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When a Good Company Is a Bad Loan Risk
Sobel-Miller was profitable and had a flood of orders from big-name retailers. Banks still said no

With more than $3 million in new orders pouring in from some of the nation's biggest retailers, Jerome and Susan Miller found out how precarious a small business's existence can be.

The Millers have spent 10 years in an industry ruled by the whims of young girls, making ephemera such as fuzzy rainbow-hued slippers, cowboy hats, and iridescent handbags shaped liked Chinese takeout containers. But their company, Sobel-Miller Inc., got its big break in early 1998 when Target, Wal-Mart, K-Mart, Lerners, and other retailers hit the Millers with an onslaught of orders -- six times what they'd planned for. They needed cash fast to ramp up production, and financing seemed like a slam dunk. After all, interest rates were low, consumer demand was booming, and banks had been falling all over themselves to compete for borrowers. "And I have the hardest thing you can possibly get in this business: I have a Wal-Mart vendor number," says Jerome Miller, 46, president of Sobel-Miller.

But by the end of the spring, six banks, including Chase Manhattan Bank, Citibank, Marine Midland Bank, and the Millers' own bank for 10 years, Fleet Bank, had turned them down flat. The result: The Millers had to raise money by selling their Manhattan apartment, which was supposed to be the nest-egg for their two young children's college tuition. It went for $440,000 in one day in New York's superheated real estate market, forcing the Millers to move into a rental. "Most people we know think we are crazy," says Susan, 36, who ruefully notes that an identical apartment downstairs sold for $695,000 only a few months later. But their choice was either to sell the home or "go get a job and work for somebody."

The risk has paid off. This year, they expect revenues to top $10 million, up from their usual $3 million to $7 million, and profit margins have jumped to between 20% and 30% from around 15%, Susan says.

So what were those bankers thinking? It's hard to say. None would concede they had even heard of the Millers. But Ralph Sillari, a Fleet executive vice-president, says many variables go into a loan. "Having orders coming in is...very important to a credit decision, but it really is only one aspect of what we or other banks are looking for," he says. Without addressing the Millers specifically, he notes that a company's debt, profitability, and collateral also figure into the decision.

Susan says none of that explains why her debt-free, profitable, asset-rich company didn't get a loan. The couple says banks are just plain suspicious of any part of the retail supply chain. "If we were in the computer industry or any other kind of industry, maybe we could have gotten the money," says Susan.

To be fair, banks have some reason to be cautious, given the notoriously fickle market the Millers serve -- preteen and teenage girls. Retail chains have made and lost fortunes trying to keep up. "It is the most fast-paced market there is, as far as the clothing market is concerned," says Eileen Bruckman, a women's buyer for Urban Outfitters Inc., a Philadelphia-based retailer. "Juniors change their minds like the weather." As for suppliers, she adds, "There are huge amounts of people who make products for the juniors market, so we have more than we could possibly want or use."

Paradoxically, the Millers's great coup -- landing the retail giants as customers -- may have worked against them in their quest for financing. Lenders get leery if they believe a borrower is overly dependent on a few large customers. "When we saw the larger players in the department store industry falling into bankruptcy at the beginning of the 1990s, we saw a lot of small vendors take the risk and go down with them," says Thomas H. Tashjian, a retail industry specialist at Nationsbanc Montgomery Securities in San Francisco.

National discount stores can be less-than-ideal customers for small businesses in other ways, analysts say. Even in good times, they stall on paying small vendors, who have little leverage to compel payment. Lenders may also worry when small companies expand to serve big stores, only to have them back out next year and leave the little guy with unused capacity and new debt.

The Millers say they've learned a few lessons from their near-death experience. They're simplifying their company's complicated structure to make its financial strength more evident to would-be lenders. But the Millers say they have no regrets about selling the family home. "In this business, you have to put your butt on the line," Susan says. "We're sure we made the right decision." In fact, they've started shopping for a new apartment in their old neighborhood. If their gamble really pays off, they'll be able to stay there this time as long as they want.

By Jeremy Quittner in New York



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