Money has never been cheaper. And finally, it’s easier to come by. Your relationship with your banker is a critical component of growing your profits, and improving financial options and opportunities mean now is the time to reconsider this pivotal aspect of your business.
Jewelers are reporting that interest rates on working capital loans—a primary source of borrowing used to finance day-to-day operational expenses—are at historic lows. In many cases, jewelers today can borrow at less than 3 percent.
“It’s cheap money that can offer a huge opportunity to grow the business,” says Craig Rottenberg, president of Long’s Jewelers, which operates five stores in Massachusetts.
While low rates make capital borrowing an attractive tool for financing a range of business functions—from building inventory to simply paying the monthly bills—the main challenge many jewelers have faced over recent years has been the difficulty in obtaining a loan, even when companies are verifiably creditworthy.
Lending to small business plummeted after the banking crisis of 2008. According to Federal Deposit Insurance Corp. data, nonresidential loans of up to $1 million—a standard metric for gauging small-business borrowing—fell by 27 percent from June 2008 to June 2013. As banks have begun to adjust to the postrecession landscape, however, the tables are finally starting to turn.
“It’s definitely a lot better,” says Dan Hufford, president of Huffords Jewelry in St. Louis. “I won’t say it’s easy. And it’s not back to pre-2007, 2008. But finally, you are at least able to get a loan again.”
Where the Money Goes
The timing couldn’t be better. As the economy continues its recovery, with equities markets at all-time highs and the jobless rate back down to 2008 levels, consumers are finding themselves with increased disposable income. And jewelers are once again positioned to begin growing their businesses.
That, of course, takes money. Jewelry is a unique retail category with its comparatively slow inventory turn and extreme seasonality. For many jewelers, adjusting stock to meet intensified demand for occasions such as Valentine’s Day, Mother’s Day, and especially Christmas tops the list of reasons to borrow.
“We think of our loan as a cushion if we need extra inventory at a specific time,” says Leo Zeik, co-owner of Leonardo Jewelers, which operates stores in Red Bank and Elizabeth, N.J. “For Christmas, with the rates what they are, I might pay in advance if I’m getting a 3 or 4 percent discount from my supplier. So I’m making that quick 4 percent. What the bank loan offers us is the availability of credit to do it with.”
For others, what makes a line of credit attractive isn’t making money on the buy by playing the spread, but how it enables a business owner to smooth out cash flow by essentially extending vendor payments. This safeguards the company’s credit rating, allowing it to pay promptly.
“Good terms with a vendor are 90 days,” Hufford explains. “Yes, some guys will give you a small discount for full payment up front. But to me, the bigger benefit is that you can buy more in fall and then stretch out your payments [to the bank] rather than doing the vendor’s standard 90 days.”
How the Dollars Break Down
Working capital loans come in several standard types for independent jewelers. Open- or closed-end revolving credit facilities offer the flexibility to borrow up to a specified spending limit based on fluctuating need for capital over the course of the annual business cycle. Fixed-term loans generally come with a pre-established finance percentage cost and payments based on the jeweler’s historical monthly sales averages.
Jewelers typically don’t own large receivables accounts, so loans are commonly collateralized by inventory. Lenders use insider valuation experts such as Gordon Brothers Group or the Tiger Group to appraise and determine a liquidation value of the borrower’s inventory. Bankers then extend credit at a calculated ratio against that value, referring to this as a company’s “borrowing base.”
“Generally, whatever you have at cost, they’ll give you half that,” Hufford explains. “If they needed to liquidate you, that’s what they’re figuring they can do it for.”
During the credit crunch, however, jewelers saw their borrowing limits shrink through either decreased inventory valuations, reduced lending ratios, or sometimes a combination of both.
“After the crash it was brutal,” recalls Rottenberg. “Some banks got out of lending completely, and those who stayed in it wanted to have much more protection, building in more exclusions to give themselves more cushion.”
At Craig’s Fine Jewelry in Ridgefield, Conn., owner Billy Craig ended a 30-year relationship with his banker in the wake of the 2008 crash after a new loan officer wanted to reset the jeweler’s borrowing ratio at 15 percent of inventory valuation. (Craig has since reinstated the relationship.)
Bankers also built a greater number of covenants into their commercial lending in general, requiring jewelers to fulfill an expanded set of requirements and restricting how they could use the money.
“After ’08 they started asking for more information,” Zeik says. “We had to personally sign.”
Some jewelers found it impossible to obtain financing at all. Industry analysts cited this as a significant factor behind the increasing number of family-owned firms exiting the business.
Fortunately, as bankers have begun to get their arms around the new regulations and increase asset bases for lending, the pendulum is swinging back in jewelers’ favor.
“We’ve seen our inventory valuation return very close to pre-crisis levels,” Rottenberg says. “Our ability to borrow has gone up.”
Better Than Memo
The credit rebound is good news for jewelers, who are finding it difficult to secure alternative methods of financing. Because most independent jewelers are family owned and operated, the standard route of raising cash through divesting equity ownership has never really been a viable option.
Instead, jewelers have historically bolstered their inventories through vendor consignment, or memo, in trade jargon. Today, however, memo brings its own suite of challenges.
When banks cut lending to the trade, the tightening was most severe at the supplier level. Prominent banks curtailed or even eliminated their jewelry programs, citing transparency and valuation concerns in lending against supplier inventories. The model of suppliers essentially serving as bankers to their customers became unfeasible.
The recent trend toward branded product has compounded this development. Watch brands don’t engage in the memo business. Similarly, major designer jewelry brands like David Yurman and John Hardy may require jewelers to place orders six months in advance as they seek to turn inventory more efficiently and avoid carrying costs.
Jewelers warn, however, about becoming too comfortable with dipping into bank financing to expand inventory. “Unless it’s something that’s had no representation in your area and you know absolutely that it would work, it would be a poor use of your credit to just go buy a line,” says John Carter, CEO of Jack Lewis Jewelers in Bloomington, Ill. “There’s no guarantee you’ll turn that line or that it will be the next hot thing.” A better idea, Carter says, is to remain vigilant in liquidating aged inventory and nonperformers and transferring that money to proven turners.
Loyd Stanley, owner of Stanley Jewelers/Gemologist in North Little Rock, Ark., says he reserves his line of credit for unique buying opportunities. “We buy a lot of estates, and sometimes that requires extra money,” he says. That’s when “we might choose to borrow, when we’re buying things that would be extraordinary.”
Smaller Can Be Better
Banking consolidation continues to influence where jewelers choose to bank. As the big institutions get bigger, so do the size of assets available for lending and their extensive menu of services. For many jewelers, however, these aspects are less important than the deep community roots, flexibility, and personalized approach of local banks.
“With a small bank, you’re talking to the people who make the decisions,” Billy Craig says. What’s more, because they’re both independently owned, jewelers and small banks are likely to share common cause in developing their local business communities. “I’m trying to revitalize downtown Ridgefield with more name-brand stores to bring in foot traffic,” Craig says. “My local bank gives so much to the community it’s unbelievable. At a big bank you’re just a number.”
Carter adds that as jewelers forge relationships with bankers, they must continue to approach their financing intelligently. “I don’t think you’ll ever see regulations get as loose as they were,” he says. “The old days of using the bank as your cash register are done.”