco Connection.

According to government statistics, the U.S. economy has been out of recession for nearly two years now. Unfortunately, this recovery is leaving a lot of small businesses behind.

Typically, small businesses lead the way out of recession, noted Jeffrey Leonard, the CEO of the Global Environment Fund in Washington, D.C., in a Washington Monthly article and on a subsequent appearance on The Colbert Report. But this time, that’s not happening, and Leonard believes that one of the main reasons why has to do with small business cash flow.

“Many large companies today have simply announced that as a matter of policy, they will be paying their bills late—sometimes as much as four months late,” Leonard noted in the article. “This in effect forces small businesses to make free loans to big businesses instead of being able to use their working capital.”

Optimize Cash Flow

In this environment, it’s more important than ever that small businesses manage their cash flow as efficiently as possible.

“A critical part of managing any business is optimizing cash flow,” notes John Barrickman, a Costco member and the president of New Horizons Financial Group, a financial services industry consulting group headquartered in East Point, Ga. “Owners should concentrate on boosting cash flow by improving operating efficiency and cash management practices.”

The first step Barrickman recommends to small business owners is to determine the total amount of their uncollected accounts receivable. “This represents a large lake in which huge amounts of cash can be trapped.” Then examine your current processes for managing your cash.

“Can you use bank tools like lockbox, remote capture and electronic payments to process receipts and collect receivables faster?” Barrickman asks. “Banks offer a broad range of treasury management tools that small businesses can use to increase their available cash.”

Also take a close look at the flip side: your accounts payable. Lisa Aldisert, the president of Pharos Alliance Inc., in New York City, a management consulting firm, encourages clients to revamp their payables procedures in order to hold onto cash longer.

“Stretch your payables as long as possible without hurting your vendors, unless you’re offered a discount for prompt payment,” says Aldisert. “Take full advantage of your 30 days to pay if those are the agreed-upon terms. But don’t be late — you want to maintain excellent trade credit.”

If one or two large customers have slowed down their payments, this makes it more important to sharply focus collections efforts on your other customers, Barrickman adds. “Does it make sense to hire a part-time employee to call customers and encourage prompt payment? For that matter, can you justify spending 30 minutes a day calling slow-paying customers?”

While doing business with a large corporation can provide a significant sales boost, Barrickman says owners must assess the overall profitability of these sales in light of the potential impact on cash flow. “You’ve got to make a business decision about whether or not you can afford to carry the receivables.”

Factoring as an Option

One option that many cash-starved small businesses are considering to help ease the cash flow crunch is an alternative financing vehicle known as factoring.

“Factoring is a creative financing solution for businesses that don’t qualify for traditional bank loans but need a financial boost to help manage their cash flow cycle,” says Tracy Eden, a Costco member and the national marketing director for the Commercial Finance Group (CFG), which provides factoring and asset-based lending services to small- and mid-sized businesses in the U.S. and Canada.

With factoring, businesses sell their outstanding accounts receivable to a commercial finance company (or factor) at a discount. “Instead of waiting up to 90 days or longer to get paid, the business receives most of the cash (typically 70-90 percent of the receivable) when the invoice is generated,” says Eden. It receives the balance (less the discount) when the factor collects the invoice.

“The improved cash flow derived from factoring benefits a company’s relationships with vendors, enables additional growth, and helps ease the demands on payroll,” Eden adds.

Don Sadler is a freelance writer based in Atlanta who specializes in topics related to small business and finance. Reach him at don@donsadlerwriter.com.