A look at retail credit

(A piece I wrote about possible retail credit options. Written mid 2008)

Credit where credit is due

Standfirst: Fed up with the doom and gloom? Nick Aston looks at offering credit as a way of boosting your sales

Pullquote: ‘Credit and payment terms have always been popular at the lower end of the market. There’s no reason why these options couldn’t work at the higher end’

Rising inflation. House market crashes. Lending cuts. We’ve been hearing it for a while now, and we could need one almighty painkiller to get rid of this hangover. The International Monetary Fund’s latest Financial Stability Report warns, “financial markets remain fragile and indicators of systemic risk remain elevated”. At home, the UK’s sales volume between May and June fell by the lowest rate since records began in 1986 (although some put this down to unseasonably good weather in May boosting high street sales). Consequentially the Bank of England is under pressure to curb a sixteen-year high inflation rate. There’s no doubt that some signs of the economic uncertainties we faced in August 2007 are still evident.

Speaking this June Alistair Darling admitted, “it will take time for these global difficulties to work through”. Yet a 1970s-like state is less convincing when long-term considerations are added. Retail sales increased by almost four and a half percent compared to this time last year. Luxury retailer Richemont recently reported an increased jewellery turnover of £100 million compared to the same period in 2007. Demand for luxury goods has risen and research firm Verdict predicts business within this sector to more than double within the next five years. Breitling, Rolex and Tag Heuer have all experienced strong sales in recent months.

Retail finance is an option that can help boost these sales further. While banks are cutting borrowing, retail credit providers are experiencing a surge in business. The opportunity, selling guru and regular Jewellery Focus columnist Leonard Zell argues, is one that jewellers too often pass up. Worse still, they can mis-sell. “I have visited so many stores”, he says, “where the sales people have no clue how to sell credit. They almost seem afraid of scaring off the very people you want in your store because they feel they won’t like the rates. Worse still, they don’t have a clue how to sell the concept”. When it comes to borrowing, Zell says many business owners fare no better. “So many are afraid to ask for help. It’s nuts – if you need financial advice, talk to someone. Go out there and talk to banks, financial service providers. Just don’t sit there doing nothing about it!”

A possible solution to both retailers and wholesalers may be in the form of invoice financing. “In many ways” says Ian Robins, Sales Director for Ashley Commercial Finance, “it can be sold as interest free credit as far as the retailer is concerned”. Through invoice financing, an invoice is raised by the wholesaler to the retailer on agreed payment terms. This is then discounted or factored for up to ninety percent of its face value. Once due, the retailer pays the factor the full invoice amount. When the charges have been accounted for, the final balance is advanced by the factor to the wholesaler. “The benefit here”, Robins continues, “is that it gives a wholesaler the opportunity to sell more items in bulk. Since retailers can spread the cost, they can spread their cash more evenly and the wholesaler knows that they can have the cash coming in”. With Christmas approaching fast, he adds that demand for Ashley’s services has soared. “We’ve noted a substantial increase in enquiries”, he continues. “We have bigger deals on the books that historically would have been a banks’”.

Indeed, a number of providers are taking advantage of the banks’ reluctances to lend. Providing specialist asset finance and block discounting for more than 5,500 businesses, Hitachi Capital specialises in Point of Sale finance. A member of the Japanese Hitachi group of companies, they have more than twenty-five years of experience in the field. They’re now firmly established as one of the main providers of retail finance within the UK. John Atkinson, Group Head of Marketing, says its core aim is to increase retail sales and “deliver increased footfall through targeted point of sale, direct marketing and guidelines on advertising”. When it comes to testing times, he says, “You always have to offer the customer what they want and can afford. We aim to fully utilise your existing customers to buy more jewellery through your marketing and targeted use of point of sale finance”.

Professor Patrick Barwise of the London Business School made similar comments earlier this year. His findings from an extensive review of advertising expenditure during economic downturns concluded: “if competitors retrench, those who maintain or increase their ad spend achieve a higher ‘share of voice’. Any reduction in these companies’ short-term financial performance is typically soon outweighed by their increased revenue and profit growth when economic conditions improve”. In other words, success comes to those who spend more, and spend it wisely, when other businesses are making immediate savings by cutting back on marketing. If this is the case with marketing, finance providers could argue the same with offering more flexible credit terms with your customers.

