Time to Make Your Banker Your New Best Friend
If you’re like most contract furniture dealers, chances are a meeting with your banker is not exactly at the top of your priorities these days. That may not be a good thing.
Unless you’re located in some kind of Magic Kingdom market that’s immune from what’s going on in the rest of the country, business right now is probably as bad as it’s been in a long, long time.
It’s not going to stay that way forever, though. Sometime this year business will come back and now is the time to make sure that when things do start to pick up, you are primed to make the most of it.
That’s why spending time with your banker right now is so important.
It’s an unfortunate fact of business life that most bankers don’t really understand the special dynamics of the contract furniture industry.
As far as they’re concerned, all you’re doing is buying and selling stuff just like any other retailer. You bring in inventory and keep it in the warehouse in the hopes that you’ll find somebody to sell it to. When somebody does buy something, you send them an invoice and at some point between 30 and 90 days later, most of the time at least, your customer will pay for it.
Absent any effort on your part to change things, that model is what your banker will use to determine the size of your line of credit when business turns around and you come looking for an extension to help your cash flow.
If you haven’t already put in the time educate your banker on the true nature of your business so they understand what’s really going on, now’s the time to start. And that education process should not be limited just to the rep who serves as your primary point of contact with the bank.
You need to look at your bank like it’s one of your major accounts. That means multiple points of contact with key business partners, decision makers and influencers throughout the organization and the higher up the corporate ladder those contacts at the bank extend, the better.
Some of the key elements you need to get across in that process of educating your bank include:
- The contract part of contract office furniture. The vast majority of the product that you’re leveraging to borrow against is not bought on spec in the hope that someone will buy it. It’s underwritten by a commitment by a specific customer to buy, a signed contract that makes it worth a lot more than if it was just waiting in a showroom or on a warehouse shelf for someone with a checkbook to show up.
- Be strategic with contract information. If you’re looking to get a bridge increase on a line of credit to handle a large order from a major account, make your banker aware not only of the customer but also the underlying purchase orders and signatures on them that are essentially legally binding. If you’re doing business with high profile, Fortune 1000 type companies and your banker knows, it will make a big difference in how he or she views the creditworthiness of what you’re offering as collateral.
- It’s not “Work in progress” but “Finished Goods Not Sold.” You and the rest of your team need to stop talking about product that has been committed to but not yet delivered as Work in Progress but instead describe it as Finished Goods Not Sold that will soon be showing up in your Accounts Receivable. They are not items waiting on a buyer but sales that haven’t yet been recognized and they should be valued as such by your bank for borrowing purposes.
When it comes to establishing the amount of the loan for which you can qualify, you should aim to get at least 80% of your receivables out up to 90 days and at least 50% and potentially 75% of the value of your Finished Goods Not Sold. Putting it simply, if you are not borrowing against your finished goods not sold, you are leaving cash flow on the table. That may not be a big deal today but it will definitely make for problems when business does come back.
- Disassociate the deposit from the order from a borrowing base perspective. A lot of banks will want to offset the finished goods not sold amount with deposits that you’ve received. That would reduce the total value of your finished goods not sold and you don’t want that to happen. As part of the education process, you need to make the case that the full value of your finished goods not sold should be classified as a pre-receivable and not have that amount netted against the deposit.
- Don’t forget your own business. Your banker knows a whole lot more about your local market than you do. He won’t be expecting you to present record sales or even growth on any scale. But he will be looking for signs of strong, proactive management and the ability to respond to changing market conditions no matter how bad.
In an earlier post, we talked about five ways you can lower your breakeven point safely without sacrificing quality. Hopefully you’re doing at least some of them as part of your response to current conditions. Share them and all the other great things you are doing to lower your breakeven point and ensure your dealership will be positioned to take advantage of the upturn when it comes. Educating your banker about your own business is just as important as educating him on her on our industry.
Once you’ve gotten those points across and feel like your banker genuinely understands how you do business, you can think about getting more aggressive about building your line of credit. For example, see if you can also borrow against true inventory—including showroom items and used product in a warehouse and/or deposits with a vendor and your net fixed assets.
Banks may or may not be willing to consider any of those items in determining your borrowing capacity. While the bread and butter when it comes to building your line of credit is A/R and finished goods not sold, it is possible to negotiate for other custom items to be included on a borrowing base calculation.
But the key to getting as much of a line of credit as you can is education first and foremost. And the time to do that is now.
We work with many different industries, helping them navigate the digital transformation process. Reach out to us and see how Avanto can save your company time and money.
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