Credit Issues Draw Interest at FBI Seminar
As the apparel industry remains challenged by the current economic climate, many startups and younger apparel companies are losing dollars by failing to maximize their management of credit, collections and receivables, according to Michael T. David, a nationally recognized expert in collection services who spoke to the fashion industry during a recent seminar presented by the Los Angeles trade organization Fashion Business Incubator (FBI).
David, managing director of Los Angeles-based Allied National, and Robert Prather, partner in San Dimas, Calif.-based A/R Management Services, outlined steps to maximize bottom lines through better credit and receivables management.
Speaking to FBI’s group of largely younger apparel manufacturers and designers, David encouraged new companies to seek out credit opportunities despite the downturn in the economy. He also outlined steps to improve chances to get credit and how to issue credit while minimizing risk.
“A down market doesn’t mean that the credit market is dried up,” he said. “Banks are being forced into diversity. And there are always vehicles like the Community Reinvestment Act, which require banks to reinvest in their communities. There are also opportunities in enterprise zones and other areas.”
David emphasized how much lenders and creditors take into account the character of their customers.
“It’s probably the most important aspect,” he noted. “Look at what’s happening with companies like Enron and Kmart. This whole situation with Enron and Kmart involves concerns about character.”
Character comes into play during simple steps such as filling out a credit application, David said. Just by being filled out completely, an application, whether for a factor or for a resource, can relay important information about the applicant to lenders and others, according to David.
“You have to fill out every detail,” he said. “It says a lot about who you are.”
On the other side, companies sometimes go too far in extending credit to retailers or other buyers. David used the recent Warnaco bankruptcy as an example of how companies could get into trouble in extending their limitations. David said he likes to use a 10 percent rule, which factors and banks usually use, in extending credit to no more than 10 percent of a buyer’s net worth. Going beyond that involves trusting instincts and conducting certain “smell tests,” said David.
He also said companies need to take into consideration how long a company has been in business, as most businesses fail in their first year. Management experience, years at a certain location, square footage, inventory mix and demographics are important as well, he added.
When credit issues get to be a problem, companies have to become debt collectors, which are a completely different breed of animal, David said. “You have to have an understanding of human nature. It’s the people within the company that you have to deal with, not the company as a whole,” he said.
When debts get way out of hand and all communication lines are broken, then it’s time to go to court, David said, noting that 90 percent of contracts are verbal.
When it comes to this, David advised filing cases in county courts and making executions on non-exempt assets.
In regards to chargebacks, which cost the apparel industry millions of dollars a year, Prather said many newcomers fail to document orders adequately enough in case they want to challenge them later. Chargebacks could come through freight discounts, shortages, improper labeling, misshipments and other disputes. The keys to minimizing these are through documentation and establishing strong relationships with customers, he said.
Prather advised even the smallest firms to get some type of software to manage receivables because “they can really get away from you,” and he recommended that companies document all details of a transaction and discuss solutions before issuing a blanket credit. He noted that solidifying relationships with customers is equally important.
“I’ve seen situations where we can go into a major chain and get $500,000 in credit because we know the shipping manager and can work with him,” he said.
Getting management involved in disputes and reviewing and following up on all issues is also key to minimizing the toll that chargebacks can take, Prather concluded. —Robert McAllister
