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On Your Own Terms

How to help customer's cash flow without getting burned.

By Meredith Schwartz -- Gifts and Dec, 3/1/2010 12:00:00 AM

Neither a borrower nor a lender be' may be good advice for your personal life, but in business, if you don't borrow, you don't buy; if you don't buy, you have nothing to sell and your vendors, in turn, don't buy from their own suppliers. That way nobody eats.

According to an article in the Wall Street Journal, even retailers with excellent payment histories are seeing their bank lines of credit sharply reduced. As a result, they are unable to stock up on inventory for their busy seasons. They are having to turn to alternative sources of funding, including tapping family and friends for loans, and some are even worried about being driven out of business despite strong sales, a situation that has only been exacerbated by the bankruptcy of major retail lender CIT. Todd McCracken, president of the National Small Business Association, said lending restrictions on small business could have a trickle-down effect. “If they can't get the loans, they can't stock the merchandise, which means they won't make the sales and can't hire temporary employees,” he said.

Naturally, they turn to their vendors for help. Yet in today's continuing iffy economy, extending credit is potentially disastrous, with retailers and lenders alike going out of business and leaving unpaid debts behind. This leaves gift industry vendors stuck between a rock and a hard place: customers are looking for higher limits and longer terms to ride out rough spots, while the vendor's own lenders may be cutting down their lines of credit, reducing the amount of customer debt vendors can afford to carry on their books. What is a vendor to do?

Know Your Borrower

Gifts & Decorative Accessories spoke to several credit professionals. While they offer a range of innovative solutions, they all boil down to a single principle: lend smarter. For example, Ron Solomon, a founder of The Credit Collective, suggests that manufacturers pool their information about payments to make a far more informed decision on how much credit to extend to current and prospective customers. (See sidebar for more details.)

Steve Mertensmeyer is president of Myrs Credit Advisors, which provides credit services for the home furnishings, jewelry, gift, greeting card, and many other related industries, lays it on the line: “The odds of checking references or just throwing the dice are practically the same in this volatile economy. The financial health of American businesses is changing so rapidly, that how you paid a certain vendor last season is not an accurate indication on how you are going to pay a certain vendor this season. Even the time element of last month is problematic in this economy.” In addition, he says, since retailers provide references that they pay first, the information is not necessarily representative and can cost a lot of time to check out.

“If I chose not to use a credit analysis firm to rate my new customers, I would definitely not go the route of references,” says Mertensmeyer. “I would take that same time and expense and actually conduct a phone interview with the owner or principal of the potential company. Get specific. Ask hard questions. Listen to the answers. Evaluate why they become evasive on certain subjects. Read between the lines. Ask for data that is commensurate to the size of the order. Act like a loan officer, because that is what you really are.”

He also cautions against letting an emotional reaction to a recent bad debt color unrelated decisions. “Don't get severe, just because you took a hit from a customer last week that upset your books. Keep your ratio of different levels of risk in balance and your sales and bottom line will prosper.”

Mertensmeyer has his own credit reporting system, a program called Net 30 manager which offers a database of payment history on retail stores, importers and distributors. But he recommends checking as many sources of information as is practical: “All these systems help, none have the whole answer. If you're just looking at one method, that's when you get in trouble.”

Rick Contino, president of Midwest-CBK, concurs. “The credit crunch has forced many vendors to [...] improve the collections process. [... We] manage our exposure by completing an in-depth credit review on the front end, and by communicating with our customers to understand their business needs.”

Decide How Much It's Worth

Meanwhile, Davy Tyburski, founder of CreditandSales.com and president and CEO of Profit InnerCircle, San Antonio, TX, agrees that “the biggest problem is that manufacturers and vendors don't know their customers well enough.” But his focus is on, not their likelihood of paying on time, but how much they're worth to their vendors in the long term. “What I call the lifetime value, or in this case the three-year value, of that customer,” explains Tyburski. “We could be making a short term decision to upset that customer and ultimately lose the three-year value of that customer. There needs to be some algorithms developed to help collectors make some very objective decisions about whether they should be extending more lenient terms.” Considerations which would go into such an algorithm include whether the retailer is a “center of influence,” such as someone who can turn the vendor onto other retailers in the area. Tyburski recommends creating an incentive for the sales team and the credit team to work more closely together.

“Once we have that three-year value, we should also be thinking about what's going to be their next three-year value,” Tyburski told G&DA. “It is a good time to fire customers. From an operation costs perspective, you have retail stores that cost you more money because their 'pain factor' is so high (i.e. disputing invoices, making customer service jump through hoops). The most valuable customers have a low pain threshold and they produce some significant revenue.” In addition to payment history, he recommends considering the cost of servicing that account and whether they are self-service (such as ordering online) versus needing hand-holding.

The Best of Both Worlds

Mertensmeyer describes a phenomenon commonly seen in the aisles of the gift shows. “Many of the smaller vendors during 2009 have forsaken Net-30 terms for prepayment via credit cards,” says Mertensmeyer. “This may be wise to keep bad debt to a very minimum, but it negatively impacts their sales volume and creates bad feelings with customers. The stricter your credit policies, the lower your sales.” Especially now when, he points out, “Even credit cards aren't working as well for the retailer because individuals have had their limits lowered.”