Stewart Wicks, an independent business consultant for a wide range of businesses and charities, says that in today’s market this is essential for both wholesalers and retailers. “Point of sale finance can be a real deal-clincher”, he says. “You might have something of real interest that a customer would love to buy, but can’t afford right now. By allowing your customer the option of deferring the payment you could well be looking at a sale you would never have had before”. However he warns, “often you’ll find that the repayments with most POS deals are higher than bank loans. If you can offer a low-interest option, or even interest-free, you can generate significant customer loyalty”. That repeat business, he says, can significantly drive your sales.

Leonard Zell is in agreement. “Repeat business is key, but look at boosting add-on sales. People can afford it but sales people often ignore the importance of these. Yet look at the credit card companies who promote the rewards you get – they don’t mention the interest at all now because they know their customers max out their cards!”

However, John Atkinson is keen to stress that businesses have to know their limits with buying. “We always encourage customers to not over-commit. You should only buy what you know you can afford. We work with quality retailers and have a team of in-house training partners that work with the jewellery branches to ensure all sales staff can understand the finance product”. Through doing this, he says, Hitachi “ensure the best product to suit the customer need”. Consequentially, though, you do end up waiting for payments and your immediate cash flow is affected.

There is help at hand, however, should a situation like this become a problem. Business Link is a national Government-funded service providing free of charge business advice to companies on a range of subjects. These include borrowing, business planning, debt recovery and business banking. Stephen Herman, Business Adviser for Business Link East, feels that businesses should take advantage of these services. “It’s now much harder for businesses to extend their lines of credit. We’re seeing some consumer belt tightening and in the business-to-business trade, there’s a combination of raw material and energy inputs and a reluctance to raise prices too much. All of this puts strains upon sales”. Was this something the UK economy needed though? “It’s more a question of when a reality check came whether than if it was needed”, he says.

While he acknowledges that the service does not provide the role of “an economic forecaster”, Herman says, “Retailers can rely on Business Link to provide practical, down to earth and independent advice on a range of business problems”. However, he has a defiant confidence in the trade. “Retailers have always been very inventive in finding ways to promote sales in hard times”, he says. “Credit and payment terms have always been popular at the lower end of the market. There’s no reason why these options couldn’t work at the higher end”.

In an age where technology is playing an ever-increasing role in our lives, he provides an interesting marketing strategy for luxury wholesalers and retailers. “In any downturn”, he says “there’s always a niche for a specialist retailer and it’s well worth looking at the opportunities for selling your items online.” While he admits “it’s very competitive”, he adds that “you can reach a much wider market very fast. If you don’t want to devalue your shop brand, create a new-online identity. Business Link can help you there”.

Fundamentally, he concludes, the biggest threat to your business isn’t the economy, but negativity. “Retailers are concerned at the increasing lack of credit on offer”, he says. “But there’s a danger of talking oneself out of business. How much has your revenue actually declined and your cost raised? Above all, what are you actually doing about it rather than just talking about it?” Services such as Hitachi and Business Link, after, all, are “here to help you – just come and talk to us instead of to yourself!”

Business Advice

Bill promptly – invoicing promptly and regularly should help ensure a steadier flow of cash into your business. Negotiate for regular payments across the life of any long-term contracts you may have.

Avoid overtrading- don’t continue to accept orders that you won’t meet if you have insufficient cash and/or resources.

Recover debts- chase up any debts owed to you.

Trim your inventory- this ties up your cash significantly. Take the time to plan a stock reduction program and consider advertising this.

Renegotiate your credit limits – adjust your payment dates and credit limits with your main suppliers.

Consider factoring/invoice discounting – sell your outstanding invoices to a third party. The factors pay some of the debt off in advance of collection.

Sell unused assets – raise cash by selling your under-utilised assets and lease them back. Make sure these are sold at their true value and check whether the sale will result in a profit or loss.

Reduce overheads – review these regularly, especially if you have problems generating cash. Avoid cutting to a level where it is difficult to operate.

Generate new sales from add-ons – you will be surprised at just how many sales you can generate here.

Advertise – let your customers, both potential and existing, know you’re out there. Promote those special offers and new ranges!