Suppliers lose credit safety net
Many cannot get enough insurance to cover losses if retailers fail to pay bills
NEW YORK — Gold Medal International is sitting on millions of dollars worth of socks at its North Carolina warehouse that it can't ship to stores.
The reason?
The 66-year-old family-owned sock maker can't get enough credit insurance to cover potential losses if the stores can't pay for the goods they've ordered.
Without that insurance, Gold Medal — and thousands of other suppliers facing a similar dilemma — would be on the hook for unpaid bills.
But not shipping the goods to retailers means losing sales and big write-downs on inventory.
The problem will only get worse if retailers can't stock their shelves and shoppers can't find what they want heading into the critical holiday season.
“I got the goods, I made them. I don't have a liquidity problem,” said Paul Rotstein, who's been president of New York-based Gold Medal for 30 years. “But if
I can't ship $12 million worth of orders, guess what? I have a big liquidity problem.”
Before COVID-19, suppliers routinely relied on so-called trade credit insurance to get the reassurance they needed to design products, receive orders, and ship to retailers.
Now, with the pandemic creating so much economic uncertainty, many retailers are struggling and credit insurers are unwilling to take on the risk.
Many insurers will only provide protection on orders to big-box stores and others that have been able to withstand the pandemic, leaving in the lurch a huge swath of nonessential small and medium retailers still trying to claw their way out of months of lockdowns that decimated their businesses.
Trade credit insurance provides a financial backstop for at least $600 billion in annual U.S. sales, according to Robert Litan, an economist and attorney, who published a report in early July on the issue for Econ One, an economic consulting firm. That doesn't include the estimated $50 billion loss in orders that suppliers will be too reluctant to ship, Litan estimates.
Without the safety net, these suppliers — 60% of which have revenues of $20 million or less, according to Litan — are starting to make hard choices about whether to maintain their current production level or cut back on orders to minimize the risk, experts say.
Rotstein says his credit insurer hasn't pulled back coverage on his accounts with big retailers like Amazon or Dollar General, but it's cut back or eliminated coverage for mom-and-pop stores and many nonessential chains he declined to name.
Industry executives say that the squeeze on trade credit is far more acute than what happened during the Great Recession.
“It was an economic downturn but it wasn't a downturn that had the same levels of uncertainty and triggered this trade (credit) crisis,” said Steve Lamar, CEO and president of the trade group American Apparel & Footwear Association.
Christa Pitts, founder and co-CEO of The Lumistella Co., which produces toys, books and other products under the Elf on the Shelf and Elf Pets brands, says her retail orders were covered 100% before the pandemic. Now, only 50% are covered, forcing her to rethink who she will sell to.
“How much can I spread around to enough retailers across the board, mixing in what I know is somewhat of a sure thing, and recognizing not everyone is going to make it?” she said. “We are putting our economy in terms of retail in a losing situation.”