June 6, 2024

Inflation levels remain above the Federal Reserve’s target rate of 2%. The latest figures show U.S. inflation sitting at 3.36%, but business and consumer sentiment would suggest that prices are much higher.

After falling for much of last year, inflation accelerated again at the start of 2024, reducing the likelihood of early rate cuts. The Fed’s next interest-rate meeting is set for June 11, and the overwhelming consensus of economists is that there will be no rate cuts from the current level of 5.25% to 5.5%.

Why it matters: Interest rates determine the cost of borrowing and the ability of debtors to meet their financial obligations. High interest rates not only impact a debtor’s ability to repay their debts, but also create higher difficulty for collections.

• Debt repayment. High interest rates increase the cost of servicing current debts, which can lead to higher monthly repayments. Because of this, customers or debtors will be strained on meeting their financial dues, which can lead to more delinquencies.
• Sustained inflation. As the global economy still navigates uncertainty, economists expect most financial outlooks to be stretched by sustained higher interest rates.
• Slowing consumer spending. Consumer spending is expected to slow down this year, as many cannot afford to keep up with inflated interest rates and prices paired with increased debt balances.
• Increased scrutiny of collections. As interest rates and inflation weigh on debtors, there will continue to be more pressure on collection functions.
• Overall credit risk. High interest rates can increase the risk of default for both commercial and consumer borrowers. It is important for credit managers to assess the creditworthiness of both new and existing customers in times of economic volatility.

To combat ongoing inflation, the Fed raised interest rates 11 times between March 2022 and July 2023. But even as inflation starts to inch slightly lower, the Federal Open Market Committee (FOMC) said it wants more positive data before cutting rates. Some economists even believe interest rates will not move until March 2025.

What they’re saying: “With higher interest rates and risks in the marketplace, lending has gotten a little tighter,” said NACM Economist Amy Crews Cutts, Ph.D., CBE. “The kind of lending done by credit managers is different in that they are not underwriting a loan but underwriting the ability to do business. Interest rates affect the decision of how much to lend and who to lend to because the cost of financing for the company has gone up, and it means a delay in payment costs you more money.”

For credit managers who have accounts beyond terms, there is likely an interest expense incurred on that customer. For example, the losses from that account are increasing not because you have not collected the money, but because there is no interest being earned on it.

“The marketplace now depends on what your penalties are for going beyond terms,” said Cutts. “It affects the collections in the sense that it may make your decision in a higher interest rate environment to flip a delinquent account over to collections faster than you might otherwise because your cost of funds is higher.”

Cash flow is now as crucial to you as it is to the customers who owe you payments. As you approach the end of a contract with a customer, consider the impact of inflation. Costs may have significantly increased by then. For instance, if costs have risen by 20%, you could end up with zero profit. This situation ultimately affects the credit manager's ability to inform suppliers about delayed payments.

“Many respondents in the Credit Managers’ Index (CMI) said cash flow is a major problem right now,” added Cutts. “A lot of customers are trying to protect their cash and the way they are managing that is by asking for extended terms. Collections in the survey indicates to me that until you lower the hammer on these guys, you're not getting paid.”

Zoom out: From a global perspective, the economy is expected to continue to grow at a modest pace in 2024, with steady GDP growth of 3.1%, according to the OECD. The IMF's World Economic Outlook (WEO) also projected global headline inflation to fall to 5.8% this year.

Fred Dons, global head of structured trade finance at Aria Commodities (Zug, Switzerland), has seen longer payment terms being sought in countries such as Argentina and Turkey. “Where we used to have 30-day terms, 60 to 90 days is now the new average,” Dons said. “If you have short periods of time such as 30 days with high inflation, it's expensive but it's still doable. However, if you're going to go beyond 180 days or even up to 360 days, it will be near impossible to repay.”

Dons recommends keeping terms as short as possible, even for inland exports. “Though the U.S. has inflation under some control right now, other countries such as Egypt and Argentina are still at 200%. If you're shipping within the U.S. on an open account basis, keep it as short as possible, especially if they only produce goods locally.”

