Retail is risky. Sellers have to shell out for product, in the hopes that they will sell enough to pay off suppliers and earn a profit. The U.S.-China trade dispute will make that situation harder for e-commerce companies—even if the two countries avert the tariffs that are set to kick in on December 15. Just the threat of a conflict has spooked Chinese suppliers, who are now asking for more money upfront from U.S. e-commerce companies that were already tight on cash.
That might not hurt your orders with major online retailers such as Walmart or Target. But it could squeeze the inventory of smaller and medium-size sellers, says Clearbanc, an institution that provides loans to such companies. That’s yet another reason to start your holiday shopping early instead of waiting till the last minute.
According to Clearbanc president and cofounder Michele Romanow, e-commerce companies used to be able to negotiate deals with Chinese suppliers that let them pay in stages, such as half the cost of goods on delivery, and the rest one or two months later. That kind of time frame would give companies a chance to sell their products before having to pay their suppliers the full price. But that’s changing now.
“I think a lot of these Chinese suppliers are really scared, given the negotiations that are happening,” Romanow says. “And so they’re asking for much more aggressive upfront payments than they ever have,” up to 100%. The change couldn’t come at a worse time, as companies need to take on huge inventory to meet demand for the holiday selling season.
Clearbanc has learned of this change from the nearly 2,000 e-commerce clients that it provides funding to. Companies that receive money pay off the principal, plus interest, as revenue starts rolling in, and the size of monthly payments is adjusted on the basis of their income. Clearbanc’s clients range from mom-and-pops to medium-sized brands such as mattress maker Leesa Sleep, fashion rental service Le Tote, home goods company Public Goods, shirtmaker Untuckit, and cereal startup Magic Spoon.
Until recently, most of the money Clearbanc fronted went to advertising and marketing, for which it required repayment of principal plus as little as 6%. But now, with Chinese suppliers requesting more money up front, Clearbanc has advanced companies twice as much money for stocking up on inventory in the third quarter of 2019 as it did in the second quarter. And Romanow expects the demand for funding to grow higher by the end of Q4.
Investments used to buy inventory, which Clearbanc considers riskier, had 12.5% interest. With more clients seeking money for inventory, Clearbanc is now offering rates as low as 9%, based on the financial health of the company. (Higher-risk companies still pay up to 12.5%.) Companies don’t have to start repayment until they begin making money from sales.
Romanow says that clients fear they will never return to the old payment terms they had with Chinese suppliers, regardless how trade negotiations turn out. They’ve started to look for suppliers outside China—in countries such as Vietnam, Thailand, Mexico, and Honduras. But those suppliers aren’t yet as equipped to quickly meet demand as the well-oiled Chinese manufacturing machinery is.
So log on now to check off items on your shopping list, as supplies may not last.