Checking Credit From the Trade Show Floor
As manufacturers and retailer prepare for the Las Vegas trade shows, finance experts offer tips for taking and placing creditworthy orders.
The upcoming MAGIC Marketplace and the satellite trade shows surrounding it in Las Vegas can be an exciting time for new labels to ramp up business and for clothing stores to find a new spot of brightness in their apparel lineups.
But business is business. And the experts are saying that while there are tons of new faces on the trade show floor, with things such as fresh-looking T-shirts and screen-printed cashmere sweaters, make sure you do your financial homework before placing orders with a new manufacturer. Likewise, manufacturers should check out the credit background of new retail customers.
“My experience shows that manufacturers sometimes become overly excited at the prospect of having so many potential customers and forget credit basics,” said Sunnie S. Kim, president and chief executive of Hana Financial Inc., a Los Angeles company that specializes in factoring and purchase-order financing. “The one overriding common mistake that the majority of the manufacturers make is that they do not know the customer. Manufacturers are sales-driven and get into the habit of believing that all orders are good orders.”
That being said, many financial experts who deal with apparel and textile clients don’t discourage manufacturers from writing as many orders as they can. “If Don King comes to your booth and wants to buy 10 million pairs of jeans, book it, then worry,” said Paul Herold, senior vice president of marketing at First Capital (Western Region), a financial institution in Los Angeles. He explains that manufacturers can do their financial homework on a new client when they return to the office. But they must do their financial homework. If a company doesn’t sound creditworthy, don’t do business with it.
“I have seen people who foolishly take the position that, ’Oh, I have orders on net-30 terms [buyers pay the invoice 30 days after the goods are shipped], and I am going to ship.’ They take their chances. That I would not recommend. That is very dangerous,” said Don Nunnari, vice president of Merchant Factors Corp. in Los Angeles.
Many manufacturers use factors to do the painstaking work of checking up on the financial credibility of a new client. Factors are the financial institutions that make the apparel industry’s wheels go ’round. Their job is to buy your accounts receivables and pay you for them once the goods have been shipped. Then they worry about collecting the accounts receivables from the stores. Of course, that costs money. Manufacturers usually pay a factoring commission as well as a percentage of the factored volume.
But sometimes manufacturers aren’t associated with a factor, so they have to do their own financial sleuthing.
“The key is to try to know your customer,” said Dave Reza, senior vice president of Milberg Factors Inc. in Glendale, Calif. “Create a process for getting information about who your clients are to make the sale.”
Experts suggest that manufacturers ask buyers for their bank and credit references, as well as the company’s financial statements. Then call those references. Ask to talk to other manufacturers that have done business with the buyers to check out their invoice-paying history.
Dun & Bradstreet, based in Short Hills, N.J., has a credit-rating service with financial data on millions of private companies around the world. For a fee, it will share those credit ratings, which are often used by big businesses trying to determine the creditworthiness of a firm.
Buyer beware.
On the flip side, buyers should take a buyer-beware attitude when dealing with clothing manufacturers, particularly if they have just appeared on the scene.
Bruce Berton, director of international business consulting for accounting firm Stonefield Josephson Inc. in Los Angeles, said buyers need to pose a number of questions to manufacturers, especially those importing from overseas. “Ask how long they have been in business,” Berton said. “The next question is to ask if they have been factored [if they have an account set up with a factoring firm]. If they are factored, it means they have some type of financials in place. If they import apparel, ask if they own the factories or are import/design manufacturers.”
Ask manufacturers how they deliver their overseas goods. Is it FOB (free on board) USA, meaning they will pay the freight costs to get the goods to the U.S. port of entry and you are responsible for the rest? Or is it LDP (landed, duty paid), which means they deliver it to your door? “Few specialty stores have import departments, so they prefer to ship LDP,” Berton said.
In addition, he suggests that retail buyers make sure they know the terms of paying their invoices, such as net-30 and net-60, meaning you pay the invoice 30 days or 60 days after the goods are shipped. Also, ask if there is “anticipation,” which is a discount given to retailers if they pay their invoices before the due date. “You usually get a 1 to 1.5 percent discount for paying invoices early,” Berton noted.
Harry Friedman, senior vice president with Rosenthal & Rosenthal Inc., a factoring and asset-based lending company with offices in Woodland Hills, Calif., said retailers should treat their dealings with a manufacturer as if they were hiring a new employee. Ask for references and ask what stores they are selling. “When at the show, try to speak to the right people,” he said. “Many times the people in the booths are the salespeople. Try to talk to the decision makers or the company executives to get the right [financial] information on the company.”
To get more time and attention with the salespeople, he said, it helps to set up an appointment ahead of time. You can get company names and booth numbers from trade show organizers.
Above all, make sure you and the manufacturer are on the same page when it comes to merchandise, terms and price. “If not,” said Kim of Hana Financial, “much time and energy will be wasted in the future trying to resolve disputes.”
Factors FAQ
Factors are financial institutions that lend money to apparel manufacturers by buying their accounts receivables for slightly less than the full value of the invoice. Factors help manufacturers check the creditworthiness of their customers and are responsible for making sure the invoices are paid on time. Factors also charge a commission, which is based on several variables including:
bull;Factored sales volumebull;Average invoice sizebull;Terms of sale to customersbull;Number and type of customers
