Nurseries need to play it safe when it comes to setting payment terms

In 2006, about six years after he founded JLPN Inc., a nursery seeding operation in Salem, John Lewis had finally reached a point where he was ready to begin operating on cash. Up until then, the business had been run largely on credit.

Lewis then borrowed what he calls “a ton of money” and maxed out a massive credit line to buy his father’s company, Lew’s Lakeside Nursery. The year was 2007.

“That was the year everything crashed and business took a 40 percent nosedive,” Lewis said. “I didn’t have money to pay my bills or payroll. My 12-month credit line took six years to pay off.”

Living through the Great Recession was an eye-opening experience for Lewis, as it was for other nursery owners. He said it took years to get back into the black, and during that time, he and other owners had a hard time paying invoices. At the same time, however, there were also some growers who were still able to prepay with cash and get the industry-standard 5 percent prepayment discount.

“I couldn’t figure out how everyone could be broke and yet a few growers were still so cash-heavy that they went for the prepayment discount,” Lewis said. “Relying on credit and being on cash was the difference between growers. I then realized the importance of credit at certain times, but also the Achilles heel, or noose, it could become. It was my goal to never use credit again.”

Not all growers may have the same take on credit as Lewis does, but his experience with it illuminates the scrutiny that those in the nursery industry need to exercise when it comes using credit to keep the engine running.

Credit can be a helpful tool that allows customers to buy and sellers to ship. But it can also lead to a slippery slope of debt that can become overwhelming for any business.

As a result, nursery owners need to take a measured, well-thought-out approach to credit to make sure it’s used effectively and doesn’t become troublesome.

“I think it is so important for growers to get on a cash basis and examine financial risk from customer to customer,” Lewis said. “Knowing the impact that a bankruptcy or rough patch of a customer can cause you is critical. Too many companies get distracted by all the big zeroes they see on a purchase order, and as a result, they can’t say no to a big order. However, it’s the big zeros that make or break you when somebody can’t pay.”

Where credit’s due

As in most industries, credit plays a big role in the nursery business. Growers need and use credit for a range of purposes, from acquiring land and equipment to paying for inventory.

“The nursery industry, in particular, will have pretty heavy investment in inventory, and the product mix can be multiple years of inventory, so you have a long cash cycle,” said Valentin Celaya, senior vice president of credit for Northwest Farm Credit Services, which provides lending services and crop insurance for the agriculture industry. “You try to match the structure of the debt to what the cash flow is and when it can be repaid.”

At present, Celaya said the environment for credit is fairly healthy. Interest rates have been “very attractive based on long-term historical trends,” and even though they rose a bit across 2019, Celaya said that rates dropped again toward the end of the year as the economy eased back a bit. Credit availability has been positive, as well.

“In general, it’s all pretty healthy,” Celaya said. “There are probably some concerns on the horizon if we go into a recession, what that will mean for the housing market and the nursery industry, but I don’t think there will be the same level of challenges as there were in 2008 and 2009.”

Credit and customers

One of the most important areas in the nursery industry where credit plays a role is in transactions with customers and suppliers. Growers will often extend credit to customers as a way to keep transactions flowing and goods moving. But it is in these kinds of arrangements where credit can become a problem when, for example, a customer ends up not paying on time — or at all. That can lead to financial troubles for a nursery, especially if the customer is a large one.

“I’ve had people ask me how I’ve walked away from some very large orders over the last 20 years, and my response is always the same: ‘What good is a huge order, if they can’t pay their bills?’” Lewis said. “When you don’t get paid, it’s your profit margin you lose, not your overhead. It’s not personal, but I’m not risking my company and its people for somebody else’s business issues.”

That’s not to say that nurseries should never extend credit to their customers or use it themselves. But they do need to be cautious and cover their bases.

For starters, one of the most important steps a nursery can take is to simply get to know its customers. Lewis said one of the first things he looks at when considering doing business with someone is “the known reputation of the business practices of the grower.” By that, he means the quality of a customers’ product or growing practices and, more importantly, if they have a reputation for paying their bills on time.

“The business is of no value to JLPN if they can’t pay their bills,” Lewis said.

Getting to know customers is even more important in this day and age of mass consolidation in the nursery industry.

Bill Stine, who manages the legal department for Cash Flow Management, a commercial collection agency in Portland, Oregon, said consolidation has found some nurseries using the same names but being owned by completely different people or entities than the original owners.

“Things have changed dramatically, and you don’t even know the people anymore,” he said. “You really need to recognize that you have to protect yourself. You need to know a little bit about your customers, have things established and know the routine.”

If you do decide to extend credit to a customer, Doug Cushing, a shareholder with the law firm Jordan Ramis PC who’s done work on both the creditor and debtor side of the law for more than 30 years, said it’s important to get some formal credit application and references. Try to find out information from banks or other credit providers, if possible.

“For a lot of the nursery folk who are selling out of state, that’s even more critical,” Cushing said. “You can’t just walk over to the local customer and get a sense of what they’re all about.”

Setting clear terms for credit leaves little room for surprises. It’s OK to give better terms to long-time customers than new ones.

“You have to decide how strict you want to be and how much business you could lose,” Stine said. “You don’t want to be so strict that people don’t want to do business with you.”

He also said that getting a personal guarantee in a contract from a customer is a wise move. While a person could start a corporation and walk away from it if things go downhill, a personal guarantee legally requires the person to repay any debts.

In addition, Stine said establishing venue in your contract can be helpful if any troubles arise with a customer. Doing so requires out-of-state customers to come to the grower’s home state for any lawsuits, making it more challenging for them and giving the nursery, essentially, home-court advantage.

Keeping watch

If nurseries do decide to extend credit to certain customers, it’s critical to keep a close eye on payment schedule.

“You want to have good communication with your customers there,” Celaya said. “Somebody may start to slow down, or they maybe don’t do as big of an order as they used to in the past. You want to keep an eye on those kinds of shifts so you have time to react.”

Pay attention, too, to make sure that your customers are keeping up their business. Watch for annual statements and check that they’re renewing their LLCs and otherwise tending to their companies. Red flags could signal that a company’s in trouble.

“Those are things that happen,” Cushing said.

And if things simply end up going awry with a customer — they’re late on payments, they cancel orders — sometimes the best thing to do is just walk away. In December, Lewis had to do that to a customer who’d developed a history of slow payments. Lewis pulled their credit and put them on pre-payment, then ceased doing business with them altogether.

“As far as breaking up with customers, it’s a real and necessary thing at times,” he said. “You have to be willing to have the hard conversation and say, ‘It’s actually not me, it’s you!’”

Jon Bell is a freelance journalist who writes about everything from craft beer and real estate to the great outdoors. His website is www.jbellink.com. He can be reached at [email protected].