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Why Specialty Lenders Give Retailers an Edge

BY CSA STAFF

By Jim Hogan, [email protected]

The retail industry is a bellwether for U.S financial health given that consumer spending is roughly 60%-70% of the economy. While the economy has sent mixed signals of late — consumer confidence down, unemployment up — consumer credit has swung up decidedly and leading companies in a wide swath of retail segments can point to positive year-over-year same store sales. This is prompting some retailers — particularly discount stores–to begin opening new stores.

However, even relatively bullish retailers are proceeding with understandable caution. As part of this guarded outlook, more retailers are looking to work with specialty lenders with a deep understanding of their industry to serve as a long-term partner in growing the business. Retailers still want a competitive rate, of course. But their decision is not based solely on whether a lender can shave a few basis points off the interest rate. There are at least four areas where a specialty lender gives retailers a competitive edge.

Industry insights and relationships
It’s critical to have a lender that’s abreast of the current events and trends in the borrower’s sector. There will always be distinct competitive and economic drivers facing customers and a lender with retail expertise can draw on its wide experience to give counsel to the company on industry best practices. These lenders don’t waste the executive team’s time with a series of basic questions about the industry, instead they can begin with a substantive discussion about the specific business and capital requirements of the retailer.

A specialty lender is also “networked” to other specialists in the retail space. Thus, the lender can connect the company with professional specialists in the sector, such as investment bankers and accountants. For instance, many retailers whose leases were up during the recession sought counsel from experienced real estate professionals on how to negotiate more advantageous lease terms.

Smarter valuations and liquidity
Unlike manufacturers or service companies, retailers need to open new stores to grow and this is a capital intensive undertaking. Lenders with domain expertise get this. They also better understand and value assets, which can enhance availability of capital increasing liquidity. It’s important that the accounts receivable, real estate, equipment and inventory backing a deal are all appraised by experts dedicated to the retail segment in order to get the most accurate valuations. With better information, the lender can potentially offer higher advance rates.

Also, critically, a specialty lender understands various growth strategies underway at the company and how the competitive environment is influencing these strategies. For instance, virtually every retailer today has to develop an online presence and make it profitable. A specialty lender can see how an online strategy fits into the company’s larger growth story, and why funding this kind of channel development is vital to the business’s future.

Patient capital
Each retail segment has distinct seasons and spikes in cash flows — sometimes extreme spikes. To use just one industry example: consider a toy company that sees most of its sales during the fourth quarter leading up to peak holiday shopping season. An experienced lender understands that retail is an inherently volatile arena and that — quarter to quarter — there are plenty of circumstances that are beyond a retailer’s control.

To an inexperienced lender this volatility can be traumatic. But a specialty lender is more patient, eschewing drama, confident that they understand and can monitor how the season should play out. Such lenders are also more willing to stick with the company during broad economic downturns. The last thing a borrower needs is a lender threatening to pull a line of credit at the first bump in the road.

Speed and decisiveness
A lender with a deep understanding of the industry can get a deal done faster: from the initial request, to negotiating the term sheet, to securing necessary documentation, to the closing and then the actual funding. Whether the financing supports growth, working capital or turnarounds, reducing the deal’s “cycle time” is critical in today’s fast-paced environment.

Speed is also useful during restructurings. For instance, companies must follow an established Chapter 11 process for requesting and approving either liquidation bids or going concern bids. The liquidation bid is followed by a court approved “going out of business” sale where the liquidator will promote the closing and offer products at increasing discounts until the inventory has been sold and the proceeds have been distributed to creditors. Lenders that are deeply familiar with the retail segment in question can increase the pace and ease with which these deals are done.

Leverage expertise
As the country emerges from its economic malaise, retailers across a wide swath of segments have enormous growth opportunities. But caution is still the watchword. Any expansion must proceed with extreme care, and to this end retailers should marshal as much expertise as possible. For this reason, it’s advantageous to establish a relationship with a specialty lender, someone that takes a long-term interest in a company’s growth plans.

Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America supporting working capital, growth, acquisitions and turnarounds. He can be reached at [email protected].


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Oct-11-2012 04:10 pm

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