How Are Finance People Handling the Weak Retail Market and Have They Adjusted Their Financing Rules for Clothing Manufacturers?

Every day the headlines are filled with news of venerated retail chains cutting back or going bankrupt. Even veteran designer Ralph Lauren is not immune to the shifting shopping patterns of consumers who are veering toward online sites to browse for merchandise.

As retailers start shrinking their footprints around the country, apparel manufacturers are wondering how to cope with this constricting retail landscape.

Should they produce less? Should they be more cautious when striking deals with stores, and how do they protect themselves from not getting paid?

Many rely on their factors to check out the financial health of the retailers who have placed orders with them. With so many retailers having a hard time getting shoppers through the doors, the California Apparel News asked factors and finance-industry experts this question:

Given that so many retailers are going through challenging times, how are you changing your evaluation of retailers to decide whether you will finance the accounts receivables held by your apparel manufacturing clients?

Mark Bienstock, Managing Director, Express Trade Capital

The retail world as we knew it is over. If the retailer did not invest in an e-commerce portal early on in the cycle, the ability to play catch-up is drawing to a close.

Only those well-established discounters are the winners in the traditional bricks-and-mortar retail landscape. The shopping dynamic has changed from a mall-based experience to a smartphone point-and-click experience.

We are comfortable with the financially sound retailers or e-tailers that are at the forefront of providing the new-world shopping experience. The old world of how our grandparents and parents shopped is going away like the wind.

As a lender, you must be able to change your financing model with the times. Our financing team has positioned us to be able to react timely to any of our clients and prospects’ specialized financing requests to satisfy the ever-changing landscape.

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

Many retailers are going through challenging times for sure, but we have not significantly changed our evaluation of them.

What many may perceive as changing is actually just a matter of more retailers struggling financially. This makes us request and look at more detailed information regarding their results and their projections.

For example, the same poor results posted for any given retailer in 2016/2017 would garner the same scrutiny if those results were posted in the boom years of retail.

Negative results are just that; there are just more retailers posting those poor results now than in the 1990s. Keep in mind that part of the equation on whether to finance the accounts receivables and/or additional support is the financial strength of our client and the people involved, taking into account the overall relationship.

Gino Clark, Senior Vice President, Portfolio Manager, Western Region for Capital Business Credit

Capital Business Credit has always taken a disciplined approach when it comes to making credit decisions regardless of market conditions.

This process analyzes a company’s liquidity and capital structure. Does a company have enough liquidity to achieve its business plan and pay its bills within terms? Normally we would expect to see a liquidity cushion to mitigate unforeseen events such as last year’s LA dock strike.

However, what has become increasingly important is the impact on revenue and gross margin mixes related to an accelerating shift to online retailing and fast retailing.

These trends, coupled with an overexpansion of bricks-and-mortar assets, require us to closely evaluate the ability of management to adopt to the changing landscape—expanding into online retail while potentially closing or revamping stores.

Adaptation to today’s changing market conditions requires stockholder support, including the ability to secure new capital, management talent, focus and transparency. It is this type of analysis that makes the relationship between wholesalers/manufacturers and their financiers extremely important in today’s economy.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

Many, many retailers have been going through rough times. Retailers have been fighting the online trends as well as the lack of shoppers going into bricks-and-mortar stores.

With the financial collapse of 2008/2009, many retailers just went out of business. Those that survived are to be congratulated, but that is not enough. They have to find a way to not only stay in business and make a profit but also be relevant to their customers.

When advising clients as to whether to take the order, putting goods into work and then ultimately shipping the goods has become a more relevant conversation. Long gone are the days of taking an order, even from a previously viable retailer and assuming it will be paid.

If you use a factor, you need to continue to consult with its retailer credit departments to make sure your customers are still being approved, are not going on a surcharge list or paying slow. All are signs of potential problems. If your factor isn’t approving the orders, you should ask your advisers to check the credit community to see if others are still approving the customer or not.

If you find other factors are approving orders and your factor isn’t, I suggest a face-to-face meeting to discuss your findings and to push your factor in the right direction to approve those orders. You might have to change factors if yours is not approving enough of your orders.

I have also seen many manufacturers turn to the insurance industry to obtain credit insurance policies for specific customers. In some cases, this might create additional costs to your company, but the policies will allow you to continue to ship your products with credit guarantees. These policies are not as easy to administer as having a factor, but it is manageable.

If credit for your customer is still unavailable, you should contact them about giving their credit card as payment. You can first check to see if the card is valid and there is room on the card for the amount of your order. You might want to consider that you will charge the card 50 percent before you put the goods into work and the balance before shipment.

All in all, the retail environment is challenging, to say the least. Protect yourself by doing your homework, check for alternative sources of credit protections and by staying active in knowing the credit status of your customers. Don’t be afraid to ask for payment or credit cards up front. If they want and need your goods, they will pay upfront.

Sunnie Kim, Chief Executive and President, Hana Financial

The metrics of credit evaluation do not necessarily change because the current landscape is challenging. Yes, it is true that there are many retailers under pressure for a multitude of reasons—slumping sales, too many stores or disinterested consumers.

However, this is not a new phenomenon. Economic cycles have been the norm, as we have seen many retail collapses due to the great recession, the dot-com crash, the market bubble and high-interest-rate environments. The automatic reflex would be to tighten policy and become more conservative, but this does not necessarily help our clients nor does it address the overall problem on a macro level.

We are continuing to take the approach of evaluating each credit based upon its own merit in spite of the broader industry. Granted, there are many more accounts on our watch lists, and we are mindful of the need to react more quickly to certain results.

However, the industry will eventually right itself, and everyone will be working with an industry with fewer bricks-and-mortar stores and an increasing online presence.

