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Are You Banking Safe And Smart?

Monday, March 2, 2009

(GIFTBEAT)As retailers deal with challenges of cash flow, working capital and declining revenues, it's important to address the financial issues that can help your store stay more stable as others falter. Giftbeat contributing editor Sharon Bopp recently discussed "financials" with William Wen, a Seattle-based personal banker with U.S. Bank and owner of The Papery in Edmonds, WA. Wen conducted a financial seminar at January's Seattle Winter Gift & Home Accessories Market.

Q. How is your bank dealing with the independent retailer now versus a year ago? Will lines of credit be more difficult to get going forward?

A. A year ago, business was status quo. Credit was flowing much more freely, and the financial markets were working smoothly. With [2008's] financial crisis, we're seeing credit markets at almost a standstill. At U.S. Bank (as well as other banks), loans and lines of credit are considerably much harder to qualify for. Even with the $700 billion bailout package passed by Congress, there has been a slight loosening of the noose, but it is still very tight out there. Regulators are scrutinizing banks' balance sheets, and bankers are picking and choosing who they want to loan money to.

I believe that credit will remain pretty tight for 2009. The economy is still in a recession and getting worse. Because business has slowed [for many retailers], that may affect their creditworthiness and ability to attain credit.

Q. What are some of the financial products available to retailers?

A. Most [of the same types] of loan products or credit lines are available, but the criteria to obtain these loans are much stricter now. A working capital line of credit assists businesses in the daily cash flow of their operations. This line of credit tends to be available in the range of $50,000 to $250,000. Rates are based on the prime lending rate plus 1 percent to 6.5 percent.

Reserve lines are for emergency access to cash [and are] tied directly to a business checking account. The limit for a reserve line generally does not exceed $15,000. A reserve line is based on prime plus a range from 7% to 10%. Rates for both types of lines are based on a business' creditworthiness and debt-to-income ratio.

There is also a category called the general-purpose loan. These are typically geared toward purchases of counters, glass display cases, vehicles and more. General-purpose loans are installment loans with fixed interest rates between 6% and 9% and with terms up to six years. There are also business credit cards, SBA loans and secured loans. Some types of secured loans can use inventory as collateral.

A home equity line of credit is another option for the business owner. The home equity line is a consumer-based rate which is currently quite low—at 4% or under (as of 2/18/09). The interest paid for a home equity line of credit is generally tax deductible.

Q. What do lenders look at when a business owner asks for a working capital line of credit?

A. The main categories they look at are the length of time in business, solid financial statements, appropriate debt-to-income ratios [today, lenders will want to see a debt ratio that is 42% and under], and good credit scores.

Q. How can store owners be "banking safe" and "banking smart" today?

A. It's very important to build a relationship with your banker. An established relationship could mean acceptance of a loan or line of credit, especially if your financials are in that marginal area. Bankers can give their retail clients special treatment, especially if they know that the client has both business and personal accounts at their bank. So you might see something like a reduced interest rate on a business credit card or the waiving of an annual fee for a line of credit.

If you have foreseeable problems [like a downturn in business], it's best to be upfront. Call your banker and explain the situation. If you have a good relationship, [he or she is] more likely to work with you and perhaps structure a different payment plan. Be sure to know the bank's fee structures, such as overdraft fees and fees if an account falls below a certain minimum. These fees will vary from institution to institution.

There are a lot of banks out there that do have some financial issues. It's wise for retailers to keep abreast of banking news like what institutions may be in trouble. You can find this out in the Wall Street Journal or a specialized business publication in your city. There's nothing wrong with moving to a bank that's more solid. It's not uncommon to work with a couple of different banks because they each offer their own special niche products. Remember that the FDIC insured your funds for up to $100,000 per bank prior to October 3, 2008. Until the end of 2009, that amount of insurance is $250,000 per bank.

Q. As a banker and retailer, what tips can you offer for "buying smart"?

A. Vendors have become more flexible. At the Seattle show, I saw a lot more discounts across the whole spectrum [i.e. product, shipping, longer terms]. If you have vendors that offer early pay discounts, you want to take advantage of that. If a vendor has a program where you buy "X" amount and get free shipping, you may want to buy out farther into the year to attain that dollar amount. If you have strong relationships with some of your vendors, you might be able to ask for N45 or N60 terms. This lets you hold onto your cash longer if needed for other purposes. You might also find new vendors that offer guaranteed sales, or local vendors that offer products on a consignment basis.

Q. How can store owners make their dollars work harder for them in today's economy?

A. As a retailer, you need to review every dollar that you spend. This is a very important time to review all your expenses like insurance, utilities, advertising, etc. If you write every [expense] down in a list, it's all there for you to see. From there, you can make decisions like cutting back on your advertising budget, or finding an insurance company that offers a better rate. [Remember that] some merchant services, or providers of credit card machines, offer next-day access to funds—versus others where access could be 48 hours or more. This is also important for cash-flow purposes.

Q. Do you think the retail marketplace will shrink this year? If so, by what percentage?

A. With current economic conditions, I believe the independent retail market will shrink going out the next two years. Some retailers don't have deep enough pockets if it takes too long to weather this storm. If you're comparing 2008 to 2009 and 2010, I think there will be an 18% to 20% reduction in the retail market in terms of the number of stores [of all sizes]. There are still retail areas that can find growth, [including] those that have a very specific niche market.

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