Globalization creates challenges, opportunities in furniture financing arena
By Marc Barnes -- Furniture Today, February 25, 2007
High Point — The only constant in the furniture industry is change.
As furniture production has shifted offshore, marketers who were once used to dealing solely with domestic suppliers are adjusting to the new world of how to obtain goods from overseas and more importantly, how to pay for them.
Industry observers say that securing good terms on import financing can free up needed capital for expansion. Many say the biggest challenge for the industry when it comes to importing, beyond language, cultural differences and distance, is that it has had to learn how financing gets done — and learn it quickly.
"The furniture industry is a latecomer to imports," said Lewis Tabb, senior vice president of CIT Commercial Services. "We do business in three industries — apparel, textiles and home furnishings. Furniture has done in five years what it took textiles 20 years to do."
As furniture imports began to ramp up a decade ago, letters of credit were the primary means by which inventory was purchased. The letters provided foreign companies with reassurance that they would be paid and with the capital they needed to purchase raw materials. They provided American importers with a guarantee that the foreign manufacturers would do what they said they would do.
The downside, according to Thomas V. Pizzo, president and CEO of Wells Fargo Century, is that letters of credit can be inflexible.
"That ties up your line of credit," said Pizzo. "A lot of people would prefer open lines of credit. You don't have as much availability of capital to play with."
To counter that, financial experts have come up with new methods of funding the purchase of inventory from overseas, which provides both sides with assurance that the transaction will be successfully completed.
That's especially true with Chinese manufacturers, who have ordinarily insisted on letters of credit and have become more willing to accept different methods of financing within the last couple of years, according to Pizzo.
A big part of the equation might well be the level of risk the importer is willing to accept. Carol Treventi, director of marketing for Sterling National Bank, urged importers to be cautious as they go forward, especially at the beginning of the business relationship.
"It's really better if the bank can assist you," she said. "We recommend that you use the letter of credit to assist you in the level of protection that you may need in terms of familiarizing yourself with your manufacturer overseas."
New approaches
Still, letters of credit are being used less often in favor of other types of purchasing, according to Elizabeth Atkins, senior vice president and head of supply chain for Wells Fargo HSBC Trade Bank.
Instead of a straight open account, Atkins said that Wells Fargo offers a global payables service, in which the exporter can get money almost immediately at shipment. The buyer in the United States can issue a draft to the supplier in Asia and the draft works like a future-dated check.
The exporter can then take the draft and present it at the Wells Fargo branch overseas, where it is sold to Wells Fargo at a discounted interest rate based on the creditworthiness of the buyer — which at U.S. rates is better than the rates the supplier would otherwise get in Asia. The supplier gets its money and Wells Fargo holds the draft until it matures, in about 90 days. The draft is then presented to the U.S. buyer for payment.
"You've gotten the best of both worlds," said Atkins. "The buyer gets an extended term to pay, and the supplier can get money immediately."
GE Capital Solutions offers a Trade Flow Finance solution, in which GE pays the exporter up to 100% of the value of the goods shipped and provides payment terms to dealers that match their inventory sales cycle.
"Exporters receive full payment from GE and dealers receive a credit line to redeploy their cash into their growing businesses," said Peter Salzer, managing director of Trade Flow Finance.
Anthony K. Brown, international managing director of GMAC Commercial Finance, said that a letter of credit can still be useful, especially in the beginning.
"One good thing about a letter of credit is that it is a good control over performance," he said. "If (the product) doesn't ship in time (or) if it's not the quality that you want, then a letter of credit is a mechanism to use to decline or deny payment. If they are dealing with you for the first time, they may want a letter. But once you trust each other, an open account is the preferred form of credit."
That's because a purchase on an open account can be advantageous in its timing. Structured properly, the furniture can be sold to the retailer — and the money collected — before the charge for it is owed to the manufacturer. That helps the importer maintain good cash flow, but only works as long as the relationship is solid.
"You could get paid by your customer before you have to pay the foreign vendor," said Brown. "In which case, your vendor has financed your working capital, which is nice if you can get it."
To help provide funding for the purchase of raw materials, GMAC acts as an export factor, purchasing the receivables and providing immediate payment to the export manufacturer.
Sharing the risk
Mark Sunshine, president of First Capital and CEO of Siemans First Capital Commercial Finance, said that his firm provides credit guarantees on the manufacturers' accounts receivables, which gives the manufacturers some confidence in the importer.
"We figure out who they should be and should not be shipping to and if it is someone they should be shipping to, we guarantee the financial performance of the buyer," he said. "Then, if the buyer defaults because of inability to pay, we are on the hook."
Usually, given Siemans' size and credit rating, the payment guarantee is good enough to avoid having to use a letter of credit — and offering an earlier payment instead. The buyer, in turn, can get a discount in return for paying early. For the seller, Siemans can use its relationships with Asian banks to arrange loans using the accounts receivables as collateral, in a way similar to a senior secured capital loan in the United States.
The one thing that such an arrangement can't do, Sunshine said, is to guarantee the performance of the manufacturer. For that, he advises that importers get on the plane and go over and see their sources for themselves — the same way they would have done years ago if the furniture factory was in North Carolina or Mississippi.
"The same rules of common sense apply, except in Asia, you will have additional problems with cultural and language differences," he said. "For the first few turns, make the same effort that you would with a new supplier in the U.S."
Tabb, of CIT Commercial Services, said that an importer would do well to set aside one person in the organization — and not necessarily the credit manager — whose job it is to learn about different ways of financing and become proficient at them.
"We have several clients who have good systems and are set up to manage this," said Tabb. "And we have people who manage to botch it up pretty good. There is no question but that you will make mistakes, because things change faster than you can plan for them."
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