Loan Stars: How Jewelers Managed the Crisis

RAPAPORT... Despite the lockdowns, mask mandates, economic anxiety and fraught political landscape, 2020 wasn't a bad year for jewelers. "So many retailers find themselves in the best cash positions they have had in years, if not the best in their history," says Abe Sherman, CEO of business consulting firm Buyers Intelligence Group. US jewelry sales figures for March 2021 testify to that: They more than doubled year on year, increasing by 106%, according to Mastercard SpendingPulse. One reason for the surge was the strong base comparison with March 2020, notes the analytics service, since that was when the pandemic first started to hit retail. However, Mastercard also points to consumers having extra cash for jewelry due to government stimulus payments. Independent jewelers' bottom lines also benefitted from widespread governmental assistance. In January, the US Department of Treasury reported that its Paycheck Protection Program (PPP) had so far "successfully provided 5.2 million loans worth $525 billion to America's small businesses, supporting more than 51 million jobs."This combination of factors has been extremely beneficial for the jewelry industry's financial well-being, says Sherman, whose company specializes in the sector. "As far as we can tell, nearly all of our clients have either significantly reduced their debt or paid off all debt completely. This was due to three primary reasons. The first, of course, is the support the government provided through the PPP and [Economic Injury Disaster Loan (EIDL)] programs. The second is due to a significant reduction of inventories. Finally, retailers worked to reduce their expenses, including hours of operations - [and] thus their payroll - and also reduced advertising costs and travel, having not attended any or most trade shows."Using what's availableThe PPP funding certainly made pandemic restrictions easier to bear, acknowledges Rick Hamann, executive vice president at Sartor Hamann, which has three stores in Nebraska. Even though his business is debt-free and always has been, he says, he took advantage of the PPP loans when the opportunity arose. "We had a bank here locally providing them."The pandemic forced him to shut down two of his stores completely and run the third store by appointment only, so the extra money came in handy. "We saw a big drop-off during that time period, but we were able to pay our employees and our business [expenses] using the PPP loan and our own cash reserves," he relates. "And since the money was available, we took it."So did Richard Lee Mathis, owner of Symmetry Jewelers in New Orleans, Louisiana. "We were paying payroll out of our line of credit, and then we got the PPP," he says, adding that he was one of the first in his area to receive it, because his team "had started filling out the PPP paperwork immediately."Once his business reopened, Mathis approached his bank to talk about financing options. "We got our books together, and when we went back to the bank, we said we wanted to combine our line of credit and our mortgage in one loan," he says. "We were able to get a new loan with a payment that's lower than the [previous combined] mortgage payment and interest on our line of credit. So we were able to consolidate both loans and clear up our line of credit." The upshot: His business is now in good shape, despite the tumultuous year. "We're actually doing quite well," he says.Grappling with the hurdlesOf course, getting credit from banks comes with its own challenges, retailers note.Hamann doesn't feel comfortable with financing in general, explaining that his family-run business has never wanted to work with banks. "When my father started the store, they took over an existing store," he recounts. "They paid $50,000, and took that from my grandfather. They didn't believe in bank loans. There's an old-school emotional idea that they don't want to be beholden to anyone."Banks don't understand the jewelry industry well enough to service its needs adequately, Hamann maintains. "In a car dealership, they have a floor-plan loan going, where everything is financed through the vendor or the bank. The bank can identify, 'That's a Camaro, and I know what that's worth.' But the bank doesn't know what a diamond is worth. And what do they do with a diamond if they owned it? They don't know what to do with it."Mathis says the biggest challenge with any financing is qualifying for it. "It's crazy that you have to be profitable to be able to borrow money," he remarks. "They should open it up more. If you're putting up your inventory for collateral, you should be eligible for financing. But the banks don't want to be sitting on inventory."It helps to have a free-standing store, rather than a mall store, he adds. "We didn't have that much inventory, but we own the building, and that was enough to put up the collateral. That was worth more than what we were borrowing. But if you're in a mall, that would be tough. And there are more mall stores than free-standing stores. I would not want to be in a mall."Eager to lendFortunately, says Sherman, banks are currently offering retail-friendly terms. "Some of our clients who are rebuilding their stores are finding their local bankers happy to loan them the funds," he reports.Vendor relationships can also be streamlined, which simplifies the balance sheet. "Retailers are looking forward to closer partnerships with fewer suppliers, and suppliers are looking to do business with fewer retailers," says Sherman. "Considering the trillions of dollars that have been pumped into the economy, retailers with dramatically improved balance sheets would find this a great time to refinance long-term debt, such as mortgages, or term loans [that they've taken to build out their stores]."Mathis agrees that now is an especially good time to talk to banks about financing. "The interest rate remains fairly low. And what happened with us is that our books looked so much better than they did two years ago that our bank worked with us. That's why we were able to swing it. The banks are just anxious to give out money right now. They want to make sure the economy doesn't collapse."This article first appeared in the June 2021 issue of Rapaport Magazine.