Share this on

Trade Finance Business Slowly Stabilizing

Heath E Combs -- Furniture Today, June 8, 2011

Volatility in the Industry HIGH POINT - As the economy and home-related industries went into decline a few years ago, and retail bankruptcies were on the rise, the availability of factoring and related trade credit for furniture suppliers took a big hit.
"I'm always wary of a very small company who's asking for extended terms. A lot of times in today's world what that really means is they're trying to make it a consignment sale without saying it." Rick Mantin, Lyon Capital
     But most trade finance companies are reporting that their business these days has stabilized with a back to basics approach - judging clients by profitability, management and ability to pay.
     Trade finance is a many pronged field with a variety of options for suppliers. Furniture suppliers often use a factor to get advance funds - which in effect are asset-based loans on product delivered to retailers - for use as working capital.
Retailers are then extended terms by a factor, which collects on the receivables. Most factors interviewed for this story said that the industry's most common terms currently are about a month, with a grace period.
     "The banking environment is very good for large companies. But the problem is that midsize companies and even small to mid-size companies are not getting the credit they deserve." Tony Brown, Delta Trade Fina
     Rick Mantin, president of Lyon Capital, said the industry has stabilized at its new reality.
     He said Lyon is a "true old-line factor" - it advances funds, manages accounts receivable, collects money, and provides credit guarantees and non-recourse debt. In the past few years it expanded into non-funds advanced factoring and more recently into purchase order financing.
     Lyon's volume in factoring has picked up in recent years because banks have reduced suppliers' credit lines.
     Mantin said that within the furniture industry there is still a tremendous need for advanced funds and credit guarantees - meaning that if a retail customer fails to pay a factored invoice, Lyon assumes the loss. The need for funds has been a driver of business for Lyon as other sources stopped advancing money, he added.
     "Everybody sees what's going on in our industry with bankruptcies and consolidations.
     It's a real tough time," Mantin said. Lyon gives most retailers terms of a net 30 days with a grace period. Some larger big box retailers get between 60 and 90 day terms.
     Some smaller retailers still ask for extended terms, although that isn't really an option these days for most, he said.
     "I'm always wary of a very small company who's asking for extended terms. A lot of times in today's world what that really means is they're trying to make it a consignment sale without saying it. If they can get terms of 90 they'll try and sell it, and if they can't sell it, they're going to try to return it and are not going to have the money to pay for it," Mantin said.
     In purchasing, he said there's a trend toward larger container shipments with lower profit margins for the supplier and retailers.
     "I think importers are getting hammered by the retailers to bring the price down as much as they can," he said.
Tony Brown, managing director, sales and marketing for Delta Trade Finance, which has had a significant focus on furniture for about four years, said credit has been drying up not just for suppliers and retailers, but for manufacturers in Asia as well.
     Delta extends credit on an unsecured basis, with no collateral, said Brown, who calls the company a venturesome lender rather than a typical trade finance firm. The company focuses on U.S. importers with sales between $25 million and $350 million, he said.
     Its clients typically are well established and growing fast, but don't get the necessary support from banks and traditional factoring companies. Delta provides cash to exporters when they ship and gives importers terms, or trade credit, on goods brought into the U.S.
      Brown said that while many big companies are doing well and retail has improved in recent years, many U.S. lenders are still unwilling to extend financing to mid-size companies like they did before the recession.
     "The banking environment is very good for large companies. But the problem is that mid-size companies and even small to mid-size companies are not getting the credit they deserve," he said.
     That has left fast growing mid-size companies unable to borrow and short of working capital, he said.
While the United States has been worried about deflation, China - the industry's biggest source of imported home furnishings - has been dealing with rampant inflation and has already raised interest rates three times this year.
     "Raw material costs have gone up. Labor costs have gone up at precisely the time when Chinese banks have been pressured by the Chinese government to hold back credit to companies. Banks in China are trying to hold back credit to cool things down," Brown said.
      Delta, however, is able to extend credit and is "overcoming the cash flow squeeze the Chinese exporters find themselves under," Brown said.
     Michael G. Hudgens, head of business development, Southeast region, for CIT Trade Finance, said that currently credit protection is the primary focus of the company's furniture business. Suppliers use the service to shield themselves from retail bankruptcies and nonpayment.
     Hudgens said the trade financing business is stabilizing, due to a washout of weaker companies and more willingness by banks to lend. But suppliers are still concerned, wondering where their next loss will come from.
     "There's still a lot of volatility in the industry at the retail level. It's somewhat regional. As you might imagine it kind of follows the trends of the economy in general," Hudgens said. CIT is looking for strong companies with good customer bases and good relationships with their factories, he said.
      Hudgens also noted that banks are starting to extend more credit to furniture retailers as a way to diversify their holdings and give themselves some assets to liquidate if things go wrong. He said there is support for the "right companies." Primarily regional banks, which traditionally had a book of business in real estate, are starting to lend more in the furniture realm because they can more easily tell what the collateral is worth than with real estate.
     Scot Barber, vice president, business development, for Wells Fargo Finance, said the environment for trade finance is better this year than in 2010 and that the industry has improved a "little bit." Barber said small retailers are still facing a challenge getting consumers into their stores. Bigger, publicly held stores seem to be doing better, he said.
     He added that in assessing its factoring clients, Wells Fargo looks for seasoned management and profitability. Suppliers with solid relationships with source factories - especially if they can "lean on" the factories for some trade support - also have an advantage with Wells Fargo in obtaining trade credit, said Barber.

Share this on

Update: CIT future still uncertain

Jul 24, 2009

Future unclear for CIT

Jul 20, 2009

Credit worries on rise in industry

May 5, 2008

CIT: We'll keep lending

Nov 9, 2009

CIT future still uncertain

Jul 27, 2009

Also by this author

Also by Heath E Combs

Featured Company

Wright Labels

Bill and Tom Wright founded Wright of Thomasville in 1961 on the idea that printing was a creative medium and the belief that "a promise made is a promise kept." The Wright brothers focused their attention on providing exceptional printing for the... more

Most Recent Resources

Atlanta International Gift & Home Furnishings Market

Here is a selection of products shown at this month's International Gift & Home Furnishings Market here.

Networking at the 13th annual F/T Leadership Conference

NAPLES, Fla. — Industry executives and guests took the opportunity to network and play golf during down time at Furniture/Today's 13th annual Leadership Conference here this month.