Executive Insight: Per Welinder

mike lewis

• August 26 2009
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While researching lender CIT’s current financial problems and struggles to keep bankruptcy at bay, we came across a case study on the company’s site about its partnership with Blitz Distribution. We caught up with Per Welinder, who founded Blitz in 1992 with Tony Hawk, to find out where his company stands with CIT and found that its recent sale of Flip and Birdhouse allowed it to sever ties with the economically embroiled mega financier at the perfect time.

What’s Blitz’s relationship with CIT?

We actually parted ways with them in October of last year. From April through October [of 2008], they were putting pressure on their smaller customers, of which we were one. With any type of asset based lender the contract is pretty one way. They have the leverage, whether it’s CIT, Wells Fargo, GE or whoever. It’s a lot of small print that totally, legitimately allows them to do things that are, when you’re the small customer, really difficult to deal with. When you rely on a lender to provide cash flow on a regular basis, it’s kind of like if you don’t drink water, you can only last so long without it.

We got a little nervous because they were really changing things around. They were allowed to – they didn’t do anything that was out of the contract, but still the sense of trust was a little broken and we got a little nervous so we got out.

As soon as your relationship with your lender starts to go a little shaky, and it can go two ways, it can mean the customer is underperforming and not having enough assets to back it up, at which time, [the lender is] very cooperative if you present a nice plan of how you are going to get back on track. In this case, it was the other way around. We were performing within the parameters and they started looking at the fine print to find ways to not necessarily lend as much as we wanted them to. It’s unfortunate when someone like that goes into difficult times. It’s generally some of the smaller [customers] that get squeezed first in a case like this.

What did you do for financing after parting ways?

For me it was a bit of a special case because when Tony [Hawk] and I went separate ways, he bought Birdhouse and I bought Blitz from him [in October], it was the perfect time for me to exit that relationship with CIT. We’re self financed right now which is very nice, you don’t have to provide P&L’s on a regular basis, it helps quite a bit and gives you a lot of flexibility. But should we grow radically fast, which I’m foreseeing because we’re growing really fast right now from our smaller base, at some point we are going to need financing. We’re hoping then to reach out to a lender [and] it’s very possible that if CIT winds up getting out of their tough spot it could be them. At the same time there’s going to be even less competition out there, which means the contract will be even more one-sided because they are the only sheriffs in town.

So despite the uncertain financial times and what’s happening to CIT you’d look to a big institutional lender in the future versus getting creative in your financing?

You don’t really have much of a choice. There are some really small, creative financing groups that are below the big guns, and those are the people that I may have to go to depending on what my balance sheet looks like, but if we have a strong enough balance sheet I would definitely reach out to the big players, understanding that this is how business is done. At the end of the day, I can’t make them change the contract. Even a billion-dollar company is under the exact same contract we were, with the exception of a few points perhaps, but it’s very, very difficult to have the upper hand when you go for an asset based lending contract – that’s just how it is.

Whoever holds the money definitely calls the shots.

Yeah, definitely, and it’s one of those things where at the end of the day the fine print is favoring them and perhaps rightfully so because if you were to go belly up, they need some where to fall back. That could be anything from personal guarantees to any other type of collateralized assets, personal homes or other assets of the company, even the trademark of the company. That’s never fun to lose and there have been some examples of that. They don’t want to own the trademark, but hey, if the customer doesn’t pay, they try to recover some of that lost money.

Fewer and fewer asset based lenders lend on inventory anymore. In the old days, the common thing to lend on was your accounts receivable and your inventory. Depending on how aggressive the finance group was, they would give you a certain percentage on both of those. Five years ago they may have given you as much as thirty, maybe even fifty percent on your inventory, but with apparel closeouts only getting pennies on the dollar, those days are over. Footwear and hardgoods is a little better. But if you go out and buy a million dollars worth of denim and at the end of the year we have $500,000 in denim at cost, if you’re lucky you may get ten cents on the dollar.

What are they basing loans on then?

It’s all formulaic. They check trends. CIT is so big, they can take a pool of 50 customers in 50 industries that are consumer goods driven and see what the going rate on closeouts is. Then they figure out what’s safe and lend a certain percentage on finished goods in a customer’s inventory. It’s just a matter of judgment calls to sense those trends and pull back.

In this case they started having difficult times in other parts of their business and needed to figure out how other divisions could help out. In good times it’s good to be a conglomerate, but in bad times, a division that’s performing well can be really compromised because it has to support the leg that’s limping.

Stay tuned to TransWorld Business’s October issue for an in-depth interview with Welinder about building brands, financing growth, partnering with core retailers, and the dawn of a new era for small brands.