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Final Notice

Thu, 12/01/2011 - 12:03pm

Recent market research gives distributors a glimpse at which customers might pose the greatest risk of defaulting on their payments. Where does your customer base fall within these delinquent payment charts?

For Cortera, providing credit information serves a critical need for companies assessing their risk. For many businesses, distributors especially, a risk-heavy business climate means absorbing serious blows when it comes to a customer’s inability to pay on time.

Most recently, Cortera, provider of business information to the industrial and other markets, assembled the Past Due by State Report, highlighting the most delinquent geographical areas (late payment comparisons, separated by state), along with a Past Due by Industry report that tracks late payments by businesses, separated by industry. The results, some more predictable than others, indicate some larger trends when it comes to who has been faring best and which areas and industries are still feeling the ripple effects of the recession.

Past Due by State

The Cortera Past Due by State Report tracks late payments of businesses within each state against agreed upon terms, measuring the percentage of late accounts receivable by state. This monthly report of accounts receivable (A/R) activities by state measures the payment activities of approximately 20 million public and private business locations.

The most recent data shows New Mexico as most delinquent (23.16% of business A/R debt past due), followed closely by Hawaii (23.11%) and Florida (22.85%). The real driving forces behind these issues tend to be specific to each regional economy. For example, explains Davie, Hawaii’s tourism-based economy took a huge hit during the recession, and Florida is dealing with an unemployment rate that’s above the national average. Other states ranking high on the list have been ones who are suffering due to a burst housing bubble, which has hurt local construction markets. In places like Alaska, a state that came in very low on the list, a stable local oil and gas market may have been able to provide some footing for the region. According to Davie, the more diverse a specific state’s economy, the quicker they’re typically able to “bounce back,” from an economic standpoint.So what larger trends does this state-by-state data indicate? “We try to look at the data in comparison to what is happening in the economy overall,” says Cortera’s VP of product management, Patrick Davie. “What does unemployment look like in those regions? What is going on in the housing market—especially if you’re looking at (how the data effects) wholesale distribution and construction supply. Are those businesses suffering in some ways? Are there other issues?”

Past Due by Industry

The other relevant metrics that came out of the recent Cortera study include an industry-specific breakdown of delinquent payment activity. Construction businesses top the list at 24.2% past due. This monthly report, according to Davie, provides companies doing business in these segments with a way of protecting themselves. “The (geographic) areas where we’ve had bad cycles in the housing market have clearly affected the construction space.

According to Cortera’s reports, agricultural and finance & insurance accounts fared the best in terms of ontime payments. Besides construction, other areas with high percentages of past due were retail, manufacturing, and transportation. Wholesale trade landed somewhere in the middle, with 14.53% A/R past due. The national average for industry was 17.34%.“I think a lot of businesses woke up after 2008 and realized a handshake among guys they’ve worked with in the construction space for a long time isn’t going to do it anymore,” says Davie. “They need to actually know how financially sound they are.”

Data Application

As for how businesses might actually use this data, Cortera has a number of suggestions but cautions distributors to react appropriately when it comes to this type of (often-fluctuating) data.

“Some of our indices spiked harshly back in 2008 when the banks starting collapsing, and people started pulling back until they knew what was going on with their own cash situations. People held onto that cash as long as they could. Other businesses realized they were not going to get paid; California had IOUs—and still has IOUs sitting out there. We’ve heard stories about lots of small businesses getting crushed by that. So as everybody tightens, we see how that ripples through small business,” says Davie. “We see it go up and down; there’s no perfect sound bite because it has been so choppy.”

It’s also important to look closely at some of the drivers behind these statistics, versus merely taking them at face value. In Minnesota, for example, the high concentration of retail sales means the state’s cumulative past due tends to be a bit higher: “I think those states get skewed a little bit by the big box retailers who have huge accounts receivable departments, and have the power to delay payment to their suppliers,” explains Davie.

Ultimately, Cortera’s intentions with these reports are to create a pool of data for businesses to help better predict what’s coming down the road so they can assess how it might affect their cash flow.

“You saw lots of debt just sitting there and sitting there… and then work it’s way out of the system. Then businesses started to say ‘this is the new normal and we’re going to make sure we budget and staff against it.’ It’s been a very bumpy road… the economy has been up and down and it’s been hard. Economists have trouble predicting.”

Cortera’s solution has been to offer businesses a monthly service where they monitor a client’s entire customer portfolio and notify them with daily alerts on changing risk scores, financial news, and public record filings. This is designed to enable the kind of long-term planning that’s been difficult, especially now that the recession has created so many financial pitfalls. It’s all about avoiding surprises: “People are paying reasonably well right now overall, if you look the broader indices,” says Davie. “But then there are these pockets of state-by-state and industry-by-industry issues. It’s not a perfect situation.”

For more information, and to see more comprehensive payment metrics, visit www.cortera.com.

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