Navigating Retail Banking Challenges: Strategies for Financial Resilience

26 MAR-APR11

Most retailers experienced their best holiday season in 2010 since the start of the recession. Despite Christmas falling on a Saturday and extreme winter weather in some parts of the country hindering sales the last week of December there was reason a plenty to celebrate the coming of the New Year.

During this past holiday season I spent some time talking with bankers as well as retailers to find out why banks have been reluctant to extend credit to even the most creditworthy retailers. 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. Even as we enter 2011 the banking environment continues to pose challenges for retailers looking for financial assistance.

The Retailer’s Perspective

One retailer told me he “hasn’t felt much like a customer lately” when describing his long-term banking relationship. I also heard from retailers who have had their credit lines reduced by as much as 30% even if the lines weren’t currently being used. In yet 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 owner I spoke with shared with me that his bank wasn’t even interested in his inventory as collateral and would only take real estate.

Perhaps the most disturbing case 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 which keeps inventory levels way above what I would consider optimum. 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 by the bank into making bad business decisions. Talk about being in a no-win situation…

The Bank’s Perspective

Even though there have been recent

Indications of Changing Bank Lending Practices

There are indications that banks are becoming somewhat more willing to lend to small businesses due to a gain in economic momentum. However a retailer should expect more reluctance than in previous years. The reasons are several but mainly come 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.

What You Can Do Now

If you have intentions of ending up with more than a cup of complimentary coffee and a free logo pen from the next visit to your local banker consider the following suggestions:

• Communicate effectively and often. Bankers don’t like surprises.
• Provide the banker with the information requested in a timely fashion. There are reasons behind every request.
• Bankers look for positive trends. If you can deliver good news do so.
• 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.
• Bankers are working harder because of increased scrutiny across many levels. Be prepared to supply more frequent financial data.
• Don’t be combative or adversarial. Banking is a relationship business. Work with your banker not against him.
• 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. To cope with an ever-changing economic and financial climate there are steps you can take now. To begin 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 who offer you the best terms.

Consider the Merits of the Following

Ritchie Sayner: First Talk to Your Banker—and Then?

Ritchie Sayner

Published in the March-April 2011 issue of Shoe Retailing Today copyright ©2011 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.

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.

Work the Numbers

3 turns = 121.6 days of supply (365 divided by 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 90-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 divided by 4)

Simple math will show that:
– 2 turns = 26 weeks of supply (WOS)
– 2.5 turns = 20.8 WOS
– 3 turns = 17.3 WOS

An improvement of only one week in annual sell-through increases cash flow by approximately 1% of annual sales. This point alone makes the case for all retailers to strive for increased turnover.

Use of personal credit cards is also becoming a very common practice when paying for merchandise. I know of a retailer who prefers to use a credit card when possible. This practice not only provides for longer payment options but an additional big benefit is hundreds and hundreds of dollars of free airfare as one retailer told me. This merchant also takes advantage of the points he gets to obtain gift cards which are used as employee rewards.

Just because credit is more difficult to come by now than it was in the past need not suggest that today’s retailer abandon all hope and adopt a “management by crisis” mentality. It does however mean that creative ways to finance growth be considered – and improving inventory turnover should be the Number 1 way.

Contact Information

Ritchie Sayner is vice-president of business development for RMSA a national retail consulting company specializing in sales and inventory forecasting. He can be reached at rsayner@rmsa.com or 816-505-7912.

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Manager: Tanja Towne

Phone: 520-209-1712.

Ritchie Sayner

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