Distributors tighten credit standards; stay committed to supporting retailers

Home Inside FCNews Distributors tighten credit standards; stay committed to supporting retailers

By K.J. Quinn

The job of a flooring wholesaler has never been easy, and today is vastly more complex than it was several years ago. While distributors have essentially morphed from selling agents to service companies, one critical core function which remains constant is serving as a source of credit for customers to help finance their businesses.

“Well-capitalized wholesalers provide an often overlooked or underappreciated service to the channel,” said Scott Rozmus, president, FlorStar Sales, Romeoville, Ill., and a member of the North American Association of Floor Covering Distributors’ (NAFCD) board of directors. “They help the engine go.”

Distributors consider themselves an integral part of the supply chain because they can support a multitude of retailers in a concentrated geographical area. But there are limits. The changing retail landscape and challenging economic conditions are not only affecting the way floor coverings are sold and marketed at retail, but leading distributors to re-evaluate the extent of their credit services.

“We are more careful now when we extend credit,” said David Williams, vice president, Horizon Forest Products, Raleigh, N.C., and NAFCD president. “We expect our customers to pay on time and we are quicker to close an account now than we were four years ago.”

By offering credit, the distributor provides the financial support necessary to allow dealers to complete the job in advance of full payment. “Every business owner knows that cash flow is the life blood of an operation,” Williams said. “Distributor credit provides the help retailers need for cash.”

For example, if a dealer is generating approximately $2.5 million in annual sales, it probably needs around $500,000 in working capital, experts say. “This pays for inventory, funds jobs in progress, covers day-to-day expenses and keeps the business operating smoothly,” said Jeff Hamar, president, Galleher, Santa Fe Springs, Calif.

Since most retailers do not have that sum of equity in their businesses, they depend largely on credit to cover the difference. And since many banks are reportedly hesitant to grant loans to small businesses, access to personal credit (i.e., home equity loans, credit card advances and support from family) as well as credit offered from distributors are critical to store owners. “This problem has been exacerbated by the recent financial crisis and the impact it has had on our industry,” Hamar noted. “In addition, many of the forms of personal credit that existed in the past are no longer available.”

Credit crunch aftermath

The aftermath of the credit crunch has resulted in increasing the chances of a retailer failing. As a result, flooring distributors contacted by FCNews say they have revised their credit policies and protocols to address payment delinquencies and defaults which reached alarmingly high levels last year. “We are not a bank,” said Dennis Cook, president, Gilford Flooring, Jeffersonville, Ind. “But customers do benefit by having us work with them from time to time on the extension of credit.”

Distributors say existing accounts are reportedly monitored more closely while more rigorous financial and personal history checks are conducted before approving new credit lines. “Retailers may receive more questions or requests for information while establishing or updating credit,” Rozmus said. “These inquiries are not personal. Distributors or other credit providers simply need to gather information so they can accurately assess risk.”

Dealers typically have 30 days to pay for materials they purchase from distributors. Slower paying customers are seeing credit lines reduced or eliminated, observers say, while retailers who are seriously delinquent may witness a disruption in deliveries until their account balances are settled. Customers extended beyond their credit terms may be required by their distributor to pay up front before orders are fulfilled.

“Depending on a dealer’s business and credit history,” Galleher’s Hamar said, “distributors may require personal guarantees, lien rights or some other collateral to support the credit extension, just as a bank would to extend a loan.” In addition to standard credit terms, many distributors allow dealers to pay with credit cards, third-party checks or funds transferred from a bank account.

Like many financial institutions, distributors are willing to continue working with customers who have fallen on hard times, rather than turning off their credit completely. “We do help our customers get through tough times, too, by working with them on repayment terms on the account,” said Horizon’s Williams. “As long as the customer stays in communication with us and is making an effort to pay, we will continue to work with them and help them.”

The longer a customer has dealt with a distributor, the more willing the wholesaler is to help address the various needs of the dealer. For instance, distributors may provide extended payment terms—otherwise known as “dating”—which allows retailers to enjoy a more beneficial cash cycle. Likewise, such terms may encourage dealers to take the entrepreneurial risk of buying inventory for resale.

“That action, in turn, allows the retailer to offer more immediate gratification to consumers or contractors, or in other words, provide enhanced service,” Rozmus said.

It’s not always about the money

Even as distributors are keeping a watchful eye on credit, they remain committed to supporting their customers and maintaining business relationships. “Our ability to work with customers having special credit terms on larger purchases for stock can make a huge difference, and general credit availability can influence a decision by one of our customers to do business with us,” Cook said. “Most customers need the credit support of their suppliers from a cash flow standpoint.”

Many wholesalers offer financial management seminars for their dealers, providing guidance and advice tailored to each customer’s particular situation. “The distributor can be very valuable to a retailer not only for credit, but the knowledge and experience we share with them on bankruptcy, and how we can help finance receivables on large contract jobs through assignment agreements or two-party check endorsements,” said Hoy Lanning, CEO, CMH Space Flooring Products, Wadesboro, N.C. “In ‘assignment agreement’ projects, the distributor helps the retailer collect their money and offers legal assistance.”

As business conditions are expected to improve over the next couple of years, demands for capital throughout the supply chain are projected to rise significantly, experts say. “It’s important that dealers understand this reality and align themselves with suppliers that have the ability to both grow their own business as well as support the growth of their customers,” Galleher’s Hamar said. “Choosing your partners will be more important than ever in the months to come.”

A distributor’s core function is expected to take on greater importance in the near future as depleted equity positions of retail stores and tighter bank lendings are expected to significantly impact many dealers, industry members say. “Access to capital will be a major factor in separating winners from losers as the economy recovers,” Hamar said. “During times of robust growth, the need for increased financing is even more critical.”

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