Planning for a pickup in sales, some small manufacturers borrowed money from their larger counterparts to ramp up production. Now, a growing number can't pay for the investments as their forecasts aren't panning out, with energy-related companies being among the hardest hit.
Small factories sometimes borrow from other manufacturers (who tend to be bigger) to pay for goods, with a commitment to repay them at some point in the future. Credit managers for the manufacturers who are owed the money are reporting that more of their clients are so far behind in their bills that the "act of last resort" is being taken: hiring a collection agency to recoup money owed, said Chris Kuehl, economic adviser for the National Association of Credit Management.
The association conducts a monthly survey of about 1,700 credit managers whose companies' customers include automotive and energy businesses, mostly with fewer than 500 employees. Their most recent report, released June 30, shows that the index of "accounts placed for collection" fell below 50 for the first time since March 2013, signaling that more customers aren't paying their bills on time and are being put out for collection.
The main culprits of this financial distress are small energy companies who supply large oil firms. When planning for this year, many of these companies expected the price of oil to rebound, he said. This "unjustified optimism" has left many of these companies in bad shape, Kuehl said.
There may be more strain ahead. That's because credit managers “live in the future,” forecasting whether customers can pay invoices as many as four months from now, Kuehl said, and evidence is building that more energy companies are finding it increasingly difficult to make good on their debts.