Management Accounting

Is the Credit Tussle Easing?

Trade credit managers are seeing an uptick in business and credit applications. Now the question is whether they will approve them.
Sarah JohnsonAugust 4, 2009

Credit managers see a light at the end of the downturn tunnel. The National Association of Credit Management reports that its monthly index is likely inching toward 50, which would indicate the economy is growing.

The last time the index — based on survey results of about 1,000 trade credit managers questioned during the last 10 days of every month — hit above 50 was last August. It’s now at 48. NACM predicts the index could see that critical mark again as early as next month or September, assuming the trend of its monthly barometer increasing over the past six months continues.

Keep in mind, the monthly measure of credit availability hit its lowest level in its seven-year history just six months ago, when it fell to 39.7.

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From that perspective, credit managers on the front lines of granting corporate credit are seeing firsthand which companies are paying on time and which ones are struggling — and are seeing improvement. One possible reason: they’re dealing with stronger (that is, more creditworthy) companies as the financial crisis continues to weed out the weakest credit links. “The sense is that the weakest companies fell by the wayside as the economy toughened and now all that is left are the survivors,” says Chris Kuehl, NACM’s economic analyst.

NACM bases its calculations on a combination of favorable and unfavorable indicators. For the most part, favorable signs — including sales, new credit applications, and amount of credit extended — have increased since the spring. In addition, credit managers have noted fewer unfavorable measures: since April, they have witnessed fewer disputes, bankruptcies, credit rejections, and accounts moved to collections.

The trade association attributes part of the reason to the fact that business appears to be picking up. For example, credit managers working in the manufacturing sector have seen a higher number of credit applications lately. Still, the true test of whether the economy is improving will be whether those applications get approved.

Indeed, the recession’s weakening of supply chains makes it hard to tell how restrictive companies will be in extending credit when the economy does improve and, in turn, how able they’ll be to get it themselves. In the Institute for Supply Management’s latest monthly report, manufacturers rightly noted the continuing concern over their suppliers’ financial viability. While the sector hasn’t shown growth for the past 18 months, the decline in business has slowed.