It's crunch time Industry experts speak out

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The scene was set. We're in for a rough ride. The importance of trade credit will be evident, but the issues, and how the industry will respond to the needs of the professional credit manager, need to be clearly understood. Whilst no-one should

be talking oneself into recession, that did not mean that it was wrong to plan for a period of uncertainty and volatility that most certainly lies ahead. But does it? Mixed messages from the CBI, with its rather depressed view of the world, is balanced by figures from the British Retail Consortium that suggest we have no need to panic.

On 18 June 2008, a number of senior credit professionals met to discuss the implications of a downturn, what sectors will be most affected and what the credit industry could offer to business and the economy.

The round table forum was organised by the ICM. Consultant Jon Lindsay MICM, previously Country Director of UK and Ireland at Atradius and Managing Director of Coface UK, set the ball rolling, offering a background to the current climate and introducing the format of the discussion, entitled Trade credit strategies for turbulent times. In addition to Jon, the group comprised the following experts:

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Paul Beveridge, Managing Director, KBC Business Capital

Tim Corbett, Managing Director, Fortis Commercial Finance Ltd and Chairman of the Asset Based Finance Association (ABFA)

Mike Feldwick MICM(Grad), Head of Risk Information & Foreign Risk Undertaking, Euler Hermes

Philip King FICM, Director General, Institute of Credit Management

Joe Myers, Head of Commercial Credit, Experian

Simon Rockett, Senior Manager, UK Risk Underwriting, Atradius

Graham Rumney, Chief Operating Officer, R3

Mark Runiewicz, International Partner, Birmingham Financial Solutions Centre, Yorkshire Bank

Stephen Skipwith MICM(Grad), Director of Credit & Commercial Process, TaylorMade adidas Golf

David Standish, Director, KPMG

Martin Williams MICM, Managing Director, Graydon UK

SS: Business has been growing very positively for the last 12 months, and we have been looking at our credit management strategies closely during that period, revising terms and using incentives in preparation for tough trading conditions ahead. We have been working with our sales team to promote better understanding and knowledge capture in terms of the commercial reality of who they are dealing with, so they can make better decisions on the ground, and better understand the challenges we face as a business. We have looked at credit insurance but I have to admit to being a credit insurance sceptic. We had a policy when I arrived but it was quickly cancelled, as were three others on stops on my career path. If you are pragmatic, apply common sense and disciplined credit management, and have high visibility of working capital, I don't see the need. If I am to work with credit insurers or finance providers, I want to see a much closer partnership. I want to know that if there is more openness and if I can evidence best practice, then that is going to be reflected in better rates.

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JL: Within the industry, however, pressure on rates is enormous, and providers need to be make savings in other ways by being more efficient. This impacts on relationships and makes long-term relationships in particular more difficult. Are you saying that if they had a more customised approach then you would be prepared to pay for it?

SS: Yes I would, because ultimately it will impact on our bottom line. My perception of credit insurers would change if I could see them in my office, working with me, discussing future strategies, building long-term relationships, and developing further value-added services.

PK: Many credit managers like credit insurance because it gives them something to hide behind. They don't want to worry about 'risk' if they can give that to somebody else to worry about. What surprises me at the moment is how many companies are in denial. They seem to be saying that things are fine. Then when you challenge them about the economic slowdown, rising insolvencies etc, only then do they concede that yes, perhaps things are a little tougher at the moment!

MF: Certainly many companies are in denial, and certainly conditions are getting tougher. I think that is generally accepted. It is a tough time also to sell credit insurance. We like uncertainty. Professional credit managers use credit insurance for that very reason, to cover the unexpected, and reduce the risk of uncertainty in their business. I think we do take customer relationships seriously, working with our customers through the good times and the bad. We think we do work hard to understand their issues, using our network of 10 risk offices to get closer to the risk. There is a big issue around information though. Most credit managers who do look at credit information are assessing data that is essentially historic. That may be fine in benign conditions, but not today. They need to have current, up to date data that can only be obtained by actually going out there and getting it from the risk themselves.

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SS: But I do have current data. How can I use that data? How can I know that if I share that data with my provider, it will be to my advantage in the support I receive?

MF: It's not just about the data, it's also about understanding the management of a company, their business plan and essentially what makes them tick.

SR: The fact is that times are tough and premium rates historically have been unrealistic. Managing risk in today's environment can be very high maintenance. It is not just a case of waiting for accounts to be filed at Companies House but actually getting current management information and looking at the structure of the balance sheets to assess whether the company will survive. The price needs to match the service expectation, and especially the relationship expectation.

TC: The lesson is that if you focus on pricing, you lose sight of the relationship. The trouble is that you can find yourself cutting margins to the bone in order to compete and still end up with a difficult client who you actually don't want!

