Intro

A few blocks from the Pacific Ocean in San Francisco’s foggy Sunset District, you’ll find The Last Straw, a small shop with an eclectic mix of jewelry, fabrics, and crafts. Marge Heard has operated the shop for over 30 years, buying and reselling crafts from locals. Heard defies many of the rules of retail crafts success—in some cases contradicting the advice provided in this chapter! For example:

• She doesn’t require ID from customers writing checks: “If a check bounces I call the person, and they usually come right over. In the history of the shop, I don’t think I’ve lost more than $100 total.”
• She doesn’t accept credit cards: “People say that they would buy a lot more if I would accept credit cards, but I don’t want to. I feel people will spend more than they can afford.”
• She allows people to take items home and pay for them in installments: “It works well for the more expensive stuff. I tell them, pay when you can, and please don’t die in the meantime!”
• She operates in a working class neighborhood with very little foot traffic. “Most of my business is word of mouth, although some customers don’t tell others because they want it for themselves.”

As The Last Straw proves, running a problem-free crafts shop can be accomplished using common sense, developing business radar, and doing business with artists and customers that you trust. “The thing is,” says Heard, “customers and artists who come into the shop become my friends. I don’t know if they feel like my friends, but that’s the way I feel—that we’re attracted to the same kind of things.”

The Pricing Dilemma: How Much Do You Charge?

Your price should reflect your costs and a reasonable profit. But how do you calculate costs and how do you measure a reasonable profit? Author Christopher Morley once said that when you sell someone a book “you don’t sell just twelve ounces of paper and ink and glue.” In other words, creative products have many costs that aren’t visible. For example, there’s your time, your overhead, and your training—all of which go into the costs of your crafts product. How do you sort through all those calculations and come up with the right price for your merchandise? And after you do this number crunching, will the customer consider your price to be fair, or say, “No thanks, it’s not worth it”? In this section, I’ll walk you through a few calculations that will help you determine your prices.

Overhead

Let’s start with overhead. Overhead refers to your fixed costs—that’s usually your rent, insurance, and other regular, set expenses. Here’s an example of overhead costs, broken down into monthly and daily expenses:

Omitted from sample chaoter: Overhead chart

Direct Costs (Material Costs)

Next consider the direct costs (sometimes referred to as “material costs”) for crafts goods that you make and sell. Direct costs refer to your cost of materials—the expenses that are directly attributable to the particular item you are selling. If you work with crochet, it would be your yarn, buttons, or fabrics incorporated in your work. Pick one item and focus on that. For example let’s say you make leather pouches with decorative leather buttons. your direct costs might look like this:

Omitted from sample chapter: Direct Costs (Material Costs) chart

Labor Costs

What’s your time worth and how long does it take to produce one of your crafts items? Many crafts artists underestimate the value of their time. If you’re not sure what your time is worth, why not start by using the minimum wage (currently $7.25) and multiply that times the number of hours it takes to produce one item. If you have an employee or independent contractor making this item for you, calculate the time spent by that worker.

Omitted from sample chapter: Labor Costs chart

Your labor costs also provide you with another piece of information— the number of those particular crafts items you can make in a day. In the case of the leather pouch, you can say conservatively—considering interruptions, meals, and other business—that you can make six pouches per day.

Putting Your Cost Together

Once you know your overhead, direct costs, and labor costs, you figure out your wholesale price. This the total cost to make the item—that is the price needed to reimburse you for all your costs.

Omitted from sample chapter: Cost Per Pouch chart

Markup and Profit

Markup is the difference between the cost and the price. Sometimes it is expressed as a percentage. For example doubling costs (a 100% markup) is common for many crafts items. Profit is the difference between your revenue and your costs. So, markup and profits are closely related.

