Today, we're talking about credit. As always, I'm going to try to tackle this from a practical point-of-view, so I won't be getting into all the hooey that put the world on an economic downslide. But I will be talking about what you might want to know, as credit -- and in particular, credit risk -- pertains to comics.
There are two types of credit: installment and revolving. Revolving credit is essentially a credit line someone has that does not require a set number of payments. Credit cards are probably the most common example of this; you, as the consumer, can spend as much as you like on your credit card (up to a maximum limit) and, while you will likely have to make regular minimum payments, there's still a great deal of flexibility in how/when you pay back that loan. A bar tab would be a less formal version of revolving credit. Generally, the credit limit is ongoing indefinitely -- you can repeatedly borrow against it, provided you are able to make those minimum payments.
Given my definition of revolving credit, it shouldn't take much to figure out that installment credit does have a distinct and finite number of payments. Probably the most common examples of these are car loans and home mortgages. The consumer takes out a loan to pay for a specific good or service, and pays that back over a clearly defined period of time. Once the loan is paid off, the consumer is no longer considered a client of, or has any relation to, the bank/institution that provided the loan in the first place.
In both cases, the company who issues the credit to you is taking on a certain level of risk. They're loaning you a certain amount of money now, on the promise that you will pay them back. It's a risk because you might NOT pay them back. You might come back and say, "You know what? I just lost my job; I've got no income. I don't have any money to pay you." Companies know this happens, which is why they charge interest. The interest you pay on a loan is the company's way of ensuring that they don't lose money by loaning it to people who can't pay them back. (It also encourages them to continue lending, as you're promising to pay them more than you borrowed -- compensation for their lending money in the first place.)
Typically, installment credit comes as one-off situations. You're buying a car or a house or some other big ticket item. Because of that, it's generally less risky for the credit issuer. Even if you can't pay off the loan, they can take the item(s) you bought with the loan, and re-sell them. This is what's happening when a repo man takes your car, or the bank forecloses on your house.
With revolving credit, though, it's not so easy. If you use your credit card to buy a new TV, that's one thing. But it's impossible to get back the money you spent going out to dinner and a movie. That means revolving credit is generally riskier for the lender, and they account for that with a higher interest rate. That's why your mortgage rate is considerably lower than you credit card. More risk, more interest.
Now, here's an interesting wrinkle to you, the comic book fan. Let's say you go to your Local Comic Shop on Wednesday to pick up your new books. You walk in, you're greeted by the owner, you exchange pleasantries as he hands you the comics out of your pull file, you pull a few more comics of the wall of new books, hand the stack back to the owner who rings them up, you pay the total with your credit card, and walk out of the store with a bag full of new comics. Not an unusual situation, right? Now, how many times did you personally utilize credit during that sequence?
Obviously once, when you use your credit card to pay for the comics, but you're actually using a form of credit the moment you walk in the LCS. How? Your pull file.
Many comic shops use a pull file of some sort. You ask them to set aside whatever titles you want on an ongoing basis, and they essentially guarantee you'll have those issues reserved for you, on the chance that the issue sells out before you might otherwise have a chance to get a copy. But what you're doing is telling your LCS to order a book for you months before it's actually available. And you're promising to pay them for it later, once it arrives in the store. That LCS could easily be ordering hundreds of dollars worth of merchandise for you every month, based entirely on your verbal promise to pay for it later.
I was in my LCS (back when I was still buying pamphlet books every week) and one of the owners got off the phone and declared that she had just tried calling a former customer and couldn't get an answer. The other owner said that it'd been six months since they'd even heard from the customer, let alone seen him, and it's time they cleared out his pull file. Which he proceeded to do. He called me over and said that I might actually be interested in some of the books; he thought my tastes and this other customer's seemed fairly similar. He further said he'd give me a 30% discount on any books I bought. (My normal discount for being a regular customer was 15%.) I looked through the pile, and there were indeed some books that looked interesting. But I noted that this guy looked to be spending $20-$25 a week or so. That means the LCS had accrued around $500 worth of comics that were not only no longer a guaranteed sale, but a considerably questionable sale since most were not particularly popular, or even well-known, titles.
Think about this for a minute. The LCS essentially extended a $500 credit line to a customer, asking for no interest. The customer defaulted on his credit (by not picking up the books) and now the LCS is left with $500 worth of merchandise it has to find another outlet for.
A couple years ago, I heard Chuck Rozanski state that any new comic that is not sold before the subsequent issue comes out decreases in value to about ten cents. What he meant was that, regardless of what comic it is and what price might be put on it, there's a good chance that no one will buy it, and it will end up sitting in the LCS's back issue bins for years, if not indefinitely. Only a small percentage of the back issues that are collected by an LCS in that way are sold, effectively devaluing them collectively to about ten cents each. That's why my LCS owner offered me a 30% discount on those books. He wouldn't be making the same amount of money selling them to me as he would selling them to the originally intended customer, but he'd have that many fewer books that were next to worthless.
Now, we could argue about that particular LCS's policy regarding how long to hold someone's pull file before eliminating it. But even if they had a one-month policy, that's still a line of credit they extend to every regular customer. No interest. No credit check. You can walk into pretty much any LCS in the U.S. and tell them you're new in town and want to start a pull file -- the most you'll get asked for is an address and phone number, which likely won't be confirmed in any way.
I've been to a few shops that require a nominal deposit ($5.00) to start a pull file. Depending on the amount you purchase, this could easily be saved in a discount fairly quickly, but what this also does is alleviate some risk on the part of the LCS. Indeed, my LCS did that, so the gentleman who left suddenly had already essentially paid $5.00 interest on the books he hadn't yet ordered. It still doesn't cover the $500 worth of books he left, but it's something. Especially when it's added to the customers who don't skip town, but still paid their $5.00 up front.
Here's another wrinkle: special orders. If you flip through Previews and run across an up-market statue or bust, what do you do to order it? Same thing as your new comics -- you just ask your LCS to order one for you. Doesn't matter if you can't pay the $150 three months later when it comes in, or if you're even in town. Anything in Previews is fair game, whether the item costs $2.99 or $299. You ask for it, and your LCS will order it. No credit application required. Imagine if that guy who left six months worth of comics had also left behind six months of high-end prop replicas! That could very well put the LCS out of business!
Starting any new business involves risk. But starting a new comic shop with the way the industry is currently set up (with new comics being sold by Diamond to the LCS on a non-returnable basis) seems to involve taking on more risks than many other types of businesses. Comic shops are effectively being asked to become credit issuers on behalf of the distributor. They're being asked to take on additional risk for the distributors and publishers with no real effective compensation available for doing so. Credit companies charge interest or can repo your car. What sort of fallback options does a comic shop have?
To be continued...
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