Byline: Thomas J. Ryan

NEW YORK — Independent high-end boutiques are often the best places to be from a marketing standpoint, but some of the toughest places to be in terms of credit risks.
The so-called mom-and-pops, which these days are often run by young entrepreneurs or freshly arrived immigrants, are huge drivers of trends and brand builders, not only for high-end designers but for streetwear/urban and surfwear brands.
But the main problems with these stores are scant capital and little experience running a store. Because of difficulties getting decent credit from factors, shipments often are made with c.o.d. terms.
“The problem is similar to a young designer in that they are creative young people but they are not always terrific on the financial end of it,” said Gary Wassner, president at Hilldun Corp., which specializes in designers. “They’re not always up-to-date on their numbers and it’s tough to approve credit without numbers.”
Wassner said some rapidly expanding chains, such as Scoop and Calypso, don’t realize the importance of establishing credit.
“They get less merchandise than they want and they can’t pay for everything in cash,” Wassner said. “It really creates a chain reaction because it eats up their cash flow. They have to prepay and work on shorter terms.”
Hilldun is currently not approving shipments to Calypso because it isn’t providing financial information. “Scoop is getting approved, but not unlimited,” Wassner said.
Robert Washko, chief financial officer at Diane Von Furstenberg, said there’s always a risk of not getting paid, noting that Federated and Macy’s were in bankruptcy in the early Nineties, but he said smaller stores are often difficult.
“Even though they may have a very fancy, high-fashion store, they still pay their bills slowly and occasionally they go over their head and go out of business,” said Washko.
Julie Chaiken, president of Chaiken Clothing, said most key smaller luxury stores “have really good credit” while the regionals are tougher.
“Some of them plain don’t turn over financial statements, but you want to work with them because they’re the best store in their region,” said Chaiken. “Nobody wants to take c.o.d. goods. I have to figure out a way to protect myself and still do business with the small regional stores. It’s really about working with the owners and managers to come to some sort of arrangement.”
Chaiken accepts c.o.d. in some cases until the chain establishes credit, but pushes most to work through Merchant Factors. “Merchant does a really good job for me,” said Chaiken. “The factor is there to protect me on credit issues and it’s easier to grow.”
On some newer accounts, Diane Von Furstenberg will request c.o.d. as a test before using standard payment terms. For others, DVF waits for payment of the first order before shipping the second. “You can give them a little rope but sometimes you have to pull it in,” said Washko.
Washko uses Dun & Bradstreet, some credit collection agencies and DVF’s experience in the market in making credit decisions, but he is considering factoring “just to take off some of the burden from doing the credit checking.”
“Factors have a little more clout,” he added. “They get paid earlier than non-factored accounts because people don’t want a factor angry with them. It can ruin their credit.”
The designer Matt Nye doesn’t use a factor but relies on partnerships with stores. “To me, it’s more of an instinctive relationship and about working from the gut,” he said. “It’s really based on personality and personal relationships. If I get screwed, I get screwed and don’t work with them again.”
But Nye checks sources in the market, and will often ask for 50 percent of the payment up front in newer accounts. “That way, at least I’ve covered my expenses,” Nye said.
The big problem is that smaller stores won’t provide financial information to make credit decisions. Miles Stuchin, president at Access Capital, said a factor is often better at not only deciphering but getting information: “A chain of stores is much more likely to give sensitive information about an operation to the factor who’s a disinterested financial intermediary than a vendor. They may not want to tell the vendor how they’re doing.”
Adam Winters, vice president at Merchant Factors, said it’s a factor’s job to get to know the minions of boutiques, especially those thriving in secondary markets. “Some of these stores have been around for a long time and they have a very loyal customer base,” said Winters. “While the economy’s good, this market’s going to thrive.”
Even with the wealth effect still feeding the luxury segment, Phil Pirgolizzi, national credit manager at Capital Factors, said firms should watch marginal chains closely, particularly in light of the recent weakness in the stock market. “You have to be prudent to protect your own interest,” he said.