Now some furniture retailers are further imperiled by high-interest loans
ENFIELD, Conn. — The cash-flow crisis that Planned Furniture Promotions Tom Liddell has been warning furniture retailers about for about two years is getting worse in the face of the consumer slowdown.
Now retailers are digging themselves a deeper hole by taking out short-term high-interest loans, thinking they can bridge the gap between what’s owed and what’s coming in. Getting out of this hole won’t be easy, but Liddell, PFP senior vice president, insisted the first step is to read the fine print on these quickie loan agreements and then avoid them at all costs.
An industry liquidation and sales specialist, PFP keeps friendly lines of communication open at all times with a number of industry specialists, including the credit managers of various furniture suppliers. They talk on background about how business is going for one another. If all is quiet and PFP isn’t getting many calls, Liddell will let his credit manager friends know. And if the credit managers are seeing a surge in late paying retailers, they let PFP know.
The reason for this is pretty simple: Neither wants to see a struggling retailer get so far in over their head that they run to bankruptcy court, where the only parties likely to see much in the way of payment are attorneys. They much rather the retailer seek sales and operations help to generate cash and pay their bills.
And right about now, the credit managers are getting worried. “They’ve identified challenges in collection of their accounts receivable, and they’re happening quicker than they had anticipated,” Liddell told Home News Now.
Indeed, Liddell is noticing the problem in the daily Lyon Credit Service reports he receives, too. For most of the past two years, he didn’t see much in the way of negative credit reporting changes for sellers of home furnishings as consumer demand raged on. But in the past 60 to 90 days, with the sudden softening in consumer demand, he’s seen more downgrades. Retailers once rated a 1 or a 2 for their payment histories (1 being a stellar record) are now moving to pay ratings of 3 and 4 (4 being “medium/slow, or 31-45 days past due). Net worth ratings have slipped for some, too.
The ratings are only now starting to degrade, but the problems have been brewing since nearly the start of the pandemic — after the mandatory shutdowns, when business came booming back for nearly everyone. Retailers were on a “sugar high,” Liddell said, when he described the problem before here. Now, the high-interest loans cropping up are the new, concerning wrinkle.
We’ll get to that, but first a quick recap on how we got here:
Liddell estimates that before the pandemic, special or custom orders represented, perhaps, 20% or 25% of a conventional furniture store’s sales on average, (and for the sake of simplicity, we’re calling anything that is not in stock and available for immediate delivery a “custom order”). Then came the Covid pandemic. After the initial closings, demand surged and the supply chain buckled. Suddenly, most retailers had more sales than inventory. They went from an 80% in-stock/20% custom-order model to roughly the reverse.
Before the pandemic, a typical in-stock retailer would take a nominal deposit and deliver most goods to the customer in less than a week. That model had virtually no impact on cash flow, Liddell said. But as retailers’ backlogs got bigger and bigger throughout the pandemic, cash from deposits grew while cash flow demands didn’t change. Indeed, they grew.
Retailers still needed to make payroll. In fact, most went from paying salespeople based on shipped business to paying them on written sales — because of the backlogs and the need to retain and solicit good help in a very tight labor market. Some beefed up their staff to handle the new unprecedented demand. Some began offering benefits they weren’t offering. Some spent some money on store remodels.
The problem, Liddell has said, occurs when a retailer doesn’t separate and escrow that custom order deposit money, say 50% of the purchase price, from the operations budget — because that other 50% they’re waiting on isn’t enough to cover the true cost of delivering the goods once they arrive.
To illustrate, Liddell said to imagine a $2,000 order, and a customer, who has left a 50% or $1,000 deposit. The retailer’s cost of goods in this case is going to be about $1,000, and that’s assuming the retailer is taking top margin and the item hasn’t gone up in cost from the time it was ordered to the time it arrives. That’s a big assumption, considering price increases have hit most goods.
“So when that product comes in, they’ve got cost of goods, which has increased. They’ve got freight, which has definitely increased. They have labor and handling, unpaid sales tax, expenses related to delivery, deluxing, dealing with the garbage and a discount if the purchase was financed, or a credit card transaction fee” for credit card purchases, Liddell said.
“In other words, all the things that go into running a furniture store with the exception of advertising and what they’ve already paid for,” are still to come with that delivery. If the retailer has used the deposit money for the normal course of business operations, they’re now in a deep hole.
“Most people don’t break it down in their minds and see they’re actually going to lose money on that $1,000.” Liddell said.
All of this was starting to happen way back in the summer of 2020, when Liddell first began warning about the problem. The new wrinkle is this: Not only are many retailers losing significant amounts of money on these delayed deliveries when the product finally comes in, now, “they’re not getting the new cash flow from the through-the-roof sales that they were getting before,” because demand has slowed, Liddell said.
