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Oct 01 2013
Could the Pick Up in the Economy Mean the End of the Rope for Some Companies?
DeAnna Leahy, CCE, Sunroc Corporation

Could the Pick Up in the Economy Mean the End of the Rope for Some Companies?

 

The United States economy is finally picking up, but unfortunately, for many businesses this may mean the end of the rope. Many of these companies barely survived through the downturn. During the economic tough times, they used up all of their cash reserves, sold all of their equipment, laid-off most of their employees, and reached the limit of their borrowing power. As the economy begins to gather pace, some companies will be able to recover and flourish. However, the weakest of these companies will find that the increased competition compounded with the shortage of cash will mean their ultimate demise.

 

Many companies are already showing signs of severe distress. A growth in activity means a growth in competition and an increased need for working capital. To compete for this new work, companies need to purchase new equipment, hire more employees, and purchase additional materials, yet they have used up their cash reserves and are at the limit of their borrowing power. Cash is so tight that it might not take much to finish them off.

 

At my company, we have been seeing signs of companies with severe cash flow problem for several months. There has been a sharp increase in non-sufficient funds checks as companies try to keep up with the increased volume of business without any cash. But, for a business with such serious cash flow problems, the day of reckoning may not be too far off.

 

Many companies are barely able to pay the interest on their debt. As the economy improves, orders may increase, suppliers may raise their prices, and competition will cut their prices to win jobs. If a company is struggling to make their interest payments, they have very little wiggle room to take care of the increased volume of business.

 

There is a risk out there that we may see another flood of company failures. If the economic recovery does mean the end to some of these businesses, that may also mean that unemployment could get worse before it gets better. This problem highlights the hard choices facing Credit Managers today. Credit policy makers within each organization must keep this in mind when they decide whether to set policies that are more lenient or choose to tighten up their policies as the economy begins to pick up.