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MW: Better intelligence means better credit decisions, and there has been a notable degradation in the quality of information filed at Companies House - information that some people rely on but where the reliability of that data has to be in doubt. My point is, do credit managers recognise just how poor the information is?

GR: That's an interesting point. Knowledge and Intelligence are not the same thing. I would suggest today, for example, that banks have more information but less wisdom. Relationships with your customers are most important. If you understand them, and what they do, then that helps you understand the information feeds that you are getting. If we do have a downturn, how do we avoid the banks repeating their knee-jerk reaction? They have targets to meet. They have to reduce exposure. They will go for the easy hits. We have to understand the agendas of the foot soldiers. They are not going to tackle the tougher nuts when their jobs are at risk. We need to recognise that fact. We also need to turn off the surplus information that distorts or delays decision-making.

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PB: It is the quality of the information, and the quality of management, that will characterise the extent of this downturn. As a lender, we are looking for both: decent information and strong management. Banks will look for high returns on capital businesses and those that you can work with that have quality assets and quality cash flow.

TC: The ability to extract data direct from the client, even down to a granular level, gives you a real picture of the quality of the asset you are lending against.

MR: I think we can segment the market too. I think it will be the lower end of the SME sector that will struggle the most. Banks have had it easy in the past. Many banks preferred to lend against property, and with the property values falling some are now having problems. Asset-based lending is the way forward.

SR: But finance providers, banks especially, will consider the withdrawal of facilities when the time is right for them, we have to understand that and sometimes factor that into any decision making process.

MR: Some corporates are also to blame. When we're looking to lend, we want to see a healthy profit to support the business, but businesses are often advised to show only a modest profit and avoid higher taxes. This doesn't help.

MW: Advisers and intermediaries can be a problem. Many SMEs won't have a credit management professional and so have to rely on the advice given by their accountants.

DS: Every one of you around this table has the ability to push a company into insolvency. That is the reality. So when any one of you is involved with a client, it means you end up guessing and even pre-guessing what the other stakeholders are thinking. You may be comfortable with your own position, but cannot help being fixated with how others are calling it. You end up in a kind of paranoia.

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JM: So how does a company look good to the outside world? What advice can we give them? I think it is to get the small things right. Understand, for example, that even such simple things as a listing on Yell or Thomson is something that will be shown up in a check.

DS: We find our role increasing becoming more advisory. It's not just about insolvency, we now act as a ringmaster, trying to manage the expectations of all of the various stakeholders in stressed and distressed businesses.

GR: The point about the quality of management made earlier is a good one. There is no impetus within government to 'test' a director's fitness to run a business. Many simply do not have the competencies that they need.

PK: Some don't even have the basics. You can talk to them about invoicing on delivery and you can see a light come on! They see credit management as incidental. Administrative.

GR: How is best practice recycled so that businesses can learn from the lessons of the past?

MW: There is certainly a massive educational need. I believe there are something like four million businesses and only 100,000 use credit information. That means the rest carry out their business without ever taking out references on a new client. We've started to run courses around this issue and they are proving very popular.

SR: Some companies have little or nothing in the way of strategy other than one based around increasing turnover. They think all they need to do is sell and the rest will follow.

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DS: Time and time again I see examples of what you would call "sloppy credit management". For example at one business I worked with they invoiced a customer, for several months, and were paid notwithstanding that the actual entity they were invoicing, did not exist! To make matters worse all of the set-up documentation was correct but this was undone by careless keying when the account was actually activated.

SS: The industry needs to work with credit managers to help get the basics right. It doesn't have to be complicated, but you do need to get the messages out to the SMEs.

TC: What's the average lifespan of an SME?

GR: It was three years - but that's in a benign environment.

TC: If you are setting up a new business you must get your housekeeping right.

PB: You need to invoice promptly, start collecting early, and identify overdues more quickly.

MF: That's one of the reasons businesses credit insure, because it brings greater discipline to their credit management.

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PB: It's much the same with us. It makes them focus on the stock that we are lending against. It makes them realise they can release cash by selling slow moving stock, for example, and maximise their assets.

DS: But it can mean, once again, credit managers simply shifting the responsibility on to credit insurers or asset-based lenders rather than taking the responsibility themselves.

TC: Then you look at other products that are better suited to them, for example outsourcing the management of their ledger.

GR: There is a perception that Others' will give them the early warning they need, when in fact they should have their eyes firmly fixed on the warning dials themselves, and continually check that those dials are working.

JL: What are the warning signs, the indicators of future problems?

MR: The killer is lack of cash. The problems are things like overdrafts that cover a multitude of things without being linked to stock or other assets. Therefore companies should look to use trade and invoice finance to support their financing needs.