For some, what seemed like great news in better business has turned into a perfect storm of financially crippling conditions.
What’s more, many retailers have also drawn down all they can from their bank lines of credit, he added. They’re cash strapped and jumping into what Liddell characterized as the business equivalent of consumer payday loans. They’re getting calls and emails about these high-interest lenders every day.
“They see it as a temporary fix to a temporary problem,” Liddell said, but too many are lying to themselves about how quickly they can turn the tide and pay off the loans. If you’re a furniture retailer and do everything right, Liddell said, — carefully balance your advertising and sales volume and buying opportunities — you might make a 15% return on gross sales in good times. That’s when everything is going perfectly.
But things are far from perfect today. Even retailers who are doing everything right are losing money right now because business has dropped off.
“So they go out and borrow money from one of these payday loan companies,” Liddell said. “That loan doesn’t instantly flip them from losing 5%, 7% to 20% of their gross sales. It doesn’t do anything to assist them in increasing or repairing their profit. All it does is pay their past due accounts payable. That’s the problem.”
Many of these high-interest lenders are affiliated with the “no-credit-needed” consumer financing firms that stores are using for their credit-challenged consumer segment, Liddell added. They just don’t realize they’re pretty much the same companies because they’re branded under different names.
The big appeal of these lenders is that a retailer can get the cash it needs in as little as a couple of days. Liddell doesn’t dispute that, but the real costs are being overlooked, he said. That includes credit-card-like interest rates in the double digits; and the requirement by some lenders that the retailer switch over to its credit-card processing so they can deduct the retailer’s loan payments off the top of new orders, as well as collect credit card processing fees. Others require significant payments weekly or monthly via automatic bank transfers. And they all put a lien on all of the retailer’s assets, Liddell said, not just inventory.
In short, many furniture retailers are digging themselves into a deeper hole without realizing the consequences and understanding that these are not typical banks they’re dealing with, he said.
So what’s the solution? The best one is to avoid these payday-loan-type programs from the start, he said. Retailers who can do it, should bite the bullet now and go through the longer, measured process of securing a legitimate bank loan to get through this period, one where the retailer can make smaller payments over a longer period of time and “not have to deal with opportunistic lenders trying to maximize their return in a very short period of time,” Liddell said.
Sales companies like PFP can help, too, but the help only goes so far when the retailer is already locked into one of these high-interest loans. Asked if a high-impact sale is one solution to the problem Liddell said that it’s not something he would recommend because if it’s not “legitimate and appropriate,” it can do more harm than good.
“People can see right through them and they don’t generate enough (money),” he said. Exaggerated themes — like an “All out selloff,” for instance — don’t really accomplish a retailer’s goals and oftentimes, only wind up making money for the promoter.
“They need a strong theme, one that can run for a longer period of time, one that can generate significantly more volume,” he said.
Like a going-out-of-business sale? Not necessarily, he said.
If a retailer has multiple stores, though, this might be the time to consider closing the worst performers. Liddell said PFP has been able to help a lot of struggling retailers close one or two poor performing stores, do a great business out of those units, reduce inventory and generate significant immediate cash flow.
If a retailer had a business model that was struggling before the pandemic, then managed to find new life thanks to the Covid business bump, “Guess what?” Liddell said. “Prepanedemic business is back, and in most cases, it’s even worse. If they were struggling before the pandemic, they’re certainly going to be struggling now.”
Still they don’t need to go completely out of business, he said, again, noting how PFP has helped some retailers close out one concept, and live to fight another day with a fresh new business that appeals to today’s consumer. It’s doing that right now for a handful of retailers he wouldn’t identify. Sometimes PFP has assisted with the sale of old real estate and the move into new, smaller footprints as the retailer rebrands.
“We’re not trying to force people into GOB sales,” Liddell said. “That’s not our goal here and it hasn’t been since the beginning. We just want people to be aware of what they’re getting into” when they sign for high-interest loans and fail to carefully evaluate their cash flow picture.
Since the fall of 2020, PFP has offered a cash-flow evaluation tool — more recently reframed as a backlog cash flow calculator — free on its website. It’s been downloaded more than 1,100 times, Liddell said, adding that he’s heard from a lot of retailers about how effective it has been at helping them evaluate their true cash-flow position. “Every time somebody uses it, they’re always shocked,” he said.
And now that demand has slowed, and payments to vendors are slowing, he’s sounding the alarm, or at least urging retailers once again, to pay attention to their true cash flow and stay away from quick high-interest loans that can cripple their future.
There are no easy options, but there are better ones.