The best ways to take precautions and mitigate risk are to keep communication and KYC practices at the forefront with customers. Communicate with them early and often, offer incentives for early payment where you can and try to automate your receivables process.

“Try to find out what the interest rate is and whether the margin is sustainable,” said Dons. “Check upfront with what your actual costs are going to be and do a lot of research if you're doing business with a country, you haven't done business with before.”

The bottom line: Due to ongoing inflation levels above the Federal Reserve's target rate, high interest rates are impacting debt repayment, increasing credit risk and necessitating more careful management of cash flow and customer terms.

AI is a rapidly evolving technology that has the potential to greatly benefit various industries and professionals. However, this article aims to clarify several common misconceptions about the use of AI in B2B credit and related industries.

#1 “AI will replace my job.”

This misconception stems from the widespread fear that AI will replace human jobs, rendering many roles obsolete and leading to significant unemployment. However, this is not the case, as history has shown that innovation such as the move from desktop solutions to client servers or the introduction of Business Process Automation has created new jobs rather than eliminating them. AI is not here to replace jobs, but rather to assist professionals by providing them with data at their fingertips and reducing the time spent on mundane tasks. AI allows them to focus on building relationships with customers and prospects instead of spending hours scouring through financials and current affairs. Check out Collatio® to see how Scry AI does this.

#2 “AI will replace my customer support team.”

While AI technology, such as ChatGPT, can handle many customer inquiries, it can only replace part of the customer support team. Instead, the team becomes the teacher and keeper of these systems, helping to train the AI and jumping into conversations when a human touch is required. The role of customer support personnel will evolve to become liaisons between customers and product teams, helping create new products and structures, but this is not likely to become obsolete.

#3 “AI can single-handedly help me avoid market risk.”

AI is not a magic bullet for avoiding market risk in an investment management-world. Humans distinctly remember what we read in the newspaper or an article from yesterday into today. However, we tend to miss out on the secondary and tertiary related articles while making daily decisions. “Recency bias” has led credit analysts and investment managers to make incomplete or wrong decisions. While AI can help direct attention to relevant articles and summarize information, it cannot make decisions independently. AI can assist in understanding relationships between industries, regulatory bodies, and companies, but more is needed to replace the expertise and intuition of a human analyst. Check out Sentio® to see how Scry AI does this.

#4 “AI can solve my cashflow problems.”

While support engineers can train the AI in situational conversation, AI cannot emulate human emotions, empathy, and fillers like “ums” and “ahs.”  It may be true in movies but not in real life. The so-called “mom and pop shops,” mid-size borrowers rely a lot on their relationships with the credit managers. Therefore, credit managers and analysts are still necessary and cannot be replaced by AI when managing cash flow decisions and building relationships with borrowers.

#5 “Blame AI for its decisions.”

While AI systems can make decisions, the credit analyst and manager are ultimately responsible. AI outcomes are only sometimes tractable, and policies around AI-generated systems are still in flux. Therefore, it is not possible to hide behind the non-existing "iron curtain" of AI.  A human in the mix must make and take responsibility for decisions.

In conclusion, AI has the potential to benefit various industries and professionals greatly. Still, it is essential to understand the limitations and misconceptions surrounding the technology to make it work for one's business. AI is not here to replace jobs or make decisions on its own but rather to assist and enhance the work of human professionals.

There are many other misconceptions, and you can find them in this must-read Amazon Best Seller: "The Fourth Industrial Revolution & 100 Years of AI (1950-2050)": A new book from Dr. Alok Aggarwal, CEO of Scry AI Inc, which provides more information on AI and its potential uses and applications. Scry AI Inc. was founded in 2014 and builds innovative AI-based enterprise applications that enable clients to rethink and automate their data-driven and manually intensive business operations. Scry's families of enterprise apps include Collatio® (for ingesting, extracting, and reconciling unstructured and structured data), Anomalia® (for detecting anomalies and potential fraud), Concentio® (for ingesting and harmonizing IoT data), and Vigilo ® (for predicting operating and marketing risks). Further details can be found @ HERE.