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GR: Businesses must understand their creditors and the issues and concerns they face upstream, as it were. A good business, a healthy business, will have a healthy order book today, but also a healthy forward order book.

SS: Filed statutory accounts are virtually useless. Footfall, in our industry, is an important indicator of success, but as I asked earlier, how do I communicate this to you if you are only interested in looking at my balance sheet?

MW: Stephen is right. If you are a good credit manager, what's the incentive to share additional 'soft' data if you end up being treated no differently than the rest?

GR: But you can look at it another way and argue where is my payback? How do I know I can trust the management to be good stewards of my money?

DS: The thing is we can collect all of this soft data but what use is it? If you take the dot com boom, everyone was trying to shoehorn in the usual financial metrics to make decisions without any understanding of whether they were actually dealing with a sound business or not.

NF: The provision of soft information is at least an indicator of the quality of management.

JL: Are companies concerned about handing over data? That the credit insurer, for example, might pull cover as a result? Do they have a right to be scared?

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PK: I'm not convinced. I think that sharing data does allow the credit insurer to make a more informed decision, but that decision will be to its own advantage, not to the advantage of the policyholder.

SR: Unfortunately it is true that some small companies fear the worst and are afraid to supply information as they think that it gives us the ammunition to pull cover.

MR: These small businesses also need quick decisions and that's not always possible.

GR: They need to be encouraged, therefore, to understand what information they need to provide in order to get to a 'yes' as quickly as possible. They also need to understand that within a bank, for example, they need certain information in order to achieve the next level of sanction.

PK: Can we come back to the question about what support you are going to provide in the future, or are you just going to make easy decisions?

TC: I do think we should start with the fact that not every business has a god-given right to exist. We are not obliged to help them.

SS: True.

SR: We also haven't touched upon one of the major issues of the moment - the way that certain corporates are looking at blanket extensions in their credit terms, sometimes just writing to suppliers and telling them that's how it's going to be.

SS: This is where we need to take a stand. If we received such a letter we would certainly fight against it.

SR: Smaller suppliers will be the first to suffer and fail.

MF: That's true because on their own they are not strong enough, but if this happened to one of our policyholders than we would approach the customer on their behalf and leverage our strength. Those supplier that aren't credit insured, however, would have to comply.

MR: But what if they don't?

PK: If I had agreed finance or an agreed limit based on certain agreed criteria, and then a customer wanted to change my existing terms, I would certainly expect my credit insurer or lender to support me, especially if my business model was such that it meant having to renegotiate terms with my supply chain.

TC: I think most would stay with you in the short term ...

DS: It could get a little bit like pass the parcel with a hand grenade...

TC: But then businesses should not be focused around one major debtor...

SS: Yes, and sometimes if you refuse to agree to new terms with that major customer you might end up being more profitable as a result!

JM: We talk about aged data and how it is increasingly less important. What about payment performance data? I think it is very important to see who is a good payer and who isn't.

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MW: I agree and the models are changing. Using up-to-date trade payment data to supplement balance sheet data is the way that many information providers are trying to add value and differentiate their services. Others just hand out Companies House data with an attached credit score.

MF: We use payment data to detect patterns. If you have 50,000 businesses all obliged to report on payment issues they encounter, then it helps in identifying businesses at risk. The trouble is that companies fail so quickly these days that a company's payment record may be impeccable right up to the point at which it fails.

SS: I think the corporate world needs to be better at sharing data more widely; I think payment data would be particularly useful.

MW: The only difficulty with that is how does an information provider, for example, maintain its competitive advantage?

DS: Picking up on Mike's point, companies are failing so quickly, often because they are able to hide that there is a problem right up until the end. Take a print business for example that might be struggling. He needs cash to pay his suppliers so he looks for a "soft target" which his other stakeholders will not pick-up upon. He has an asset finance agreement on his printing press. He negotiates (or maybe just takes!) a moratorium from the asset financier for a couple of months and uses that cash to pay his suppliers. He will never appear on your radar as a risk until he has exhausted all of his goodwill. He'll fail, and yet you've not even missed a heartbeat.

PK: Some businesses still buy things on credit cards to get them over a hurdle ...

GR: Traditional lenders don't know what they don't know, if you see what I mean. The fact is that the company, and the information they received about that company, probably never was right. There is no breadth of vision.

PB: You can't stop people defrauding you but you can spot it happening more quickly.

PK: Back to the indicators ...

SS: If you have payment data, footfall data, and balance sheet data and put them all together, then at least you will get close. What I want to know is that if a company is under pressure, but has an order book on the rise, will the credit insurer pull cover.

MF: Not when we need to be looking forward, not basing a decision on accounts that might be two years old ...