Putting Your Price Together

If you are selling the item yourself—for example at a crafts show—the typical markup is double the wholesale price. So if your costs for your pouch were $22.69, you would be selling your pouches for $45.00. Things get more complex when you place your crafts on consignment. Galleries and shops usually mark up your price further, so your $45 pouch may sell for $90. If it sells for $90 in shops, should you raise your direct price when selling to customers? Or should you lower your profit margin so that consignment prices will be more appealing? Here are a few things to consider:

• Is your pricing based on your own wallet or the consumer’s? As Barbara Brabec, author of Handmade for Profit, writes, “Beginners look at their product and say ‘I wouldn’t spend more than $10 for this ….’ Which is a very big mistake because most crafters aren’t very rich. What they have to do is research the marketplace and see what others who are making similar products are charging for their wares.”
• What do people pay for similar crafts? You can get a bead on this question by checking the Internet, walking through a typical crafts show, or by checking local consignment shops and galleries for similar items.
• How strong a motive is money? You may have sufficient savings or income so that you don’t need to live off your crafts. You may not need a generous profit as long as you don’t lose money. If that’s the case, lower your markup to reflect a price that is appealing to consumers. Keep in mind that you don’t want to also disrespect yourself by setting your price so low that it reflects poorly on your work (see below).
• Is price considered a measure of artistic value? This is a doubleedged question. Some crafts artists believe that the only way to get customers to take their crafts seriously is to charge a high price. Others may believe that their work is so inspiring that it deserves to be recognized and priced like fine art. This is a decision you’ll have to make on your own, but regardless whether either theory applies to your work, consult competitor’s pricing to be sure you’re not over- or under-pricing your work.
• Consider using formulas. Many crafts artists adopt formulas for pricing. For example, if consignment shops are selling your work at a final markup of 200%, perhaps you can sell your crafts at fairs at a 150% markup (raising it from 100%). For some crafts artists, formulas don’t work. “I have no formula for pricing,” says jeweler Susan Brooks. “I may do a little bit of market research, but I rely more on intuition. Through trial and error, I hit a price that’s comfortable for galleries.”

How to Increase Your Profit

Besides raising prices, here are two simple and time-tested methods for increasing your profit.

• Become more efficient. For crafts artists, one of the largest expenses is labor. Can the time you spend creating crafts be streamlined? Step back and look at your production process. Consider the sequence of events for each piece. Can you do the work in a piecemeal fashion, concentrating on batches? Can you organize your work space better so that there is less moving things or looking for things? What can you do to be able to make just one or two more items a day?
• Cut costs and inventory. You may think you have already cut costs to the bone but maybe you just need to take a fresh look at your operation. Is there any way you can spend less on materials by buying in bulk with a group of artists? Can you cut overhead costs by subletting your space? Can you cut labor costs by using contractors instead of employees? The same approach should be taken with unsold inventory. Items that are not selling are actually adding to your costs because they take up space that might be better used for new hotter selling work. If that’s the case, lower prices on slow selling inventory (and increase your cash flow, as described in “Cash Flow Management,” below).

Your Break-Even Forecast

Another way to look at pricing is to consider how much you’ll need to earn each month to break even. For example, how many $45 pouches do you have to sell each month to break even? To calculate your “breakeven,” you’ll need to determine your gross profit percentage. This is a percentage based on what’s left after you deduct the direct costs for each sale. In the case of your pouches, you would calculate it as follows:

Omitted from sample chapter: Calculating Gross Profit Percentage chart

To calculate your break-even amount, divide your monthly overhead expenses by your profit percentage (as a decimal). For example, if your crafts business has fixed monthly costs of $620 and your profit percentage is 57%, then you will need total sales revenue of $1,087 a month to break even.

So, as a practical matter, if you were selling pouches at $45 apiece, you would need to sell approximately 24 pouches a month to break even—that is, to avoid losing money. (24 pouches @ $45 a pouch = $1,080.)

Omitted from sample chapter: Calculating Monthly Breakeven chart

If this amount is below your anticipated sales revenue, then you’re facing a loss—and you’ll need to lower expenses, increase prices, or increase sales (or some combination) to break even.

Cash Flow Management

You’ve probably heard people complain about cash flow and maybe wondered what exactly that means. Simply put, the money that comes in and goes out of your crafts business is your cash flow. Business cash flow is really no different from personal cash flow. For example, when you’re in a furniture store trying to decide whether to spend money on a new futon, that’s a cash flow decision. If you use the money on the futon, you may not have enough to pay for your new laptop.

