Seasonal businesses are characterized by their short-term or seasonal peaks in operation. They tend to do significantly better during certain times of the year and experience lulls in between those times. For example, toy and jewelry retailers see sales jump at the beginning of the holiday season (Q4), whereas lumberyards and landscape outlets have their best sales during the spring and summer months, then fall off drastically, especially in colder climates. These companies experience ups and downs in their cash flow and must plan accordingly so they will be able to pay operating expenses and suppliers to stay in business. Seasonal businesses present a challenge to suppliers due to potential cash flow dips when they are experiencing a lull or hiatus. This results in the business not having enough cash coming in to pay their invoices.
Ups and downs of a seasonal business
For some, the lure of owning and running a seasonal business where they don’t have to be open year-round or be fully staffed is appealing. Some seasonal businesses, such as ski resorts or farmers markets, may completely shut down during the off season, while others such as jewelry or toy stores have defined busy and slow seasons but typically remain open.
A seasonal business provides extended downtimes, allowing the owner or staff to pursue other ventures or vacations. However, just because the peak business time may be in a downswing, that doesn’t mean the business finances cease. Seasonal businesses must spread their income across the entire year to account for incoming bills that don’t stop during the off-season. This can present a challenge to companies. When trying to decide whether to extend credit to seasonal companies, it’s important to carefully analyze the risks against the potential benefits.
Extending credit to seasonal businesses
When determining whether to approve credit for a seasonal company, analysis must go beyond the usual credit-risk analysis. The supplier must be reasonably confident that the company has enough cash reserves to remain viable during the off season and continue to pay off its debt.
You’ll need to look closely at the company’s history. How has the company managed seasonal challenges in the past? What other payments does the company have (e.g., operating expenses, wages, other debts) that might compete with loan repayment. You’ll need to understand peak inventory seasons, assess revenue patterns, and gauge the company’s ability to manage their operations and finances in the off season. Additionally, you need to know how well the company can weather a natural disaster or economic downturn. These surprises can have a much larger impact on a seasonal business than a business that operates throughout the year. If you decide to extend credit terms, make them tight and take other precautions to protect yourself and your investment. Unfortunately, even with due diligence, a seasonal customer may struggle to repay debt.
When things go south
It’s important to monitor your seasonal accounts closely for the first sign of problems. You want to receive the money owed, of course, but in most cases, you also want to retain the relationship. Send reminder notices at the first sign of trouble. Work with the customer to negotiate terms that work with their seasonal cash flow. In some cases, it may be advantageous to extend additional credit or extend payment terms when a seasonal business is behind on payments. This courtesy will allow your customer to continue operating, and could prove to be a solid business decision, especially for those companies with a sound business history and projected growth.
As with most businesses, seasonal businesses may face challenges, including cash flow during slow or off-peak times. This creates a problem for lenders or suppliers considering extending credit. However, with due diligence and a few precautions, doing business with a seasonal business can be beneficial for both parties.