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Factors count as industry finance dynamics change

Marc Barnes -- Casual Living, April 1, 2008

As a category, outdoor furniture is different from indoor. It’s meant to be set down on a patio or a deck instead of hardwoods or Berber carpet; meant to withstand a July rainstorm instead of a leap from the family Labrador.

Historically, casual furniture retailers have bought and sold seasonal merchandise differently from standard case goods and upholstered furniture, as well. With “early buy,” retailers buy furniture in August, sell it through the late summer, early fall and following spring and pay for it the following June.

Many say the financial dynamics within transactions are undergoing a change that echoes indoor home furnishings, as credit continues to get tighter with the worsening economy. Industry observers say more and more often, factoring comes into play, which means the manufacturing plants are selling their accounts receivables to a factoring agent. In exchange for a percentage, the agent pays the manufacturers up front — and many say the changes leave retailers with more questions than answers.

Carl Vice, general manager/owner of Kentucky-based Casual Living & Patio Center and president of the Casual Furniture Retailers Association, said the changes have meant that instead of the retailer dealing directly with the manufacturer, the retailer is now dealing with the factoring firm.

“He is in essence working with the bank,” Vice said. “Now the factoring agent has many manufacturers under the fold and is putting credit limits on the retailers.”

Vice said it’s worked out to be a cycle. With credit limits, retailers can’t buy as much furniture as they think they can sell.

“I have had situations where I have wanted to buy from a new vendor that I’ve never done business with before,” Vice said. “I’ve wanted to put the product on our floors and make it work, but I can’t get approved because I owe for all spring merchandise.”

The solution, Vice said, may well be to reduce early buy purchases to leave room financially within credit limits, to be flexible enough to take advantage of last-minute opportunities.

“Manufacturers don’t want to talk about it and retailers don’t want to talk about it,” said Vice. “It’s a sticky issue. I don’t know that anybody is a villain and I don’t know that anybody is a victim, but I do realize it is creating a lot of rough spots.”

Darren Linder, president and managing director of BB&T Commercial Finance-Factoring, said many want to get the merchandise on the floor sooner rather than later – to allow a longer period to sell. In those cases, a third of the repayment comes due in April, May and June.

“If the capacity is tight, we may ask them to pay earlier,” Linder said, noting the volatility within the market and length of time money is borrowed. “Some are on a $100,000 credit line and if they get another order, we would ask them to prepay some of what they already have. We would rather not do that. But in that space, the retailers get better terms than anyone else does. In most industries, we are at most net 90 and in these cases, we are making seven to eight months.”

Linder said banks have to closely examine credit limits and try to predict what will happen almost a year into the future. He said no one foresaw how bad the housing market would get – just like no one could have foreseen that Bear Stearns was almost out of money.

“Our biggest goal is to underwrite these guys as best we can to make sure they have as much credit capacity as warranted,” Linder said. “We are an unsecured trade creditor, which means if they are banking with the bank and they have pledged all their assets, then we are at the bottom if there is a bankruptcy filing or a liquidation.”

Meanwhile, industry observers say the changes are part economics, partly an evolution of the furniture industry.

“I think there are two parts to that equation, a struggle for liquidity in banks in the United States, due to the housing situation, and risk,” said Buzz Homsy, who heads Casual Classics, a buyers group that supplies 150 stores across the United States. Homsy said retailers need to realize the industry as a whole is in a crunch – and they need to adapt.

“People who have not been around a long time (whose) net worth is in inventory, who go to early buy every year for extended dating and find they are being cut back and that dating is not what it used to be, it’s going to be a big disappointment for them,” Homsy said.

Art Thompson, president of Laneventure, said he doesn’t use factoring but the fact that his competitors are, and that if retailers are being required to pay them first, means he is effectively subsidizing his competitors.

“I think for a long time, the early buy programs have been taken for granted,” said Thompson. “I don’t know that retail understands how expensive it is. If a sudden rise in factoring has brought that to the forefront, then maybe it is a good thing.”

Dudley Flanders, president of Lloyd/Flanders, said factoring helps his business and the retailers because it allows his firm the flexibility to finance receivables for operating capital – and dealers themselves don’t have to borrow money to finance inventory.

“If the dealers have good strength on their own, they should be able to find their own financing,” Flanders said. “The advantage in factoring over asset or inventory lending is that you can borrow a greater percentage of the invoice … (but) you pay a premium for extended dating. Financing for 120 or 140 days or other conditions is going to be more costly than 90 days.”

Joe Logan, executive director of the International Casual Furnishings Association, said he is aware that factoring is becoming more prevalent within the industry – and that it is having some effect.

“Anytime you insert a middle man between the two, for whatever reason, it doesn’t necessarily work to improve relations between the parties,” Logan said. “The reality of the marketplace, whether good or bad, is that we will be faced with dealing with it.”

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