Proper cash flow management is the key to profitability for your crafts business (and for its survivability). Think of cash flow as your business’s lifeblood. If it is interrupted—and this is true even for highly profitable ventures—it can lead to your crafts business’s demise. The four most common reasons that crafts businesses have cash flow problems are:

• Accounts receivables are late. When people are not paying you in a timely manner, you’ll always be short of cash. Are you reluctant to approach your customers? I discuss how to deal with collections later in this chapter.
• Inventory is turning slowly. Inventory—the crafts work you sell—is cash transformed into products. So when you’re holding unsold inventory, you’re really preventing access to cash. In addition, inventory costs create a financial burden. That’s why it’s sometimes wise to sell inventory at break-even prices rather than have it take up space without generating revenue.
• Expenses are not controlled. It may be axiomatic, but your failure to control costs can be a major factor in cash flow problems. Always look for ways to lower expenses. Throughout this book I provide tips on lowering fixed and variable expenses. You’ll be surprised: Even the leanest business can shed a few pounds.
• Bills are paid before they’re due. When possible, I recommend paying your bills early. Often, however, there are benefits to waiting—say, 30 days—and then paying the bill. In fact, in terms of holding on to your cash, it’s even better to get longer terms for paying back your suppliers.

Selling Wholesale

Okay, now that you have an idea how to price your work, you’re ready to sell. Let’s start with wholesale transactions—where you sell quantities of your work to a dealer or a retailer, usually at a discount. In other words, you charge your costs plus a markup that generates a profit (although usually not as large a markup as when you sell the item directly to consumers). That dealer or reseller resells your work to the general public.

Don’t expect to get a check as soon as the wholesale deal is made. Payments for wholesale sales are traditionally made 30, 60, or 90 days after the goods have been transferred. In effect, your crafts business is extending credit to the retail outlet. You may not feel like you’re extending credit—after all, you’re just waiting for payment—but from a legal perspective, you’re making an unsecured loan to the store or gallery. (The intricacies of unsecured loans are explained below.) Your “creditor” status can have a significant impact on your business, particularly if you extend a lot of credit to a store that has financial problems. (I talk about collections later in this chapter.)

Can You Trust the Retailer?

When People’s Pottery, the 47-store chain specializing in Americanmade crafts, filed for bankruptcy in December 2001, it claimed $20 million in debts. That sum included $3 million that remained owing to approximately 250-300 crafts vendors. An attorney working on the case told one of the crafts artists that it would be a victory if the crafts businesses got 1% of the amount owed them.

What happened to the $8 to $10 million in assets that the company still had when it declared bankruptcy? It was used to pay secured creditors—lenders who had demanded that their loans be secured with property. If the debt wasn’t paid, the secured creditors could demand that the bankruptcy court sell the assets and turn the proceeds over to the creditors. Crafts artists who had used Net 30 or Net 60 terms were considered unsecured creditors and would only be paid if money remained after paying the secured creditors. In other words, the crafts artists were left holding an empty bag!

It would be difficult, perhaps impossible, for a small crafts vendor to avoid the results of the People’s Pottery debacle. Unless a crafts business has somehow secured its loan, that is, required in writing some collateral as a condition of a wholesale purchase, the purchaser’s bankruptcy will effectively wipe away the debt.

Since there’s not much you can do once a store goes into bankruptcy, you’ll need to minimize your risks beforehand. Below are some suggestions:

• Avoid putting all your eggs in one basket. In the case of People’s Pottery, crafts artists who had a range of retail accounts suffered less than those who had relied exclusively on People’s Pottery. On the same note, don’t ditch your smaller retailers because of large orders from one retailer. Loyal smaller accounts give a business a constant, reliable source of income.
• Don’t wait to pursue those who owe you money. Some vendors managed to successfully pursue People’s Pottery before it went under. Manufacturers Credit Cooperative (MCC) began taking claims against People’s in the summer of 2001. “We had 16 clients,” said Jim Dempster, CEO of Manufacturers Credit Cooperative (www.mcccredit.com), “and all of them obtained some payments. Four collected in full. The earlier they came in, the greater percentage they received.”
• When in doubt, don’t extend credit. Some larger retailers will promise you anything to get your merchandise into the store under a Net 30 or 60 arrangement. That’s because the store may have an “asset-based” loan with its bank. Under this arrangement, the more merchandise in the store, the more money the store can borrow. Don’t play into a failing store’s problems. There’s no sense extending credit when you have doubts. In these cases, obtain prepayment or payment upon receipt of the goods.