He proposes a commonsensical compromise solution: vendors can grant Net-30 terms to businesses that pass their credit worthiness policy, but require credit card information and authorization to charge the total invoice amount on day 40 if payment has not been received. He calls the plan “Net-30CC.”

Credit Matters

For vendors wondering how important credit terms are to buying decisions, the short answer is: Very. An Advertising Specialty Institute survey found that 93 percent of buyers say credit terms are one of the key factors they consider when choosing a supplier. Some 73 percent are much more likely to give repeat business to a supplier that extends credit terms, and 59 percent took business to another supplier if their initial choice was too slow in processing a request for terms. While the promotional product industry covered is not identical to the general gift market, the data is suggestive.

Glen Colton, president of Seville Marketing, suggested suppliers reward good payment behavior. “If a supplier does good work and gives me terms, I will prefer them over another supplier with lower pricing,” Colton said. “Moreover, a supplier extending quick and realistic credit terms is twice as likely to get our business as one who wants prepayment. If cash is king, then cash flow is prince.”

Collective Wisdom

By Richard Gottlieb

Getting paid is the keystone to success for any business. So how do we protect ourselves from those who fail to pay? Ron Solomon has an answer. Solomon is a founder of The Credit Collective, which shares information on the credit worthiness of gift and other specialty retailers through peer-to-peer intelligence.

How does the Collective work?

Solomon: The Credit Collective was born of my failure to view our 14-year-old tween products company as a lender. We would extend terms to anyone with a purchase order and a credit sheet. Retailers list references for companies whom they pay. When we started losing money to bad debt, we realized that we needed to find out which stores “didn't pay.” We created a peer-to-peer, internet-based system to help us do it effectively.

Our password-protected, member's only online system allows members a simple to use way of asking each other if they've done business with a specific retailer who has applied for terms. The credit query can be specific (like those listed on a credit sheet) or can be sent to other companies who most resemble the asking member (similar industry, product, relative size, etc.). Members also generate alerts when a creditor is not honoring its fiduciary agreement. The alerts allow other members to re-evaluate a company's terms if they do business with them, or avoid them if they don't.

Our membership is based on an annual fee and there are several levels that take into account where a company is in its evolution. We conduct free, online demos [at www.creditcollective.com] three times a week and welcome anyone to attend.

We don't require our members to upload their accounts receivable reports, nor do we give credit ratings. Rather, we allow members to exchange raw references and alerts, and based on that information, each member makes its own decision regarding a retailer. We believe that risk is personal so one-size fits all credit ratings don't make sense. Plus, we don't charge on a per report basis like many other groups.

What does C.C. data say about the state of specialty retail?

Solomon: The alerts in our system have increased (and continue to increase) at a rate that far outpaces any increase in membership. Over the past three years there has been a significant and consistent increase in the number of member-generated alerts in our system. Over the first two quarters of 2009 versus 2008:

Overall alerts increased 73%
Bankruptcy alerts increased 55%
Collection alerts increased 75%
In dispute alerts increased 122%

Although those numbers are alarming and should be taken seriously, there is a silver lining. The number of overall alerts submitted in that period is down from the previous year's increase of 116 percent. However the number of collection alerts has increased. That tells us that vendors aren't waiting as long as they used to before submitting accounts to collection agencies. The number of collection claims submitted to our collection agency partner rose by 64 percent this year versus the same period in 2008. The other concerning statistic in these numbers is the increase in bankruptcy alerts.

Who benefits from the Collective?

Solomon: The more obvious benefit is to specialty vendors who exchange references and alerts about the retailers they all share. Rather than just asking the companies who the retailer actually pays, our system allows vendors to get a true picture of which retailers are paying their vendors.

It also benefits retailers who pay their bills on time or communicate with vendors if they can't. They enjoy a great reputation, which allows them to get better, faster terms, and increased credit limits.

How can manufacturers best arm themselves against bad credit?

Solomon: We have been trying to help manufacturers view themselves in a different light. Unfortunately, many companies don't devote enough of their resources to the financial side of their businesses. Manufacturers who extend credit terms to retailers must view themselves as creditors. Granting terms is no different than giving business loans. In order to be responsible to their cash flow and other assets they absolutely must devote whatever funds and efforts are necessary to protect themselves by knowing they are granting those loans to companies who are not only capable of paying them, but are willing to pay them.

I recommend that manufacturers keep things close to the vest. Don't open a ton of new accounts, and if you do, give the new ones lower credit limits. Ship smaller, more frequent orders to limit risk, and stay on top of your receivables. Don't let debtors go too late before dunning them.

What is it in for retailers?

Solomon: We educate retailers in how they perceive debt. We offer them suggestions as to ways they can get better credit, how they can avoid getting into financial trouble and how they can work their way out of trouble with vendors. Neither of us can exist without the other. It should never be an 'us vs. them' mentality.

Richard Gottlieb is president of Richard Gottlieb & Associates, a provider of business development services. His blog can be read ongiftsanddec.com. He can be reached atrichard@usatoyexpert.com.

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