California Apparel News

Today, when a manufacturer’s customer is “declined for credit” by its factor, the manufacturer often requests that the retailer prepay the order. All too often these manufacturers don’t know why their customer was declined, and they don’t follow up with their factors to find out.

Many manufacturers tell me they’re “just too busy,” to which my response is: “Too busy? How much money did you just spend to develop and sell this line, get it to market, write the orders, and put goods into work—but for a two-minute phone call to your factor, you’re too busy?”

To be perfectly clear, factoring your receivables is the absolute best way of preserving the financial integrity of your business. But in today’s financial climate, many manufacturers who ship to specialty stores only get about half of their orders credit-approved by their factors. So, manufacturers attempt to get those non-approved customers to prepay for their orders.

Some will, but many more won’t—and don’t need to—because your competitors provide them with credit. So, you lose those customers, and the prepay customers will often use the release of their payment to control when you ship. How often have you sat with several orders ready to ship but the customer won’t “release” payment? Now you’re waiting for that customer to “approve” you? How often have you put those orders back into stock?

Retailers, just like manufacturers, tend to do business with suppliers that provide them with some credit terms. You can substantially increase your sales growth by providing some managed credit terms for your customers such that the increase in your sales and earnings outweighs the potential losses from customers who default. Across several industries, nonpayment of invoices averages less than 2 percent. More companies have gone out of business in good economic times and bad because they couldn’t manage their inventory or overhead, not from nonpayment from customers.

Here are some due-diligence steps you can take to manage your risk of extending credit:

• If your factor declines a customer, ask why. The retailer may be credit-worthy, but at the time you submit your order to your factor, the retailer’s credit line may be full. Or, the retailer may be “slow pay” but always pays, and your factor may be waiting for past payment.

• After you talk to your factor, talk to your customer and see what you can work out. Working the phone, not email, will absolutely turn some of those declined orders into credit approvals.

For customers that remain credit-declined, the following are steps you can take to guide you in your decision to extend them credit. First, get credit-reference information from your customers. Ask for the names of eight to 10 suppliers who ship them year-round and have been extending them credit for two years, or ask for the names of the oldest suppliers extending them credit. Ask for the name of a contact person, address and phone number. Then call all of the suppliers and ask:

• How long have they been shipping and providing credit to this customer? If they originally shipped on a factor approval or prepayment, ask what changed and why.

• What dating do they give the customer’s invoices? 30 days? 45 days? 60 days?

• What is the credit line they extend to this customer at any one time, per month, per season? $3,000, $5,000? If the other vendors provide a similar credit line—for example, $3,000 to $5,000 per month—then you should use that as a guide and discuss the credit line with your customer and your accountant. A thoughtful retailer will write their orders to the credit limit. So, if you give your customer a $3,000-per-month credit line, with 30-day terms, your customer can write a $9,000 order for a three-month shipping season. Now, you and your customer will need to work closely, but you will have gained a $9,000 order you otherwise would not have had.

• Does the customer pay its bills on time—or, at least, regularly?It’s common for many small retailers to have a 30-day invoice but always pay a week or two weeks late, not because they’re bad people but just because they need a little more time selling down their inventory before they can pay.

• Does the customer take unwarranted deductions regularly from its invoices? If they do, this is sign of a retailer who takes advantage of its suppliers and/or that its business isn’t healthy.

• Last, but not least, ask your customer for its landlord’s contact information. If the customer is paying the landlord late, that’s a sign its business isn’t healthy.

Here are some additional steps you can take to help you manage credit risk:

• Some of your factor-declined orders are declined for good reason. If you’re not comfortable with the results of your due diligence, don’t extend credit. Ask your customer to prepay.

• Do not extend credit to large multi-door retailers; they can wipe out your working capital if they don’t perform. We’re only discussing credit for your small specialty stores whereby you can spread your risk over several small customers. Multi-door retailers need to rely on the professional trade credit community if they are going to stay in business, not on you.

• Use a credit-collections service for nonpayment.

You’ve worked hard and spent a lot of your money to get from the design room to the written order. With just a bit more work you can increase your sales, often with the same customers and orders you‘ve already written. As the old proverb goes, “An order in hand is worth a million in the bush.”

So proceed with caution, but do proceed.

Steven Goldman is president of Apparel Industry Consulting Services and has more than 20 years’ experience in managing and consulting with apparel, home furnishings, jewelry and light-manufacturing companies. He also serves as part-time COO for companies and is a continuing contributor to the California Apparel News. He can be reached at sbgoldman@earthlink.net.