NEW YORK — Some use factors, others credit insurance, and some bear risks on their own, but all vendors seem to have some kind of checks and balances in place to avoid losses from bad debt.
VF Corp. checks credit in-house, and does not use credit insurance. Established accounts are reviewed bi-monthly using a credit-scoring model.
"Using external data and combining that information with our internal records, we are able to review our entire account base of 5,000 plus customers to determine if there is any account deterioration," said Mike Durant, director of credit. Stores with low scores are reviewed by a credit manager, and marginal retailers are reviewed monthly, he says.
Since major marginal customers present more financial risk, more communication between VF’s coalitions and its corporate finance team is required, Durant said. "The final decision is a group decision, including credit, finance and the coalition or division head," he said.
For new customers, VF gathers financial and trade payment information from credit reporting agencies, and asks a potential customer to provide credit references. If the customer is not credit worthy, several alternatives are available to establish a relationship, including MasterCard and Visa credit cards, electronic payment draft, letters of credit and cash in advance. Smaller customers depend more on payment history and personal relationships.
Kellwood Corp. checks credits in-house for all its divisions through a central office. "We basically have our own credit department with our own team of analysts," said Dave Arnold, vice president of shared services. Kellwood uses some credit agencies and joins credit clubs to stay on top of credit situations, and works with troubled accounts to resolve the problems.
"Basically, we try to work out an arrangement with the customer where we can provide an orderly flow of product to them while staying close in terms of financials, liquidity and credit availability," he said. "Each one is sort of an individual situation."
Although, in "very isolated" cases, Kellwood uses credit insurance, it typically bears the risk itself. "We’re here to make a sale. Our goal is not to keep bad debt to zero, so it’s more of a balancing act," said Arnold. "We just try to be reasonably sure we’re going to be paid."Arnold believes Kellwood has some leverage given its dominance in the moderate channel. "We’ve got enough divisions so we have fair enough clout. If they don’t pay for one line, they don’t buy anything from Kellwood," said Arnold.
BCBG Max Azria uses GMAC Commercial Credit. "We think using a factor is better for administration, and the expertise the factor provides in conjunction with the economies of scale affords with the opportunity to gather more current information and be more effective in the quality of credit checking," said Myron Cozombolidis, vice president of credit at BCBG.
Nonetheless, BCBG does some credit checking in-house and will ship to a retailer the factor won’t guarantee based on its own analysis. "We take some risks where we see the need," said Cozombolidis.
London Fog Industries doesn’t use a factor primarily because it feels it’s more cost-effective to check credit itself, said Marv Toland, chief financial officer. To help watch credits, it uses D&B and Global Credit credit agencies and participates in credit clubs, as well, it occasionally uses credit insurance, spot factoring or puts.
The outerwear firm also works with troubled retailers to limit its exposure, principally by shipping partial orders until some payment arrives.
For instance, prior to its collapse in December 2000, Montgomery Ward requested a $1 million order, and London Fog agreed to ship a third of the order, with another third being shipped when payment for the first shipment arrived.
"This way, we never wanted to be exposed for more than $300,000," said Toland.
When Ward’s balked at the terms, London Fog walked away from the order and Toland estimates this saved sizeable bad debt expense.
Everlast Worldwide uses Century Business Credit, which funded the original business. "We do very little credit checking ourselves, and very seldom do we go against their recommendation," said Matt Mark, chief financial officer. "They may cost us a little bit more, but we have a very good relationship with Century."
For smaller accounts, shipment depends on the order’s size.
"If it’s under $1,000, we ship it. For accounts over $1,000, we do a little credit checking ourselves, but we have never really got burned much on the smaller accounts," said Mark.Tropical Sportswear uses GMAC for its branded business and CIT for its private label businesses, but the company is analyzing taking collection and bookkeeping functions in-house because it already has a staff handling chargebacks, said Larry McPherson, chief financial officer.
If it ends its traditional factoring relationships, Tropical might look into non-notification factoring, which is basically factoring without the collections service, or credit insurance. However, McPherson said credit issues are not big concerns.
"Most of our customers are bigger retailers like Dillard, J.C. Penney, Wal-Mart and Sam’s, and there’s not much of a credit problem with them. We do have some smaller mom-and-pops that have issues, but they’re controllable," said McPherson.
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