Commercial Collections – the Canary in the Economic Coalmine!

Commercial collections are referred to in a variety of ways and terms.  Usually as “business-to-business” or B2B accounts.  They are significantly different in process and regulation than consumer collections.  To be clear, a “consumer” collection is one that involves debts arising from “personal, family, or household” expenses.  B2B accounts lack all three of these as the basis for the claim.

Sometimes, people think if the account is opened in a business name, or an individual has an assumed business name then the business entity is responsible for the debt, and it is a B2B account.  Not so!  What the goods or services are USED for determines the nature of the debt, either consumer or commercial.  It seems trivial, but in fact is of paramount importance to the debt collector.  For example, if a person who owns a business that is an S-Corp has a CPA prepare their taxes, who is responsible for the bill?  The individual, or the business?

Also of note, and the true topic of this post, is what can we learn about the local economy form commercial collections?  Quite a bit, actually.  Since our firm works both consumer and B2B debts, we see the distinction in the economic marketplace and what can be learned from watching volumes come in our doors.  As the economy turned down in 2008, we had already seen the transition in our Commercial division in 2007.  Volumes skyrocketed for bad debts ahead of the general turn-down.  As the consumer debts started to flow in in 2 and 3 times the normal volumes, B2B debts flattened and eventually lowered.  Why the opposite trends?

When times are good, businesses take more risks with credit extension.  So as thinigs get tougher and more people have trouble paying (and in our locale many of our B2B clients have a direct tie-in to the real estate market) businesses don’t hold these new accounts for long.  So before the general public knew the economy was in trouble, we knew it was in trouble, specifically with real estate.  Commercial vendors tightened up their credit rules, and as things got worse we saw fewer and fewer bad accounts being turned in.

Restaurants serve as a good “first indicator” of problems.  We serve a number of businesses who supply to restaurants, and when people pay more for gas or have less money in their pockets because they are out of work, restaurants are often the first and hardest hit.  We can get a feel for our local economy by looking at how many restaurants are turned in for collection and fail.  We saw this in 2007 and into 2008, and then the tide was stemmed a bit.

Commercial listings flattened and went down in 2009-2011, but are starting to pick up again.  And that is a good sign!  More businesses taking more risks means they are feeling more confident in opening new credit agreements!

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