Risky Business
Financial resources, strategies top bill at Apparel Summit
The current economic downturn and the Sept. 11 terrorist attacks and their effect on the apparel and textile industries in Los Angeles were the main topics of discussion at the Apparel Summit organized by the California Fashion Association (CFA) and held on Nov. 13.
The Summit roundtable was moderated by Ben Seigel, a shareholder of Buchalter, Nemer, Fields & Younger, and was filled out by Ron Bossi, regional vice president of Union Bank; Mitch Cohen, senior vice president of Tyco Capital/CIT; Frank Brancale of the Small Business Administration (SBA) district office; Fred Gaylord, senior vice president of Capital Factors; and Lee Hirsch, president of Continental Business Credit. Also contributing to the discussion was Ilse Metchek, president of the CFA.
Those in attendance included Lonnie Kane, co-owner of Karen Kane Inc., attorney Jeff Kaper and Vera Campbell, owner of Design Zone and J.T. Design Studio.
The panel’s consensus was that pragmatic, positive solutions to financial problems facing manufacturers of all sizes are needed. Following are excerpts from the discussion. —Darryl James
Credit Crunch?
Q: A growing number of businesses say that after the terrorists pushed a wobbling economy deeper into a slowdown, spooked lenders make credit harder to get and often more expensive for the companies that need it most. If that trend persists it could deepen the downturn by restraining growth. Does everybody agree with that? Is credit tightening up rather than loosening up? Hirsch: From our perspective we have more money to lend today than we ever had in the past. And we’re more than willing to lend to those prospective borrowers that meet the general criteria that we have established. We just want to know everything that’s going on in the business—the good and the bad—so we can make a critical decision.Government Resources
Q: We hear about governmental bailout of the airlines and [how] millions of dollars are being spent to bolster airline security. What about government sources that are available to the textile and apparel industries? Frank, tell us about the availability of [Small Business Association] funds and whether the SBA can react quickly enough to help small businesses. Brancale: There are two types of SBA [programs]. There’s the traditional type of SBA [program], where small businesses approach the agency for assistance. We do not make loans. Our bank partners make loans. We just guarantee the loans.
If your business can’t open up because there’s rubble on the front doorstep because of an earthquake, that’s a traditional problem and it’s addressed by FEMA [Federal Emergency Management Agency] and SBA with respect to disaster loans. It’s very easy to identify the source and you know who’s been impacted. When 9/11 struck, if your business was adversely impacted and you were in Manhattan, you were eligible for disaster loans.
[With 9/11], this is the first time that we had this type of a problem. Within a week after that, we were getting calls from travel agents in and around Los Angeles saying [their] business was off 75 percent, [they were] going down the tubes and needed financing. What was available to these people were our traditional lines but they were not eligible for disaster loans because they were not in Manhattan.
On Oct. 22 the government opened up [the relief program] nationwide. That means these people could now apply to Sacramento [for disaster loans] but you have to be able to directly link it [to the national disaster]. It’s really difficult for an apparel or textile company in Los Angeles to really get that linkage to the World Trade towers. Clear Communication
Q: Should borrowers be completely honest with their lenders about difficult situations especially in light of economic issues facing some businesses as a result of Sept. 11 events?Cohen: I think if you’re proactive, you [can end up] with a good lender who is here to help you grow your business and understand those issues. I would not be afraid of going to a lender with those issues. I would look forward to it as an opportunity to bring him up to date with what’s happened, where [your business is] going and what you should expect.
Lender[s] today [are] more sensitive to issues that a borrower would have, and also have their own issues heightened because their own business is off. You’ve really got a common denominator when you meet with these people. We’re in this together. And that’s a good attitude. Brancale: You can take the initiative if you’re having difficulty now. Generally speaking, there are three major financial statements. There’s the balance sheet, income statement and cash flow. When things get tough, cash flow is the most important statement you can have. Resources for New Businesses
Q: There are a lot of new apparel manufacturers coming on line. What are the chances of them getting credit?Bossi: There is money available for that. The person has to have a very, very strong reality-based business plan with good projections, or put it into an intermediary and approach a bank. There are ways that those businesses can get funded. We’ve done those. Q: In general, that happens all the time. What about now, versus two years ago, before the economy began to slide downward?Bossi: Maybe you don’t start it now. Gaylord: I’d like to take the opposite view of that. If you look at some of the larger companies in this country—General Electric, Procter & Gamble—all these companies started in the Depression when things were really bad. I think you have to look at it as an opportunity. Start at the bottom; there’s only one way to go and that’s up. We take startups in our shop every week. We have a small business division and we help those guys get to where they want to go. Maybe only one attempt is going to make it but that one attempt is going to graduate to big capital and possibly put us on the map. Q: [Some] new businesses are starting to get some of the larger retail accounts. But one of the biggest problems with [working with] larger retail accounts is the whole issue of cash flow. They hinder some of these people who think they’re going to have money [available] and they don’t. What kind of recommendations do you make to these people as to what they should be planning for cash flow in those circumstances? Gaylord: That’s why factoring is good.
