Credit Risk ManagementNCS Credit - October 15, 2014
How do You Reduce Risk?RISK: “a situation involving exposure to danger” and “the possibility of financial loss.” (A definition provided by the omniscient Google.) Risk is inherent in everyday actions and interactions; whether we are driving a car, investing money in the stock market or extending credit to a customer without collateral, we take risks every day. Fortunately, there are ways to reduce these risks – we adhere to traffic laws when we drive, we diversify our accounts when we invest in the market, and we implement credit policies and utilize credit tools when extending credit to our customers. We are proactive not reactive, therefore we are prepared in the event we are “exposed to danger”.
Take Advantage of Expert Risk-Reducing-ResourcesCredit reports are the detailed outline of a company’s financial story; providing the reader, the credit analyst, with a company’s creditworthiness, payment history, financial statements, and even recommendations on whether or not to extend credit. There are many credit reporting agencies including Experian, D&B and Equifax. If extending credit to a company, it is important to consistently and to continually monitor the company’s credit report. According to The Data Warehousing Institute, bad data costs businesses $600 billion annually.
Did You Know? In 1 hour of an 8 hour work day, 88 businesses close their doors for good; it would be unwise to pull a credit report once and to never look again.
A company’s financial status may ebb and flow and it is important to be aware of the fluidity of their finances. Any opportunity to establish a “monitoring” system to alert you of changes to a client’s financial situation should be a welcomed opportunity. Resources like The Distressed Company Alert, BankruptcyWatch, LienFinder™ & NCS Corporate Monitoring provide credit professionals a monitoring solution, alleviating some of the hands-on reviewing.
Did You Know? 53% of construction start-ups are out of business after four years. What causes the failure? “Unbalanced Experience or Lack of Managerial Experience” with a specific pitfall of “Poor credit granting processes”
Mechanics liens speak volumes. Roughly 4% of active construction projects are bogged down in fiscal entanglements. Out of 418,308 nationwide projects, 17,386 mechanics liens were filed in the first quarter of 2014, according to NCS’ LienFinder™. The filing of a mechanics lien is often indicative of payment issues on a project and should be a red flag to anyone extending credit. Mary Cowan, President of NCS, asks “Do you know if your customer has been involved in projects with mechanics lien filings? To know about the filings, before contracting with your customer, means you have the opportunity to mitigate loss. You have the opportunity to save valuable time and money; be proactive not reactive.” Cowan further explains reviewing mechanics lien filings are not just about your customer.
Construction Credit Risk Management
“Go to LienFinder™, search, review and understand all of the project information and each party within the contractual chain. Cross reference the parties within the contractual chain to other projects throughout the country. Before you know it, you will have a comprehensive view of contractors, lenders, and sureties, not to mention the ammunition to make a better credit decision.”
Lastly, Cowan reiterates the convenience of monitoring all parties and projects “Take advantage of project and party monitoring. With services like LienFinder™ and D&B, you can set email alerts to advise you of any project or party activity. If someone files a lien on a project you are working on, wouldn’t you want to know as soon as possible? I would think so!”
Arm Your Credit-Management-ArsenalNCS recommends every credit professional have a Credit-Management-Arsenal at the ready. Credit Management requires an array of accessible resources and considerations. There are many terrific resources available to credit professionals; here are a few for your Credit-Management-Arsenal:
- Credit reports through agencies such as D&B and Experian.
- Financial distress alerts through The Distressed Company Alert and BankruptcyWatch.
- Monitor economic forecasts and subsequent performance through the Architectural Billings Index, Purchasing Managers Index and Credit Manager Index.
- Subscribe to publications from companies like The Credit Research Foundation, McGraw Hill Construction, Reed Construction Data and Engineering News-Record, for news and updates on national construction activity.
- Search and monitor mechanics lien activity for projects and parties nationwide via NCS’ LienFinder™, as well as NCS’ Corporate Monitoring to receive alerts when a company’s name or contact information changes.
A review of mechanics lien filings may uncover significant financial woes. If a company has been party to several mechanics lien filings it should raise concern. Red Flag: are the liens filed around the same time? If there has been an influx of lien filings and your customer’s name appears quite frequently, your customer could be experiencing cash-flow issues. It’s also important to look for releases of mechanics liens which indicate the payment issue has been resolved. Beyond the mechanics lien is foreclosure. If your customer is involved in a lien foreclosure, it is in your best interest to find out why.
- Implement a mechanics lien process. Take proactive control of your receivables, to secure your tomorrow.
Make it standard practice to include security language within your credit application or contract. This will not negatively impact your customer, unless of course, they fail to pay you. Take the time to evaluate the surety and/or lender for projects. “…confirm that the surety is licensed in the jurisdiction of the project and that the bond has been authorized by that surety.” This advice is from The National Association of Surety Bond Producers. Take the time to review ratings on the lending institution as well; understand the likelihood of an institution default or inability to meet credit obligations.
Most importantly, do not limit yourself. There are innumerable resources available. Take the opportunity to review all data, carefully, before you make the decision to extend credit. Dollars and cents are nothing without insight and action.