Australian Wholesalers specialising in the gifts and homewares sector have over time developed a special system for providing credit terms to retailer customers that helps minimise the credit risk from failed retail businesses.

The system is called a pro-forma purchase system where retailers are not given any credit terms until they have purchased and paid for a fixed amount of goods.

The Australian gifts and homewares retail industry is renowned for its high level of turnover in new retail shop businesses. The lure of seeing other successful retail businesses, the excitement of the constant change in fashions and designs and colours and perhaps optimistic self belief, brings a constant stream of new competitors into the industry trying to make their mark and achieve financial independence.

The reality is however that retailing is a highly competitive environment. It’s quite difficult to constantly be on top of the trends and shoppers always want something new. The economy has its ups and downs and yet the rent for the shop premises has to be paid each week. Additionally many new entrants go into retail businesses without sufficient working capital or without access to finance and so even if they achieve a successful launch, they can be brought undone by the first economic downturn.

Fitting out retail premises can be an expensive exercise and the total costs of setting up, and carrying costs until regular sales cover expenses, is an investment that will be totally wiped out if a business is forced to close because the owners don’t have the cash reserves to carry them through a phase where the business does not make enough sales to cover costs.

The Australian Gifts and Homewares Association (GHA) is a not for profit organisation formed by a group of Australian wholesalers & manufacturers to give them strength through trade fair exhibitions, industry representation and other member services. Most gifts and homewares wholesalers are now members of GHA and in recent years they have also accepted many retailers as associate members for the strong benefits offered to them.

Industry Standards
Through the GHA, the pro-forma purchase system has become an industry standard that insulates wholesalers from credit losses by ensuring that the retailer has demonstrated a trading record before receiving credit terms.

The Gifts and homewares industry standard for credit terms to retailers is imbedded in the terms and conditions set out in the standard GHA Account application form. The forms are provided free of charge as a member service to GHA members and ensure that importer/wholesaler businesses can have a well designed and legally binding agreement with customers without incurring legal expensed to implement that.

What Retailers Should Expect.
Some wholesalers have in the past, during the good times, flaunted the integrity of the pro-forma system by providing automatic credit (even without a formal account application) for the second purchase and now in tough economic times may be regretting that.

Wholesalers don’t really want to finance retailer’s businesses. But they don’t mind filling the need for convenience in supply and payment. A formally agreed account means orders can be despatched immediately and should mean that payment also comes promptly. The convenience of operating on an account basis is particularly important when a business has different staff ordering and paying for goods. Some wholesalers will only provide accounts to those larger types of businesses.

With cash flow an important issue for all businesses during current slow economic times, new retail customers should expect that they still can get 30 days credit for stock purchases from sound well established wholesalers, however they should also expect to have a period of pro-forma purchases where goods are paid for in advance until credit terms are available. So you will need to have sufficient working capital.

The pro-forma purchase period will be determined by individual wholesalers. Some may have a fixed time period others may have a fixed level of sales. Usually the pro-form period is something like the first $1000 of sales and most wholesalers have a minimum order level of around $500. So expect it to be around 2 to 3 months of expected sales for this supplier.

Standard Trading Terms
GHA Account application forms are a good example of standard credit terms in the gifts and homewares industry. They require  three trade references, directors or business owners personal guarantees for debts incurred, payment within 30 days of invoice date, interest penalties for late payments of 1% per month and also Order Cancellation Fees of $50 or 20% of order(because packing and unpacking orders costs money and withholds stock from sale to other customers).

GHA members can download a copy of the New Account Credit Application Form at their website agha.com.au