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Credit Management Q&A Spring 2007

Q: What is overtrading? How can you tell there is overtrading?

A: The best way to think of it is equate it to a person that has lots of current debt and very little equity. They have to stretch their finances to keep everyone paid. There are industry averages for example bankers think that non mortgage debt payments should be no more than xx % of gross income. In business there are similar ratios.

Q: Is there a timing difference from the time a statement is filed, registered and perfected? Or if when statement is filed it becomes registered & perfected at the same time?

A: They can happen at the same time or at different times depending on the situation. If there are no competing securities registered, a security document can be registered and perfected at the same time. If there are competing securities, a security agreement can be registered one day, but perfection may not take place until the other secured party(s) is notified.

Q: Does a PMSI give a creditor priority on goods supplied by other creditors?

A: No. A company can only have PMSI priority on goods that they supply. They cannot claim priority on product of another company.

Q: What is the equivalent of the Canadian PPSA in the U.S. and how does it work?

A: The UCC (Uniform Commercial Code) is very similar to the PPSA in Canada. Like Canada, there are variances from state to state. Creditors from various countries / states need to file in the appropriate jurisdiction. Each state would have to be reviewed for legislation, filing requirements, etc.

Q: How does EDI accomplish the business objective of reducing inventory?

A: An EDI system doesn't directly reduce inventory requirements. However, it can reduce the time to have product ordered, confirmed, and shipped by allowing automation to eliminate a number of manual tasks in that regard. The level of automation available may reduce lead times (and errors) allowing a company to carry less inventory.