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Suppliers are pulling back from retailers without credit insurance, here's why

Suppliers are hesitant to ship goods to retailers without credit insurance. Lumistella Co-CEO Christa Pitts joins the On the Move panel to discuss the importance of credit insurance.

Video Transcript

ADAM SHAPIRO: Welcome back to "On the Move." If this were a normal period of time without a global pandemic, we would start talking about complaining about retail outlets rushing all the Christmas merchandise onto the shelves now. That's the usual complaint.

But this year, something really behind the scenes is threatening the Christmas holiday shopping season. So to talk about this, we invite into the stream Christa Pitts. She is the co-CEO of Lumistella. She's joining us from Atlanta, Georgia. And a lot of us would know your company. One of the products from your company is Elf on the Shelf.

But the issue that I'm talking about, that does threaten retailers as well as manufacturers, is credit insurance. And very simply, we're talking about an industry-- $600 billion in sales are at risk because manufacturers can't get the insurance to underwrite what they're sending to retailers. right?

CHRISTA PITTS: Correct. I mean, if you think about the impact of a pandemic, and then you add on top of it retailers, unless they were considered essential, being shut down, the very thing that small businesses, manufacturers, distributors, sales agents depend on is trade credit insurance, underwriting your accounts receivable so that you can grow your business and that a small company like mine can actually afford to work with a company like Amazon or Target or Walmart and meet their demand. And unfortunately, at this point, that insurance that was readily available to all small businesses has basically dried up for this year

JULIE HYMAN: Christa, it's Julie here. So of the sales that you do, what proportion is direct sales, and then how heavily do you rely on some of those other outlets? I would imagine-- I mean, can you go without credit insurance in some cases as well when dealing with these big companies?

CHRISTA PITTS: You can. But obviously, it's a full risk, then, to you as a small business, particularly when you're seasonal, as many of the goods are that you're going to be seeing hitting the shelves. They have, now, an opportunity to think through it. It's not an essential good. So if your supply chain dries up, and there are difficulties there, you can't get your goods even on the shelf if you want to.

From a financial standpoint, though, many banks have come to depend on trade credit insurance to even give you your lines of credit. So when it comes to some of the larger retailers, the ones that were considered essential, you're in good shape. But when you start thinking about your favorite craft stores, your favorite department stores, your local small businesses, as a manufacturer or distributor, I'm having to take the entire burden of that risk of goods I've already made, forecasted, in some cases, I already had purchase orders for.

And so that's an enormous risk for the small business community. If any one of these retailers unfortunately, has to declare bankruptcy or is in a slow payment situation, I have no recourse. So I can ship them, but it's fully at our own risk. There's no way to underwrite that with insurance, which in the past as I said, was readily available.

JULIA LA ROCHE: Christa, it's Julia La Roche. And it's such an interesting point that I had not thought of. You're talking about the downstream effects of the small business community, where the bigger players, like the Walmarts, the Targets, the Amazons can handle this, but you're talking about maybe your local craft store that can't. are you hearing from your peers? I would love to just unpack this challenge further and walk us through a pretty tangible example that you're facing.

CHRISTA PITTS: Yeah, I have to say I'm actually excited to share this and to talk about it, because people are not talking about this and the serious trickle-down nature. This is $600 billion of business, small business, that's being impacted by the fact that trade credit insurance is drying up.

So if you were an essential business, I have no problem getting insurance on you, and I'm able to, then, not have that full burden of risk on my company. Last year, even though it may have been more expensive, I was able to get about 95% of my business insured. This year, I would say I'm closer to 50%.

And we deal with retailers across the spectrum. We deal with bulk retailers, small businesses, gift retailers, specialty retail, and department stores, as well as some of the larger retailers with our line of brands.

And so when you think about this impact and the risk of making these goods, I have a commitment for them. But if I send them to these retailers, it is a full-blown risk on anyone who's made these goods, that if they have to go under, or if they slow pay, you're taking the entire risk. So I can mitigate it. I can choose not to ship them. I can choose to short ship them. But then the goods that you're looking for aren't going to be on the shelf.

ADAM SHAPIRO: We are going to keep an eye on this, because so many jobs are tied to it indirectly and directly. Thank you for joining us. Christa Pitts, the co-CEO of Lumistella. We wish you all the best as we head towards the holidays.