The Current State of Financing for the Outdoor Markets
Purchase order financing has always been a good bet for companies in the outdoor markets, whether they be snowboard equipment suppliers, hiking gear distributors or anything in between. Ned Post of Gateway Trade Funding, a passionate outdoor enthusiast himself, looks at the current state of the outdoor markets, the benefits of PO financing and what factors should know about working in this sector.
Ned Post of Gateway Trade Funding has had a hand in almost every aspect of the outdoor markets in his more than 45-year career. An avid skier and outdoor enthusiast who has started and grown companies in the outdoor markets, Post is now helping the next generation of outdoor enthusiasts with purchase order financing to help them meet and exceed their goals.
In a Q&A for Commercial Factor, Post shared his outlook on the current state of financing for the outdoor markets and how factoring and PO finance companies can work together to help companies in the sector grow.
How did you get into the outdoor markets space?
Ned Post: I started skiing when I was 11. That single event was responsible for most of what happened after. My career in the ski and outdoor industry started at K2 in Washington. From K2, I moved on to AMF Tyrolia and on to senior executive positions at Wilson Sporting Goods in London and Chicago. From there, I took a position as president of Scott USA and eventually president of Smith Optics for over 20 years. During that period, I was lucky to have been exposed to numerous leadership and management roles, all of them with P&L responsibilities. Because the outdoor market is traditionally composed of seasonal businesses, success depended greatly on supply chain stability. As such, I spent a lot of time visiting vendors and factories in Japan, Taiwan, China, Korea and Western Europe, assuring supply stability.
When I was ready to retire from Smith, one of the principals from Gateway asked me to join him to continue helping companies in the outdoor markets. I knew him well, as he was on the Smith board of directors. This opportunity was the perfect fit for me because I had seen first-hand how PO funding had helped my wife's snowboard clothing company. An additional motivation was seeing friends over the years try to start a new venture and end up giving up a large chunk of their business using equity to finance product purchases. A benefit to PO finance is that it is more practical and protects the owner’s equity position.
Of great appeal to me [with joining Gateway] was that it was an opportunity to keep my hand in the outdoor game and help young entrepreneurs get on their feet, and it's really been successful. I have accomplished my goal numerous times and continue working toward that objective every day.
Why is PO financing especially successful for companies in the outdoor markets?
Post: The outdoor market is primarily made up of seasonal businesses. The sales cycle is not a 12-month cycle but is more likely to be a three- or four-month cycle. Consequentially, it is critical that merchandise arrives on time, or the sales opportunity will be missed or greatly diminished. Because PO financing utilizes payment by letters of credit, it is particularly suited to provide working capital for the payment of goods and to assure that the goods are shipped on time because that is a requirement for payment on the LC. While supply chain issues during the COVID-19 pandemic have complicated delivery timings, the LC is still the best way to ensure that goods leave the factory on time.
Another reason PO finance works so well for the outdoor markets is that, in large part, the outdoor markets are driven by substantial preseason orders. These orders are big and only come once a year. There may be backup orders, but you're usually dealing with just one or two manufacturers, and their orders are big and spread out amongst retailers.
What impact has the current economic climate had on the outdoor markets?
Post: Because the outdoor markets are seasonal, not all segments have been treated equally by the pandemic. The most immediate effect occurred in the snow sports market when the governor of Colorado decided to close all of the Colorado ski areas in the middle of March 2020. Fortunately, the suppliers had already delivered all of the goods for the season, and the retailers had already sold through a good portion of their merchandise depending on their location. The service industries felt the real impact, including hotels and restaurants. For the product suppliers, any effect of the pandemic was deferred to the following season, which, to a great extent, was mitigated by the realities of the next spring and summer. The spring and summer markets were immediately affected, as the suppliers and the retail world scrambled to adjust forecasts and purchases to conditions that were largely guesses. This resulted largely in applying the brakes on all activities until the picture became clearer, including a significant tightening of the credit markets, including PO finance.
Then, as the outdoors became the escape for an America faced with COVID, outdoor retail, both online and in-person, recovered to a great extent, clearing store shelves for many categories. You couldn't find a dumbbell even if your life depended on it during the summer and fall of 2020. By late fall, even the ski areas had made plans to operate on a limited basis for the winter season and, far from a disaster, the winter business was good, and for many of the outdoor segments, 2021 was a record year. Despite a significant wobble in 2020, the current economic market has not significantly affected the outdoor industry.
What has the most significant challenge been when providing PO financing to companies in the outdoor markets in the past 24 months?
Post: PO financing can be used for companies of various sizes but is particularly helpful in financing early-stage, entrepreneurial efforts where working capital is thin and a successful product may suddenly exhaust financing options. With this in mind, the past 24 months in the COVID environment have had several disruptive components. The first was the dramatic increase in the demand for personal protective equipment or PPE. Even though a portion of it turned out to be questionable activity, much of the PO community spent valuable time sorting through it all only to have most of it turned down at underwriting. The increase in demand for PPE that was real, however, was responsible for the shipping log jam, which occurred late in 2021 and continues today. The port debacle hurt PO financing by extending supply chain financing to an impractical timeline.
The second challenge to the PO finance market in general, as well as the outdoor markets, was the emergence of the Economic Injury Disaster Loans (EIDL). The SBA issued these to small businesses in amounts up to (originally) $2 million for 30 years at 3.75%. While this was incredibly beneficial to the businesses that qualified for them, they disrupted our traditional PO market with working capital at a significantly advantageous rate. While the EIDL funding has ended, the money borrowed will be in circulation for years.
An additional challenge was that COVID has driven more people to shop online. In turn, this is challenging for PO financing because it turns the deal into inventory financing. However, with our focus shifting to startups because of the EIDLs, we found ourselves in a great position. This is because startups, with limited access to capital, are more successful if they go the wholesale route because the startup and customer acquisition costs are so much higher if they were to go direct to consumer online.
How can PO financing for companies in the outdoor space help factoring companies?
Post: PO financing is perfectly positioned to help companies be candidates for factoring because there are no receivables to factor unless ordered goods are produced, shipped and invoiced. PO financing is a proven solution enabling distributors to get the goods out the door, creating receivables for the factor community. It is an excellent solution for peak working capital demands without having to spend equity funding on temporary supply chain requirements.
What is the best part of working with factoring companies on deals for companies in the outdoor market?
Post: The people who are attracted to the outdoor space are often outdoor people. This includes the entrepreneurs, the factors and my fellow teammates at Gateway. It is an excellent crowd to work with, and, most of the time, people seem to put in just a little bit more effort to get a successful package over the line because of their passion for the industry. That's a good thing.