Returns and the Increasing Risks of Purchase Order Financing

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IMG_1648 (5) David Seelenfreund is Senior Vice President of Hartsko Financial Services, LLC. Hartsko is an international purchase order financing company which handles over $200 million dollars annually in transactions.  Purchase order financing takes place when a manufactuer receives a puchase order from a retailer which it does not have the money to fill.  In order to secure the funding needed, the money  is advanced to the manufacturer against the purchase order by a third party like Hartsko.  After the purchase order is filled and the goods ship, the third party receives the payment from the retailer rather than the manufacturer.

In his guest blog, Mr. Seelenfreund takes a strong position on what he sees as a sometimes abusive use of returns by retailers.  His contention is that unchecked return policies introduce a level of risk that cannot be adequately predicted.  As a result it is making it harder for manufacturers to get the financing they need to make products.

You may or may not agree with Mr. Seelenfreund’s passion or his position.  It is, however, an important conversation that needs to take place.  Let us know what you think.  If you are a retailer and have a differing opinion, let us know.  We would like to run your opinion in a guest blog.

Commercial financing concerns like my firm are now getting caught up in a spreading controversy in which retailers are turning inflexible in their conduct and transactional engagements(particularly about returns) with many of their manufacturers, distributors, and wholesalers. Engaged in purchase order financing, I am in the trenches with these vendors who are regularly hoping to generate sales orders from retailers.  Since these vendors many times lack the cash necessary to execute the order and delivery, I provide that funding for a cost basis fee—but only if I can carefully analyze the risk in the deal.  With the emerging attitude among many retailers it is becoming impossible to plot out the risk as to whether or not payments by retailers will be made!

I acknowledge there are significant distresses which retailers are facing now in our economy, including: Intense competition with online selling; the shortcomings of real estate infrastructure; accelerating utility rates; rising taxes, and increased workplace disputes among employees in labor unrest.

The manufacturers, wholesalers, distributors and their financiers however are already feeling sharp pain from the retailers’ hard times.  If this latest managerial philosophy goes unchecked, it will wipe out many decent small business owners and entrepreneurs who now source these retailers!  Commercial finance clients want to know why costs, fees, and rates are rising.  Again, the ability of their lender or financier like Hartsko to deal with risk cannot be vague or like a hand of cards in a poker game!

For openers, a number of retailers have now become stubborn when it comes to returns on merchandise and products. In an era when many retailers have generous-to-a-fault return-refund policies in response to our hyper-consumerism— this gets written off because retailers feel they are in a defeated position.  However, it becomes a loss which cannot be overlooked by the vendors, distributors, manufacturers, and their financiers.

No one is advocating consumer fraud or rip-offs on malfunctioning products where there is a justifiable discrepancy, but we all know how many customers become gamers of the return and refund scheme. There are scammers who try to take advantage of the retailer by supposedly buying the product, using it, and then making a return for a credit or refund (sometimes weeks, months, even years later).

Return rates are being driven to an all-time high and are growing worse.  Complicating this are the margins being demanded of wholesalers by retailers (when merchandise starts getting discounted and marked down where retailers want wholesalers to absorb to difference).  Holding a 30% margin from a wholesaler, a lender, or financier isn’t adequate anymore.  Some retailers are calling for margins of 40%, even 50%!

Those retailers which have taken up these practices are depleting the reputation and trust they have worked to build.  As lenders and financiers, we would like to think that retailers as credible organizations have fair business policies which stand for something.  Or are these retailers diminishing into mere consignment houses?

Retailers are unyielding on terms and negotiations.  They do not want to be held liable for anything. The retailers have detached and distanced themselves from any consumer relationship to the products being sold in their stores.

The commercial finance sector is already starting to see how many clients, who lack adequate personal cash and capital on hand, are losing business opportunities with these retailers. What can be done to repair this dilemma so that everyone in an ethical process gains opportunity and sees fair return?

Retailers need to go back to their fundamental values and standards.  When they take on a product and sell it, they need to provide a level of depth, support, and guarantee.  If they try to isolate or disassociate their organization from any connection or customer service support to the merchandise, they will actually contaminate their reputation with their customer. Again, they will damage the rapport and future confidence they have with their vendor.

If the retailers continue to act obliviously, this will backfire throughout the wholesale sector!  Suppose there are six giant retailers and the six giant wholesalers remaining, where everyone else is gone from this industry.  Life could be simple for the retailers, but it would put them in an unfavorable and weak position.  The lack of competition and innovation that once came from an entrepreneurial variety of wholesalers, distributors, and manufacturers, will mean that the small group of wholesalers left standing will be able to dictate price, terms, merchandise, and more. 


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