Robert Meyers, Chief Commercial Officer, Republic Business Credit

Factoring companies regularly review their retail customers through both challenging and fruitful cycles. Republic employs a dual strategy during challenging times, ensuring our clients have sufficient borrowing capability through their receivables and inventory as well as seasonal overadvances to support apparel manufacturers.

Typically, some retailers strongly outperform others. Therefore, Republic aims to help our clients understand retailers’ unique situation so they can better plan their upcoming season. We review information beyond our extensive underwriting experiences, credit insurance and credit agencies during challenging times. Republic has a significant advantage with the ability to evaluate troubled retailers on a recourse factoring basis, where we can underwrite the available cash of a retailer beyond just their recent profit reports. Despite a retailer losing money, it is more important to understand who is funding the retailer (private equity, bank lenders) along with understanding their excess cash available and its projected duration.

Our company will support apparel manufacturers during challenging times with innovative, flexible and consistent funding solutions, despite what the media may dramatize as the “end of retail.”

Don Nunnari, Executive Vice President/ Regional Manager, Merchant Factors

“Old line” apparel factors have been evaluating the credit worthiness of retailers for many years in the United States.

During these years, the retailers have faced challenges and bankruptcies. Apparel factors continued to provide the expertise of evaluating the credit of the retailers and took the losses if the retailer failed to pay the invoices.

But like any for-profit business, factors have to constantly perfect their expertise and be paid for the risk.

The manufacturing client of the factor expects this level of service, and the factor works very hard to provide it.

I don’t believe apparel factors are changing their core principles in evaluating the retailers. Due to mergers and consolidations of retailers, factors are faced with larger credit exposures to certain retailers.

Factors have to be creative to meet this challenge and provide credit coverage for their clients.

Factors in recent years have been imposing surcharges for higher-risk retailers to compensate for the risk. Not always welcomed by the client, most appreciate the fact they are getting their orders approved and financed.

Apparel factors also work directly with retailers to obtain credit information that allows the factor to credit approve and finance the accounts receivables of the manufacturing client to a greater extent than credit insurance companies.

Unlike credit insurance, apparel factors indemnify 100 percent of the factor guaranteed receivable.

Every apparel factor I’ve worked for was dedicated to evaluating and trying every means to guarantee the credit risk for the manufacturing client. That is what the client is paying for.

Dave Reza, Senior Vice President, Western Region, Milberg Factors

The challenges posed by the soft retail environment require analysis that uses traditional credit benchmarks (i.e., capital, working capital, cash flow, profitability with updated projections, future covenant compliance). We advance on both approved and nonapproved accounts receivables. Of course, nonapproved accounts bear more scrutiny when it comes to funding decisions. Questions such as Is the unapproved amount an overage on an otherwise good credit? Is it a declined account debtor? Is the unapproved amount a meaningful percentage of the total client accounts-receivable base? Could the underlying account debtor be in imminent danger of failure? A factor also has to understand the impact on our client if we cannot advance on the particular accounts receivables. These decisions are not typically black and white.

However, as a privately held factor, Milberg has the advantage of being able to make these decisions on a true “what’s good for the client” basis without being encumbered by outside regulatory compliance requirements.

Ken Wengrod, President, FTC Commercial Corp.

Historically, the credit community has based its evaluations on the “five Cs” (character, capacity, capital, collateral and condition of the retailers).

There have been significant shifts in the retail landscape over the last several years. Consumers are purchasing more and more online, and they need to find the merchandise to purchase instantly instead of waiting for it to hit the stores. Also, the recent rise of interest rates has significantly impacted those bricks-and-mortar retailers that overexpanded and burdened themselves with debt due to “cheap money.” They are now facing the reality of survival. Many retailers lost their power branding by placing a higher emphasis on setting up off-price stores and lost their cachet on the way.

When premium-denim companies went through the same battle a few years ago, they lost their profits from the core business and eventually shifted their focus to the off-price business. Without a doubt, we will see further reduction of retailers over the next year.

We are experiencing a necessary cleansing in the retail environment. The retailers that have the ability to properly serve their individual markets and offer a more diverse merchandise selection to the consumers will be filtered through the process and survive the cleansing.

Knowing what we know, we will need to analyze additional information from these new retailers before we can make our credit evaluations. There are four Rs in retail ratings. In today’s environment, it is critical to use all the Rs and have a strategic partnership with parties from all sides—consumer, retailers and even the suppliers.

Reality: Does the retailer even need to exist? Are they a dinosaur ready to be extinct? What demographics do they serve?

Research: Does the retailer appear to have a competitive edge over its competitors? Are they leaders or are they following the herd? It is imperative for the credit community to actually visit the stores and get a feeling about what’s going on?

Reaching Out: Is the retailer reaching out to its customer with social media and carrying the proper merchandise that suits the local market?

Retaining Customers: Is the retailer able to maintain the loyal customer? Retailers can confuse the consumer by constantly switching suppliers. The product has to be consistent.

As to our view on financing the accounts receivables, we still look to the “five Cs” with a strong emphasis on character. How does the owner act when things get tough with their lender and their supply chain? No matter what the financial statements may appear, we may be taking a big risk if the owners don’t have strong character.

Collateral of the client is just as important. The creditworthiness of our clients’ customers do not automatically equal strong collateral. Big-chain stores with strong credit may have higher deductions and disputes/swapping compared to a smaller retailer with a lower credit score.

As a factor, we would rather support those astute clients who are in tune with the flux of the current market conditions and those who maximize their opportunities in such conditions. It is those businesses owners, who don’t need to chase sales to support their overhead, that will do exceptionally well in this market. Their operations are lean and mean and when the market opportunity arises they can maximize their position.