Cohen: Something important is diversification. If you have all your eggs in one retailer, you’re really owned by the retailer. Are you a subcontractor to the retailer or are you an independent company? My recommendation is, don’t go too deep with anybody and know the rules of the game before you ship the product, because if you’re expecting to collect 90 cents on the dollar and you’re only going to collect 75 cents, obviously your business model is not going to work.Hirsch: This is where the full disclosure comes in. As a lender we understand what’s going on with that retailer. We understand how that retailer performed, what their behavior is like, what their morality is like. Where a factor provides [for a company] in terms of purchasing receivables, we guarantee the credit worthiness of the account. We don’t guarantee their morality. But we can tell you what their morality is like, what they do and what they don’t do, how they treat their vendors, how they treat new vendors and that type of [information] to give that new manufacturer some information that they may not be armed with. Even if it’s an Urban Outfitters or a Barneys, the gross profit has got to be very, very big so they can support the risk in the downside of working with one customer. As a lender to the arena of emerging companies, we look at those kinds of components and who they’re doing business with and what their backgrounds are. We try to share the information that we have with every borrower that we have and every potential borrower. Export Financing Available
Q: Is there a difference in financing for a company doing business locally or one that exports the majority of its business?Bossi: There are many programs that are geared toward international transactions. Most of the government desire is to export, not necessarily import. We’ve got an enormous trade deficit. If you’re exporting product, there’s a program. Also there’s the CEFO—California Export Finance Office—that’s an export program. Brancale: You might have a specific program with your bank where you’re doing domestic work and your financing is geared to that. You might nail down a contract to do some exporting and this might be a first for you. There are loans that are available [that allow] you to carve out that specific piece of business and have it financed on short-term financing on a line of credit and still keep the amount of money you have geared to your domestic business. Metchek: The CFA with the [World Trade Center Association] just received an apparel industry grant [for] $1.5 million over a four-year period to get all that information out. Financing Far East Production
Q: We [also] need to consider the fact that a major source of inexpensive labor is still in Pakistan, Bangladesh, [India], Turkey and a lot of other Third World countries. What do you guys need to know to continue financing those businesses that are doing their sourcing in the Middle East and places around the Middle East? What about shifting sources back to the United States and Mexico, or Canada and South America?Brancale: I think you have to look at the political scenario in these countries. If you are sourcing out of Indonesia—it’s probably the largest Muslim country in the world—there could be a problem in the future with respect to the availability of raw materials. If you’re bringing textile from there you need to hedge the bet a little. You need to come back to Mexico, come back to the Caribbean, maybe even come back to the South. Metchek: The South really lost the labor force and the equipment. That equipment was pretty much shipped to the Caribbean. Campbell: I think that depends a lot on your relationships in India and Pakistan. There have been people that have been very successful doing business in India and Pakistan. Does it help to be Indian? Yes, it helps a lot. I don’t even do business in that part of the world right now, [but] in the last three months, I’ve been contacted by three or four different people in India and Pakistan who have some very sophisticated online procedures for importing from those countries. Probably the most sophisticated I’ve seen in terms of tracking production.