De-escalating customer conflicts is a routine part of the job for trade credit managers.

Why it matters: Understanding and effectively managing customer conflict is vital because it directly influences a business's financial well-being, reputation, and overall trajectory.

To address this challenge, we have compiled a list of proven strategies that credit professionals employ to effectively manage and de-escalate even the most difficult customer scenarios.

#1 Say less, listen more

By listening to your customer, you promote expression and understanding, speeding up the journey to a resolution.

“You can’t script a collection call because you don’t know what’s going to be said to you first,” said Marlene Groh, CCE, ICCE regional credit manager at Carrier Enterprises LLC (Charlotte, NC). “I remind my team to just stay quiet for a bit. It's surprising what people will open up about when there's no pressure to keep a conversation going.”

Customers are sometimes looking for an outlet to vent about their problems. Letting them share their frustrations helps you understand the issues better, which can help solve disputes and make credit decisions later on. Plus, it builds a stronger relationship over time.

#2 Details, details, details

Gathering all available information about the situation streamlines collection calls and aids in dispute resolution. For example, Groh encourages her team to gather details such as check numbers and payment dates to identify potential issues. “If they just say it’s a dispute, ask what they are disputing and why.”

Be sure to take accountability if an issue was created on your end that caused the customer to get upset. “Did we commit to something that we haven’t delivered on?” said Michael Barnidge, CCE, CICP vice president of finance at Quality Bicycle Products (Bloomington, MN). “Are we not honoring what the salesperson decided upon? Sometimes getting a clear understanding of what the issue is opens the door to a different conversation that takes some of the stress off of the customer because it shows that we understand.”

By focusing on the facts rather than emotions, credit professionals can better understand the problem. Having as many facts as possible before jumping on a call will help you remain neutral and level-headed.

“I want to know why they’re upset about what we did on our end because most of the time, we made the right decision, but I want to understand how we made our decision,” said Brendon Misik, CCE, CICP senior manager of AG credit at PCS Admin USA Inc. (Nutrien) (Deerfield, IL). “Since I don’t want to take either side, I just lay out facts, especially when people get emotional.”

#3 Use empathy

Empathy can defuse tension and enhance customer relationships by fostering understanding and shared emotions. By demonstrating empathy, you encourage customers to share their concerns, leading to more effective problem-solving. Amid uncertainty, prioritizing customer empathy in your service fosters understanding, positive experiences and trust.

“Having been on the other side, I can say it is a complete range of emotions stemming from embarrassment and frustration to anger when you are not able to pay on time,” said Nate Yagle, vice president of credit at Premier Companies (Seymour, IN). “Our default is doing what we can to help and retain the customer when possible. We try to figure out a way to work with the customer to find a solution and deescalate the situation before it gets heated.”

#4 Have an escalation system

Implementing an escalation system for customer conflicts, whether directed to the manager or CEO, is essential for effectively resolving issues. “I like to stress making sure my team has the tools and a disposition to effectively diffuse most issues,” said Jake Merriman, credit manager at Masons Supply Company (Ridgefield, WA). “If it gets worse, someone else calls and if it gets worse, I’ll typically step in, especially if the person is upset. But working in credit and collections long enough now it's inevitable to have a customer get angry and at that point I have asked my team to forward the call to me.”

#5 Walk away

Conflicts with customers may escalate to a level where their behavior becomes disrespectful or unreasonable. At that point, it's best to take a break. Allocating time for both parties to cool off, whether it be an hour or a day, helps clear your mind.

“If you have a heated conversation with a customer and it escalates, don’t jump on another call,” said Carl Davidson, director of credit and collections at Blue Water Industries LLC (Jacksonville, FL). “Take a break to get yourself together first because you don’t want that conversation to bleed into the next customer. I encourage my collectors all the time, get away from your desk and take a break.” The bottom line: Effective management of customer conflict, which impacts a business’ financial health and reputation, can be achieved through strategies such as active listening, fact gathering and empathy demonstration.