The Wholesale Order Form (Invoices)

When selling wholesale, you don’t need a custom-made wholesale order form. Perfectly suitable order forms can be purchased at an office supply store. You can personalize these forms, if you wish, with a rubber stamp with the name of your business. Alternatively, many business software accounting suites include customizable forms and invoices.

Form on CD-ROM: In the event you want to create your own custom invoice, you can find an Invoice template on the CD-ROM at the back of this book.

At a minimum, your order form should include:

• information about your company (name, address, phone, and so on).
• date of the order
• information about the buyer, including customer account number, “ship to” address, sales tax number, and “bill to” person
• order number
• ship date and method of shipping, and
• order information including quantity, item number, description, price each, and total cost.

It’s normal to include a statement in the invoice that the order cannot be canceled. After all, a deal is a deal, and most stores understand that. If you want, you can seek compensation in the event of cancellation. For example, in the sample invoice, check the box, “Buyer agrees that in the event the order is cancelled, there is a cancellation fee of __% of balance due.” Although some crafts businesses use such language, always keep in mind that if a store fails to pay it, you must go to court to enforce the agreement. The same is true for the optional statements regarding interest payments and collection fees. When preparing your own invoices, you can decide whether to use this language in (or delete it from) your invoice.

Related topic: Using PayPal to create invoices. In Chapter 3, I discuss how to use PayPal (an online payment system) for creating invoices that are emailed to customers.

Selling Retail

Retail sales are when you sell directly to the public, whether at a crafts fair, an open studio, or as the result of a special custom order. Such sales are the bread and butter of the crafts industry and the source of more than half of the money made by crafts artists. The good news is that you probably won’t need much legal advice for retail sales. All you need is a trusty receipt book and a system for accounting for your income. This section provides advice on the few areas of retail sales that sometimes raise legal red flags—sales tax, handling checks and credit cards, and returns.

Omitted from sample chapter: Invoice sheet

Sales Tax

Did you ever dream of working as a tax collector? If your state has a sales tax law and you sell directly to customers, then your dream has come true. Sales tax is added to your selling price, usually after you ring the item up. You will need a permit from the state authorizing you to make sales and collect sales tax from customers within the state. Sometimes, the permit lets you buy items from wholesalers (for resale to customers) without paying sales tax. Some states call this a seller’s permit; others call it a resale permit or something similar. (Note: You might need a permit even if your state doesn’t have a sales tax. Even in the handful of states that don’t impose a sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon—local governments sometimes impose sales taxes, which you may be required to collect and pass on.) If you’re caught doing business without a permit, you could be subject to a number of penalties—such as having to pay the sales tax you should have collected from your customers, along with a fine. Also note that you may be subject to sales tax if you live on the border between two states or regularly sell in a neighboring state—some states have arrangements with neighboring states for combined tax certificates.

Accepting Checks

Considering that over 200 million checks bounce each year, it’s best to follow some commonsense procedures for minimizing your risks. For example, check your state’s law regarding what ID you can demand. Some states, such as California, have established limits on the types and number of identification that can be requested from a customer. For information, check with your state attorney general’s office. Other tips:

• Avoid taking checks that lack the person’s name or address.
• Require ID, preferably a driver’s license—and really look at it, for example, by comparing the address on the ID with the address on the check.
• Never accept a postdated check.
• Never accept two-party checks (checks written by someone other than your prospective buyer).
• Never accept the following as identification: membership cards, library cards, any card or ID that appears to be altered, Social Security cards, or temporary driver’s licenses.
• Record the buyer’s license number and phone number on the check.

Accepting Credit Cards

Though some retailers such as Marge Heard don’t like to use them, many small crafts businesses find that accepting credit cards is a business necessity. More and more customer’s wallets contain only plastic, and the ATM machine may be nowhere in sight at your local crafts fair.

Handling credit cards is fairly straightforward when the customer is physically present (not online). You’ll need to establish a merchant account, set up through a bank associated with a credit card processing company. The latter handles the actual credit card orders. You must pay application fees, which can range from $200 to $600.