Cohen: China is basically the alternative. And we see most of the growth [there]. We have guys that are importers of 10 percent of their business and we have people that are 100 percent importers. If the guy was 100 percent importing and he was importing from those markets I would think you have a real problem. He didn’t show good decision making in the first place because he put all that risk into an area of the world that has been in turmoil and he should be sourcing throughout the world. Hopefully, we have a window now so that before it gets any worse, he can pull out of this [area] and replace it with other suppliers. Bossi: I’m not so much concerned as whether it’s Pakistan or India; I’m concerned with sole sourcing. If you’re buying from one source, in effect, he owns you as well. You’ve got to have multiple sources. I can’t tell you where to buy—you know that far better than I—but you’ve got to have backup sources [and] contingency plans. Your lender really wants to know and if you have the right relationship with him, he’s already going to know that you’ve got a multiple set of sourcing. It’s having that regular information exchange. If that’s happening, 90 percent of what we’re talking about today is going to get worked out. Because he’ll know, he’ll give you advice of what some of his other customers have done. Funding Options for Troubled Companies
Q: [Some] businesses that appear to be directly affected by 9/11 may have [already] been in trouble, but all of a sudden they’ve had tremendous order cancellation, they’ve had to lay off people, and they’ve defaulted on their loan agreements. What are you doing to deal with these situations? Hirsch: It goes back to what your relationship has been with the borrower in the past. We would probably enter into some kind of a forbearance agreement and expect the borrower to dispose of some inventory. Bossi: It comes back to understanding the borrower. If you’ve got a company that is successful, vibrant and it gets hit with 9/11, you’re going to work out solutions to fix that. If you were doing the right thing and going in the right direction and we all agree it’s got a future, 9/11 shouldn’t be an issue. Cohen: I would take a look at the problem, put it on the side and look at the rest of the business. Maybe we should carve out a term loan and carry that inventory and not disrupt the whole business. If there’s enough net worth and you have a good relationship, you shouldn’t overreact to everything that happened. Gaylord: The last thing the lender wants to do is a foreclosure. We lend money. That’s what we do. The idea is to try to keep lending. Case Study: Evaluating Collateral
Q: We have a question from one of the CFA members, a [hypothetical] scenario that they wanted us to include in the program. Suppose that your borrower, because of the 9/11 situation, has a lot of cancellations [and a] lot of problems but they have good projections for the future. They need additional short-term capital for $500,000 and you’re willing to provide it on the basis of a short-term secured loan. You already have a security interest in inventory to support your current financial accommodations. The customer will put up additional collateral in the form of trademarks, copyrights, accounts receivable, personal real estate and a breach-of-contract action against a textile mill in which your borrower is seeking $5 million in damages. Are you going to give that customer that loan? How does the lender evaluate that kind of collateral in view of the current economic situation? Cohen: There are people in town who will give you an evaluation of a company’s trademark and evaluate the cash flow that trademark represents and issue a value to that. Bossi: It’s important to understand that there’s a difference between a collateral lender and a bank. All make lines of credit and all use collateral. But normally I’m not looking at the collateral being my primary source of repayment. I’m looking at the health of the business, cash flow, projections, the state of the balance sheet in general.
If you’re dealing with a bank and you have a line of credit, it’s important to make sure that your collateral is available for an asset-based lender. I may have a line of credit and at some point I may say I need to rely on that line of credit more than I had historically. I may say I need to do a collateral audit. I need to send our people in to look at your books and records. I need to make sure that should I need to rely on that collateral, it can be an effective source of repayment.
Some of these things, patents, trademarks are not going to be worth a lot to most collateral lenders or even a bank. It’s an asset that’s not going to be available to me as a source of repayment. I can’t take your trademark and go out into the marketplace and turn it into cash. But there are sources out there that will rely much more on that. You have to do your shopping and find those sources. Q: Are you evaluating collateral differently today than you were on Aug. 15?Hirsch: For us we’re basically using the same standards. We have not made a paradigm shift in how we’re evaluating the collateral. We were relatively conservative in the past on making overadvances in secured types of arrangements. Cohen: I think we are more aggressive. We’re challenged today to look at the individual opportunities and make the necessary decision. [We ask], is this a guy that’s going to survive? Is this product a winner, and does it have a real long-term place in the market? If we feel good about that analysis we will be more aggressive today to step out and help those people than we would have been in the past. Gaylord: I don’t see anything any different than what we saw before 9/11. Good credit is good credit. You look at the positive view of it—you still need the cash flow, you still need the financials, you still need the customer lists as far as factoring is concerned. Those are things that we’ve always required. We may be taking a little more risk on the customer side because of what’s going on in the retail market but we’re still taking that risk. We’re still doing business. We’re not changing a whole mode of operation because of what developed. You just find a way of doing it. As far as factoring, we may not concentrate on getting the apparel business as much as we were before, but we’re still seeking apparel business. Bossi: I don’t think there’s any change because of 9/11. In an overall economic down-cycle you’re making less interest income because your portfolio starts to shrink. If anything, there’s a desire to try to replace assets, so you’re going to look harder to do a transaction. I’ve got to increase my operating income this year. But in being more aggressive you’ve got to be more cautious. You’ve got to analyze the business and where the business is going and make that determination. But I don’t think 9/11 has changed what we’re all saying.