SR: But there are only so many businesses you can do this with.

PB: That's very true. Sometimes though you can look at a business, its order book, its business plan, its assets, and understand that it might get worse before it gets better. Where they are going rather than where they have been is more important.

MR: Is liquidity being taken out of the market? It seems to me that it is and the cash isn't being put back.

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JL: Do you think it will remain tight?

MR: I think receivables and trade finance will be the way forward. Companies can look to invoice discounting on the one front or trade finance on the other if the mainstream banks aren't interested.

GR: Lending against future cash flow/profitability has to be the best way. Lenders should have to really understand the business, otherwise it's just lazy banking. Banks are sucking money out of the market; the question is, who is going to fill the void?

PK: There will be more shocks to come and I don't think it will just be amongst SMEs. Any businesses working in the construction industry or those that are propertyrelated such as estate agents must be under the greatest pressure.

MF: Other countries are already suffering -the USA, Ireland, Spain ...

SR: Retail is also very difficult, especially furniture, white goods and electricals. When you consider the construction sector, the troubles extend right the way down the supply chain into the fabricators, the glaziers etc

MF: But there are still good risks in poor sectors, and bad risks in healthy ones.

GR: How long before the transport industry is hit?

DS: Pubs, cubs and restaurants are also feeling the pinch.

PB: That's all Steve McLaren's fault!

DS: We're not as flat-out as you would expect us to be; given the picture we are all painting. Meanwhile my bank contacts are telling me they are being run ragged. Maybe it's the quiet before the storm, and there is a volume of cases that are backing up.

GR: If a company is half decent then it needs two things to survive: time and money. Trouble is, the banks don't have either

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SR: Some of the High Street names are supported by major institutions with deep pockets. Footfall is an interesting measure, but increased footfall doesn't always mean increased profit. It could also be a sign of a quick dash for cash to shift stock.

MF: If we're honest perhaps we had been expecting more claims. Even though the volumes and values have increased in the last two months, that's starting from a very low base.

GR: The High Street must be vulnerable as consumers' buying habits are changing. They are now far less concerned about buying online. It was always a threat, and now perhaps moreso. What other vulnerabilities should we be thinking about?

SR: You mention pubs and clubs. Actually many of them are property portfolios that just happen to sell beer and crisps. With property portfolio values decreasing this is an area that needs to be monitored.

MF: In the last downturn, we noticed that banks were quick to pass on debts and leave somebody else to do the dirty deed and avoid reputational risk. I haven't heard anyone yet say that the downturn will be short, and I am still surprised some companies are in denial.

GR: The reality is that there are two crunches: the credit crunch and the oil crunch. It's not just the one big wave that's coming along to hit us.

DS: The whole shooting match has changed. The price of a barrel of oil hits new highs on almost a weekly basis at present and commentators are not predicting a let-up. So we talk about sectors under threat, but almost everything has to be transported, accordingly every sector will be impacted in some way...

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PB: So things are fine as long as we don't need to drive or eat?

JL: So before we plunge into suggesting that we are all doomed, we need to advise prudence, to batten down the hatches, and to remind everyone that cash is king. Whilst recognising that not all businesses will survive, what can we or should we be doing to ensure that those that should survive, do?

MR: We need to be looking at the stock, order book and the buyers, not just the balance sheet. Then we need to ask the question: 'could they perform if we took the financial risk away?'

TC: Companies should also look to leveraging the strength of their balance sheet.

PK: Stephen said at the outset that he wanted partnerships with providers. It seems to me that insurers and finance providers need to be taking a holistic approach, where each party needs to clearly understand what is driving the other party's strategies.

TC: That makes it more vital that trade finance will have to pick up the lack of finance ...

MF: But we should not forget why we give credit terms in the first place. It's to allow businesses time to convert goods into cash. Move away too far from that simple premise and you're in trouble.

PK: So what are the key messages to come from today?

MF: Know your customers, moreso than ever.

JM: Get your house in order. If the reference agencies know about you, and if you file your accounts on time, it will look good when that information is passed on.

SR: Co-operate by giving accurate management figures and projections of future business, and have that information readily available.

GR: Make it easier for insurers and finance providers to say 'yes', even down to making sure you present your case in the right way. Make sure what you think you know about a business is actually accurate.

MR: Match finance to the asset.

MW: Get the message out to SMEs about the range of information, products and services available to help them.

PK: Keep an eye on your profit margins. There's no point in agreeing to extended terms if you're not making any money out of it!

AUTHOR_AFFILIATION

Next month, Jon Lindsay reflects on the findings of the forum, considering the key signals that credit professionals should look out for in these difficult market conditions, and how good credit management practice can be supported by the trade credit industry.