Credit still hard to get
More lenders shunning industry
By Heath E. Combs -- Furniture Today, June 22, 2009
High Point — Credit availability, or lack of it, has become a serious stumbling block for furniture companies trying to survive the slump or rebuild their business.
While money is cheap — when it’s available — it’s not easy to obtain.
"If you don’t need money, it’s easy to get. If you desperately need money, it’s not available. If you’re in between, it’s in between," said David Beckmann, president of furniture and bedding source Emerald Home Furnishings.
A series of actions by credit providers in the past year has reduced the availability of credit in the industry. The most recent step was American General’s move this year to eliminate consumer financing, which a number of furniture stores offered through the company.
Stores are finding they have fewer sources of traditional customer financing, while suppliers continue to report problems with factoring or with insuring their receivables, as banks’ appetite for credit risk diminishes.
Some manufacturers and retailers have complained in the past several months that factors like CIT have tightened credit terms. GE Capital essentially ended its unsecured inventory financing program to reduce its exposure in a harsh retail climate. And several companies backed by private equity firms are finding the flow of money slowed or halted.
As the problem becomes more widespread, some retailers are struggling to pay suppliers. Throughout the industry, companies are seeking new avenues for financing, straying from traditional sources to other providers.
Gat Caperton, president and CEO of case goods manufacturer Gat Creek, said finding financing for any new business venture is tricky right now.
“As credit tightens, it is stagnation. It’s a little bit of a waiting game. You want some capital to make the initiative. It’s the chicken and the egg. You don’t want to try something different until you get some extra capital,” Caperton said.
Commercial credit has clearly tightened, he said. Big banks appear to be getting more nitpicky and are looking for reasons to increase interest rates on loans, while smaller banks are just scared to lend, he said.
“It’s good to have a good bank and a long-term relationship because there’re not a lot of doors to knock on,” Caperton said.
Retailers can face a downward spiral as they reduce their inventory to save costs, said Tom Gray, senior industry analyst of Global Credit Services, a credit risk management firm based in New York. With less inventory, a store’s borrowing capacity becomes more limited, since they borrowed off that inventory. That reduces the funds available for operation.
“It’s a snowball effect, which is why you see the economy where it is today,” Gray said.
He said the lenders’ cautious approach is an overreaction to the massive losses that banks sustained last year.
“Last year, we had an issue with consumer confidence which was really exacerbated by the financial crisis. With the banks, it just snowballed from there,” Gray said. This year’s poor first-quarter performance has left banks even more severely averse to risk, he added.
“Because they’re gun-shy, they can’t accept the risk they were accepting before,” Gray said.
He said the most important item he watches with companies currently is how much cash they are generating, rather than the income they’re reporting. The tight credit environment makes an ample cash flow necessary, he said.
Shannon Weick, credit manager Emerald Home Furnishings, said many retailers are having a tough time. She continues to see more retailers — even usually prompt payers — who are now 30 to 60 days past due. In addition, more of the company’s customers need payment plans to catch up, she added.
Mid-sized stores are also having a harder time flowing containers of imports, she said. Some stores that in the past could turn containers in 30 days are having to ask for 60-days-plus dating.
Weick added that it’s important for retailers to control their costs, particularly overhead and inventory — if it’s not turning, don’t buy it, she said.
She adds that companies that can make it through the downturn will emerge with fewer competitors and leaner operations. “I think the people who survive this will do better. Lots are getting concessions from landlords, cutting overhead or moving into smaller buildings.”
As credit remains tight, some retailers even see the future of one of the industry’s most popular financing tools — no interest and no payments for an extended period — in jeopardy.
Carmen Valleri, owner of Rosen’s Furniture in northeastern Pennsylvania, said that about a third of his customers use such a financing plan.
“We were with American General and we got a letter that just said: 'We’re out of the business.’ So we have a relationship with people and they just choose to go out of business.”
Valleri said he is still able to offer a no-interest program through a pair of regional financing providers.
“That was a big part of why business was good. The long-term no-interest. That definitely created business,” he said.
But he also continues to see more customers turned down for financing as banks raise the bar for what is good credit. And he added that with the credit crisis, his relationships with suppliers also have changed.
“Dating and terms are just not there. I’m not that big of a company, I’m a small independent. For a small independent, whatever I can get comes out of FMG Buying Group. As an independent there’s almost nothing you can do on your own,” Valleri said.
He said the best financing plan for retailers used to be GE Capital’s 90-day terms. But GE exited the business and now, almost every invoice requires payment in 30 days, he said.
“It cuts your cash flow back. Every month that you don’t have the terms, it increases the amount of cash flow you need. You have to really either reinvest more capital into your business or cut your inventory back to generate that into cash. I think most of us have cut inventory back,” he said.
Longer terms had allowed retailers to keep more inventory on hand — something that larger furniture retailers can still do, he said.
“But the independent is being crunched from both sides. The lack of credit on the consumer side and lack of extended terms on the suppliers’ side reduces our inventory, which is a squeeze on the retail furniture owner,” Valleri said.
And for furniture retailers seeking an expanded credit line in this environment, the odds are not good.
“Right now, commercial banks look at you like you have leprosy,” he said. “The furniture business is not a business banks want to get into right now.”
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