Since Colorado first legalized medical cannabis in 1996, more than half of the U.S. has legalized marijuana for recreational use today. But possession and distribution or sale remains illegal under federal law—meaning any money that can be traced back to state cannabis operations could expose banks to significant regulatory risk.

Why it matters: Understanding the implications of liability is key for everyone in states where marijuana is legalized and for those conducting business with companies in these states. For credit professionals, there are many questions regarding how or if you should engage with customers in the cannabis or agricultural industries where marijuana is grown. This decision depends on many factors.

As more states decriminalize weed or make it acceptable for medical purposes, the substance may be headed to reclassification on the federal level. Marijuana was previously classified as a schedule I drug, defined as drugs with no accepted medical use and a high potential for abuse. However, federal law is looking to move marijuana to a schedule III drug, which is defined as drugs with moderate to low potential for physical and psychological dependence.

What they’re saying: “It won't open up the floodgates on the recreational use, but once it is rescheduled from one to a three and is regulated, I think that's going to really blow the doors wide open on the medical marijuana industry,” said Karen Hart, Esq., attorney partner at Bell Nunnally & Martin LLP (Dallas, TX). “The tension comes from the states being able to legalize it in different forms. It’s what makes the broad-brush development of the industry from a national level and causes issues of not having a national based business unless it's legalized across the board.”

Similarly to the prohibition era in the U.S. from 1920 to 1933 that prevented the manufacture, sale and transportation of alcoholic beverages in the U.S. under the 18th amendment—although it was a federal law, bootlegging (the illegal production and sale of liquor) and speakeasies were vastly common across the U.S.

“It took time for all of our cultural attitudes towards alcohol to shift, but one by one, each state began doing away with pro statewide prohibitions on alcohol and most states would leave it up to county by county or municipal,” Hart said. “In terms of marijuana, it is kind of the same thing. I think we will see a similar progression once there is an industry-wide sense of stability, so if we decide to do that as a country to de-schedule it altogether, then that will open up the market even further.”

Yes, but: Not being regulated on a federal level means many businesses in the cannabis industry are not included in taxes because deductions cannot be made for illegal operations. This has a significant impact on the overall business climate across the U.S. as cannabis businesses operate in cash only.

However, the Safe Banking Act, or the Secure and Fair Enforcement Banking Act of 2023, was a key piece of legislation designed to bridge the gap between state-legalized cannabis industries and the federal banking system. The Act protects both banks and credit unions from facing legal penalties by federal bank regulators that provide services to cannabis-related businesses. The Act also prevents the limitation of deposits and protects banking institutions from asset losses related to cannabis business transactions.

“Most banks are federally regulated under the FDIC and there are a few banks that are governed by state regulations,” said Jason Mott, CCE, NACM Board director and corporate credit manager at MFA Incorporated (Columbia, MO). “Credit unions are governed by federal credit union acts and those institutions have to abide by federal law. This means they cannot accept any deposits from sales that result as part of the cannabis.”

The biggest current risk for credit professionals lies in customer stability. If federal laws allow, companies will have more access to finance tools that are not currently available. Because there is no prior information for credit managers to reference with customers in the cannabis industry, it creates a higher risk for determining creditworthiness.

“There hasn’t been a bank for traditional lending that credit managers could look back on and call for references,” said Mott. “I think it’s something that we as a company are going to look into because as of July of 2023, the governor of the state of Missouri signed a bill that allows cannabis businesses to access banking services. I would still say the banking industry overall is still wary of marijuana and cannabis simply because of its prohibitions on a federal level.”

The bottom line: The evolving legal status of cannabis across states presents a complex landscape for credit professionals. However, learning to navigate all potential risk due to federal law discrepancies in the cannabis industry is essential.

What’s next: For more information, be sure to attend session 33027. Cannabis Law Update: Where We are Now, How We Got Here and Where We are Headed at Credit Congress on Monday, June 10!