The percentage you have to pay Visa or MasterCard (usually 2% to 3% of sales)—depends on your expected sales revenue and the bank. Although the percentage takes a cut from your revenue, there’s an upside to it—payments by credit cards don’t require collections or a credit check. Because banks may reject your merchant application if it seems suspicious (you’re estimating way-high sales revenue), it’s wise to estimate conservatively. Expect bank approval to take one to two months.

Credit card fees can eat into your profits, so you need to check them thoroughly before you sign up to be a credit card merchant. You can do comparison shopping on the Internet (type “merchant credit card compare” into your search engine).

Going Online With Credit Cards

If you’re taking credit card orders online, you’ll need an e-commerce provider who manages your shopping cart and credit card acceptance. The credit card processing is handled by the provider’s credit card transaction clearinghouse, a company that collects money from a customer and then pays the credit card companies their percentage of the sales. The balance is then deposited into your bank account within three days. There’s a simpler solution (see the discussion of PayPal and Google Checkout, in Chapter 3) but for more information on e-commerce providers, type “shopping cart services” into a search engine.

Credit Card Fraud

In the offline (real) world, where a person must show you the credit card, it’s sometimes easier to avoid fraud. You have an opportunity to judge the customer’s demeanor and (in most states) to verify with identification that the customer and card owner are one and the same. If in doubt, you can call the issuing bank and check that the credit card is in good standing.

Although fraud is harder to prevent online, the good news is that credit card transaction clearinghouses use fraud prevention systems that can flag risky transactions—for example, they may use Card Identification Codes, the three- or four-digit numbers that are printed on the back of the credit card in addition to the 16-digit embossed number. Ask your e-commerce provider or credit card transaction clearinghouse about its antifraud protection.

Nevertheless, when accepting credit cards in person, here are some precautions:

• If at all suspicious, require proof of identity, check a “Hot Sheet” (a list of bad cards), or telephone the issuing bank for authorization.
• Avoid any transaction where a card has been altered, has expired, is not yet valid, or shows a signature that doesn’t look like the one the customer writes on the sales slip.
• Always be careful processing an order from a new customer— especially if the customer places a large order or wants overnight delivery.
• Consider rejecting purchases when a bank in a foreign country has issued the credit card. This may seem harsh, but foreign credit cards are reported to have a higher fraud rate than those issued by U.S. banks.
• When you ship merchandise, choose a shipment method that requires the card owner to sign upon receipt. This approach adds some expense to the transaction, but you’ll know whether or not the shipment arrived—thereby preventing claims by the customer that it didn’t.

As for online purchases, “gateway software” or a transaction clearinghouse can also provide additional fraud protection services. Some popular software add-ons include:

• Fraud protection. This system lets you rate the chances that a particular transaction will be fraudulent based on criteria that you select. If a transaction is flagged as especially risky, you can seek further information from the customer or reject the transaction entirely.
• AVS. This system (short for Address Verification Service) takes the first five numbers of the street address and the ZIP code information from the customer’s stated billing address and compares that data to the billing address the card issuer has. You’re told if there’s a good match. If not, you can decide to reject the sale.
• CIC. Every credit card has a Card Identification Code, a three- or four-digit number that’s printed on the credit card in addition to the 16-digit embossed number. You can minimize fraud by including a feature that checks this number, since only someone who actually has the card in hand will know the number. Some companies call the number a CVV2, CVC2, or CID.

Credit Card Chargebacks

Look out for excessive chargeback fees—the money a bank takes out of your business account when a customer disputes a credit card transaction. Disputes about online transactions can pop up in several ways. For example, a customer may order merchandise, get it and keep it—but dispute that it was ever received. Or a customer may have some other complaint about the transaction. Unfair as it may seem, a bank typically can take a chargeback in any situation in which the customer is dissatisfied. In a retail store, chargebacks are rare, accounting for a mere 0.14% of credit transactions; but at an online store it’s 1.25% of transactions. In other words, chargebacks are nine times more frequent in online transactions than in traditional store transactions. So compare chargeback rates at merchant banks before signing with a merchant bank.

Getting Paid via PayPal

Some crafts artists use PayPal (www.paypal.com), an automated online payment system that enables anyone with an email address to make payments from across the country or around the world. Because the system works so well, it is the clearly preferred way to pay for many online purchases. Sending money via PayPal is free, but receiving money may be subject to a fee depending on the type of PayPal account you have.

