Until the fall of 2008, obtaining or extending a line of credit with a bank, or even getting a small business loan, was a relatively painless process. Now, in 2011, the banking environment poses challenges for retailers looking for financial assistance. This article presents both sides of the equation, as well as tips on what you can do to improve your banking relationships.
The Retailer’s Perspective
One retailer told me he, “hasn’t felt much like a customer lately,” when describing his long term banking relationship. Other retailers have had their credit lines reduced by as much as 30 percent, even if they weren’t currently being used. In another instance, a bank wanted seven figure life insurance policies on both the owner and his wife, in order to secure financing for a particular project. One store I spoke with shared that his bank wasn’t even interested in his inventory as collateral, and would only take real estate. Perhaps the most disturbing case, however, involved a bank demanding more collateral from a retailer, or risk having the note “called.” In the eyes of this bank, more collateral meant more inventory, since inventory to the bank is an asset. This was a slow turning store that kept inventory levels way above optimum levels. They also resisted taking markdowns on old goods, for fear the bank would get nervous when lower gross margin figures were discovered. The store felt they were actually being forced into making bad business decisions.
The Bank’s Perspective
Even though there have been recent indications that banks are becoming somewhat more willing to lend to small businesses due to a gain in economic momentum, a retailer should expect more reluctance than in previous years. There are several reasons for this reluctance, but it mainly comes from increased requirements of bank examiners, declines in financial strength in some institutions, A rise in past due and troubled assets, erosion of consumer confidence, and an uncertain outlook for the future.
If you have intentions of ending up with more than a cup of complimentary coffee and a free pen from the next visit to your local banker, consider the following suggestions:
1) Communicate effectively and often. Bankers don’t like surprises.
2) Provide the banker with the information requested in a timely fashion. There are reasons behind every request.
3) Bankers look for positive trends. If you can deliver good news, do so.
4) Bankers are constantly looking to show management and examiners areas that will reduce the level of risk to the bank going forward. If you have a line of credit that can be reduced due to lack of use, consider reducing it.
5) Bankers are working harder because of increased scrutiny across many levels. Be prepared to supply more frequent financial data.
6) Don’t be combative or adversarial. Banking is a relationship business. Work with your banker, not against him or her.
7) Strive to become the “A” customer, even though you may not always feel like one; this doesn’t mean that you have to have the best balance sheet or the highest volume store. Being responsive, truthful, timely, reasonable, available and cooperative will go a long way toward strengthening your banking relationships.
Continued uncertainty will most likely challenge retailers throughout 2011. In order to cope with an ever-changing economic and financial climate, there are steps that can be taken. Negotiate the longest payment plan you can with vendors. Try to sell at least half of what you are buying before you have to pay the invoice, and buy what you can from vendors that offer you the best terms.
Consider the merits of the following strategy. Assume for a moment that you are able to negotiate 60 day terms with a few key vendors, and that you turn your inventory three times.
3 turns = 121.6 days of supply (365/3)
Approximately half of the merchandise is sold by the time the invoice is due.
Would it ever be possible to sell all of the merchandise prior to paying for it? If you can get ninety day terms and turn the inventory four times, for all practical purposes the entire inventory will be sold by the time the invoice is payable.
4 turns = 91 days of supply (365/4)
Simple math will show that 2 turns = 26 weeks of supply, 2.5 turns = 20.8 WOS, and 3 turns = 17.3 WOS. An improvement of only one week in annual sell-through increases cash flow by approximately 1 percent of annual sales. This point alone makes the case for all retailers to strive for increased turnover.