by HIGH POINT — Earlier in the first quarter of 2024, Furniture Manufacturers Credit Association recently reached out to its members to get a perspective of the top issues they are facing from a credit and risk management viewpoint.
A top concern is the number of retailers closing their doors entirely or filing Chapter 11 bankruptcy. One member noted, “The closing of many small/midsize stores leading to industry consolidation at the top is concerning.” Many suppliers foresee this troubling trend continuing.
One credit manager responded, “It is absolutely critical that credit departments stay laser-focused on the current state of the economy and manage their risk prudently. FMCA has been a tremendous resource for getting an early jump on potential problems.”
As we move through the uncertainty of this election year, credit professionals have their work cut out for them in staying on top of their exposure by obtaining information as early as possible, which identifies dealers who may be headed for trouble. This means adding all the resources available to their credit management toolbox.
Another top issue that most of our members who provided feedback are experiencing is an uptick in accounts paying beyond the due date. One factor noted is the reduction of foot traffic in many brick-and-mortar stores, especially the smaller retailers. This decline in cash flow is reducing their ability to pay their suppliers on time.
This cash flow issue, along with the banks pulling back on capital and increased interest rates, is a cycle that is currently keeping the troubled dealers below water. There are less discretionary funds for consumers to spend on home furnishings because of stubborn inflation, high interest rates, mounting credit card debt and the resumption of student loan payments. Our members report that the larger retailers and e-tailers are not hit as hard; however, many of these dealers are also seeing reduced sales and vendor payments.
Another trend contributing to some dealers paying late is the rapid decrease in lead times from the height of the pandemic. One member noted, “Many dealers became accustomed to long lead times and had adjusted their business to ride it out. However, now orders are shipping quickly, and customers are not ready for the furniture in the current lead time environment, which leads to delays in payment because they are having to hold more product again.”
“No Pay” retailers are the next category. Our members are sending significantly more FMCA final demand notices to their customers. These are part of FMCA’s membership benefits, which have a 10-day free demand period in which no collection fees are incurred if a dealer pays within that time frame.
These FMCA final demands are often much more effective than internal dunning letters. The demands are strongly worded and state that if payment is not received in 10 days, the matter will be turned over to FMCA for collections, reported to its members and to major business credit bureaus. The demands also list the FMCA membership roster on them. This often gets a “No Pay”/unresponsive debtor to address the issue and triggers them to prioritize payment to the issuing member ahead of other vendors.
We are also seeing more final demands turn into collection accounts and an increase in the number of immediate action claims submitted. The collection side of our business has increased exponentially over the past two years in contrast to the height of the pandemic when the industry experienced enormous sales and retailers had the means to pay on time. One member stated, “The FMCA name carries significant weight when we either issue final demands or place an account with them for collections.”
Another issue that members reported is that they are setting up more prepay accounts. One member stated, “Five years ago, prepay accounts made up about 25% of our dealer base; they currently make up 50%.” It should be noted that this is not all attributed to financial issues, as many designers request that their accounts be set up as prepay. Suppliers are also changing more existing accounts to prepay when they become poor paying. Also, some members are requiring more personal guarantees, especially on small high-risk accounts, to protect their exposure.
The next item is the number of new accounts suppliers are setting up is down for most of our members who provided feedback. These decreases are mainly attributed to smaller retailer accounts. On the other hand, the amount of new designer accounts is up for many of our members. There is also the situation where retailers are returning to suppliers they did business with in the past but switched vendors due to high lead times during the pandemic. One member detailed, “We have heard many dealers tell us that they used other manufacturers due to our long lead times, but they are returning now and begging us to reopen their accounts.”
An additional problem our members are experiencing is increased disputes and deductions. This is especially true with e-tailers, which cause them to be high-maintenance and time-consuming accounts. One supplier stated, “Customers always look for deductions but our customer service process really reduces the unauthorized credits that we see.” Another contributor said, “Customers have increased their scrutiny of products. Call it the ‘Amazon.com’ effect. Dealers and end users expect perfection; if the product is anything less, they will deduct. The furniture industry dynamic has changed where service in the field does not happen the way it has historically.”
Another topic covered in our membership questionnaire is the relationship between credit and sales departments. While credit departments and sales teams are often seen as having an adversarial relationship, many of these teams in the home furnishings industry realize that it is essential for them to work together to benefit each other and the company as a whole. While many might find this to be taboo, it’s anything but. Many realize the effectiveness and efficiency in achieving the overall goals of their individual departments and their company as a whole are better obtained when this prejudice is set aside and credit and sales teams work together. The result is mitigation of risk, facilitation of sales, and protection of sales commissions. Examples of this teamwork are highlighted by the following feedback from some of our members.
“Our salespeople have been told to review potential accounts with our credit department before the first sales meeting, which eliminates a wasted sales trip if their credit history is poor.”
“We work closely with the sales staff to ensure their time is well spent on accounts that are credit-worthy and have a strong business.”
“Especially with long-time good customers, we try to work payments out to bring their accounts current so that we can resume sales with them. Many companies go through tough times once in a while and we do not like to sever a good relationship when it can be resolved”.
Our association offers our members industry-specific credit interchange trade reports and regular meetings. These vital tools are indispensable during all credit exposure life cycle phases, from setting up new accounts to updating existing accounts to gain insight into how retailers and designers pay fellow members. The reports show trade data on completed transactions detailing trade lines for each reporting member. Our regular interchange meetings are in a roundtable format, allowing members to discuss common accounts within federal antitrust guidelines. This is the foundation of our “member helping member” association. Troubled accounts are often identified in these sessions, which is invaluable for our members to protect their exposure and mitigate risk.
One final question asked of our members was: Does being a member of an industry credit trade association dramatically aid in mitigating exposure risk?
The feedback included:
“Trade-specific credit reports will be your best friend.”
“Most definitely, if I have any issues, I always check the current interchange report at FMCA, and if there are issues, I reach out by email to the members.”
“Communicating with other members about their experience with specific customers helps us make better decisions.”
“It is very beneficial to be able to pull current account status or email other vendors for references on a specific customer who is having payment issues.”
“I like the ability to ask questions and share credit experience with others in the same industry. I always get useful tips and tricks I can use daily in my profession.”
“We feel we are not alone.”
“It’s beneficial to hear the experience of fellow suppliers.”
In conclusion, the first quarter of 2024 has proven to be very busy for suppliers in managing risk and credit because of the issues they are facing, as detailed in this article. The current state of the economy, including inflation, recession fears, changes in consumer buying priorities and it being an election year, all contribute to increased concerns with slow-paying dealers, “no pay” accounts and those going out of business as we move through 2024. One of the absolute best ways to mitigate these issues is to have access to the collective knowledge and experience of many industry peers through membership in a credit trade association such as FMCA.
David R. Johnston is vice president and general manager of the Furniture Manufacturers Credit Association, a 62-year-old member-owned association of many of the top manufacturers, importers, wholesalers and factoring firms in the home furnishings and accessories supply industry.
