Concerns that a commercial credit crisis is seizing up retail supply chains have prompted a group representing hundreds of US apparel and footwear brands and importers to call on the government for help.
As retail supply chains are turning their attention to the recovery phase following enforced store closures and reduced footfall to stop the spread of the coronavirus, the American Apparel & Footwear Association (AAFA) warns this could be stalled as businesses run out of cash and struggle to obtain credit.
“In a normal year, our members rely on varying degree of credit to move product through supply chains,” says AAFA president and CEO, Steve Lamar.
In a letter to Federal Reserve System chairman Jerome Powell, and Treasury Secretary Steven Mnuchin, Lamar explains: “Revenue earned from previous seasons, and the cash flow it generated, would be used to support and backstop current and future credit decisions.
“In a process that occurs constantly, this credit would enable US companies to make commitments to design product, place orders, and ship their goods. Collectively, each of these actions support millions of US jobs in robust domestic and global value chains.
“But this is not a normal year and one of the side effects of the very severe liquidity and cash flow crunch we’ve experienced in the past two months, and the closure of most retail outlets in the country, is a commercial credit crisis that threatens to seize up our economy and stall the safe restart in its infancy.
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By GlobalData“Retailers’ sustained loss of revenue since mid-March, although ameliorated to some extent by Federal stimulus measures, has sent a debilitating shock through our supply chains.”
Lamar adds that as companies are trying to claw out of this supply chain shock, “they are finding vastly different credit terms than what we had going in – less than three months ago – as credit insurers, including factors, are forced to greatly scale back the coverage and services they are offering.”
He also cites the example of an apparel/footwear company producing products for a long-time retail customer, which in February might have been able to insure an $800,000 credit line for a $1 million purchase order. This would leave the company exposed for $200,000 – a risk that is manageable given past relationships and a predictable and largely uninterrupted source of revenue.
“Today, that same transaction might yield only a $100,000 credit line because the insurer is no longer willing to take the risk given the unprecedented business interruptions we’ve experienced and uncertainty we are still forecasting. Unable to assume the risk for 90% of the transaction, the company now must walk away from the order or try to negotiate a smaller order with their customer.”
Factors, who play a critical role by advancing funds based on accounts receivable or unpaid invoices, are also being squeezed. “Uncertainty and business disruption over the past three months will hobble the ability of these financial agents to fully support a restart at pre-Covid- 19 levels.
“As retail supply chains are trying to crank back to life, this story is beginning to repeat itself hundreds, if not thousands, of times each week. Unless this is fixed soon, the retail engine that supports one in four American jobs will have a hard time coming back to life. Moreover, many medium and small size retailers and suppliers that the CARES Act supported will be lost.”
The letter concludes: “We implore you to use the tools at your disposal to make sure our commercial credit markets are fully functioning. Among other things, we urge that credit insurance backstops be structured so that they can fully support consumer and commercial products, such as apparel, footwear, travel goods, and other fashion accessories.”
For further information on the finance trap, see:
- Apparel supply chain financing is vital to aid recovery
- Apparel industry payment terms no longer fit for purpose
