Management Accounting

Trade Creditors Ease Up on the Deadbeats

In the spirit of maintaining customer relationships when few companies can afford to lose business, trade creditors are keeping some delinquent col...
Sarah JohnsonSeptember 16, 2009

Although companies are seeing more of their customers having a hard time paying their bills these days, many aren’t sending more overdue invoices to collection agencies or lawyers than they usually do. Indeed, only about one-third of companies are quicker about turning over their delinquent accounts to third parties because of the downturn, according to the Credit Research Foundation, which surveyed 1,027 corporate credit-department managers in August and recently shared the results with CFO.

The reason? Companies want to maintain their customer relationships — even with late payers. They want to work with these customers rather than risk ticking them off and possibly losing future business, concludes the nonprofit research group.

At the same time, companies have become tougher on their customers in other ways. More than half have been making changes to agreements with their business partners by shortening terms or cutting discounts, says a report that summarizes the results of the research group’s fourth survey related to the economic crisis. Further, 55% say they have become more conservative in extending credit because of the recession, while 64% have tightened up their collections of accounts receivable.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

At some companies, CFOs are zeroing in on the credit department. Mark Zeffiro, the finance chief at TriMas Corp., a Bloomfield Hills, Michigan-based equipment manufacturer, told CFO that he recently met with the company’s business leaders to go over how they’re dealing with aging receivables. And while the company has been working on “improving its intensity” toward customers, instead of making cold collection calls, it’s prodding customers to talk about the state of their business. “We’re banging out more ‘Is everything OK?’ calls,” says Zeffiro.

Another area that companies have kept in-house when dealing with trade credit is risk management. Some of that comes from necessity. For instance, trade-credit insurer Atradius has pulled back on its own risk threshold, which means it has limited the number of policies that are underwritten. Brett Halsey, president of Atradius Trade Credit Insurance, told CFO his firm now expects more financial data — plus higher premiums and deductibles — from customers. About 80% of his clients have been affected by these changes.

“Business has been difficult in terms of writing a lot of new business, but I would say there’s more of an upside in terms of our pipeline,” says Halsey. Indeed, he says demand for insurance has been up — however, the increase in applications has come from industries such as automotive or construction that are more likely to be too risky for Atradius to take on at the moment.

In the CRF survey, 16% of the credit managers who say they’re mitigating their risk are using credit insurance. Nearly all are demanding cash in advance or at delivery to limit the risk of not getting their money from risky customers. One-third are using irrevocable standby letters of credit as a risk-mitigation tool.

The group’s fourth survey since November 2008 reveals that companies continue to lean on their suppliers for their cash needs, since finding financing help elsewhere is still difficult. In the last two surveys, more than 80% of creditors said their customers were experiencing tighter credit conditions from their banks. And nearly 95% of credit managers have consistently reported this year that they believe their customers are using credit managers for help in dealing with their working capital needs more so than in previous years. “Banks are not supporting the economy in any way to the degree that businesses are helping each other,” notes Terry Callahan, president of the CRF.

Perhaps as a result, the foundation’s most recent survey does show a slight improvement in debtors’ tardiness: 65% of credit managers report they are experiencing a general slowdown in payments, whereas 79% reported that issue in February.