Although developed and owned by eBay, PayPal is not just for use in eBay transactions. You can also use your account to accept payments via your website regardless of whether you have an eBay account. As part of its Merchant Services program, PayPal offers a free PayPal Shopping Cart system.

Selling at Crafts Shows

Although this book, like many crafts artists, uses the terms crafts fairs and trade shows interchangeably, the term “crafts fair” often refers to a retail show where the artist sells directly to the consumer. “Trade show” commonly refers to wholesale shows where the artist takes wholesale orders to be completed and delivered at some future date. By the way, for practical advice about entering and exhibiting at crafts fairs, check out the CraftMaster News Guide (www.craftmasternews.com).

Crafts shows are like small communities that spring up overnight and disappear a few days later. And as in a small community, a wide range of problems can develop as artists try to sell their wares. For example, while attending one outdoor crafts show, I watched the customers quickly disappear as a Bible-toting evangelist confronted them about sin and damnation. For two hours he continued while the ten booths in the vicinity saw little or no sales. The crafts show promoters explained that they could do nothing, since the law guaranteed the man the right of free speech in a public place. At another outdoor crafts show, I watched sales dissipate when the smoke from a nearby barbecue stand poured through a line of booths. Another time, participants at a crafts fair spent many hours in the dark after the electricity blew in the convention center.

It’s difficult, if not impossible, to resolve disputes like these during the two to three intense days of a crafts show. An artist who has paid hundreds of dollars in booth fees and traveled quite a distance wants to generate revenue, not get embroiled in battles with a promoter. And once the show is over, most artists can’t afford and don’t want to waste time traveling to an out-of-state courtroom or endanger their relationship with the promoter. The tendency is to chalk it up to a bad show, express an opinion on a crafts message board, and factor the experience into the decision whether to attend next year. Not only that, many crafts show agreements contain provisions that relieve the promoter from damages in situations like those I’ve described. For example, one promoter’s agreement states:

I agree not to hold [Promoter] responsible for personal injuries or property damage and I agree not to be party to any legal action against [Promoter]. All exhibit personnel, merchandise fixtures, etc., on the premises are my sole responsibility and I agree to indemnify and hold harmless [Promoter] from all liability stemming from their presence or their acts.

(Note: The statement “and I agree not to be party to any legal action against [Promoter]” may not be enforceable in some states. In such cases, the provision would probably be severed from the agreement.)

Other crafts show promoters’ agreements shield the promoter from lawsuits through what is known as a Force Majeure (or “Acts of God”) contract provision. For example, one promoter’s agreement says:

[Promoter] will not be liable for refunds, loss of profits and out of pocket expenses, or any other liabilities whatsoever for the failure to fulfill this contract due to any of the following reasons:

• The facility in which the exhibition to be produced is destroyed by fire or other calamity.
• By an act of God, public enemy or strikes, the requirements of statutes, ordinances, or any legal authority, or any cause beyond the control of [Promoter].
• The bankruptcy or insolvency of the facility.

Just in case such broadly written clauses aren’t enough, many contracts itemize the ways in which the promoter holds all the cards, such as:

• Prohibition on refund of booth fees. Most crafts show agreements contain a provision stating that there will be no refund of exhibit space fees.
• Penalties for unqualified exhibitors. Crafts show agreements often contain language allowing the promoter to remove the exhibit if it is not “up to show standards.” In reality, most promoters will not act on infractions during the show; they will wait until after the show to decide how to investigate and resolve the matter. And in general, enforcement of show rules by promoters is inconsistent.
• No recourse for lack of promotion. If a show is not properly promoted, there’s not much that a crafts artist can do. Crafts show agreements sometimes contain statements indicating that the promoter makes no promises as to sales or attendance.

Selling on Consignment

Consignments to galleries are the third-largest method of craft sales in the United States. Consignments account for over $3 billion in annual U.S. crafts sales. But consignment obviously comes with risks and obligations. What if the store doesn’t pay? How do you retrieve unsold merchandise? Who’s responsible when crafts are damaged? And—dread of dreads—what do you do when a gallery goes belly up?

Consider the crafts people left holding the bag when a Minneapolis gallery filed for bankruptcy while owing artists a total of $97,000. Said one crafts artist at the time, “We’re the canaries down the coal mine. When the gas comes we’re the first to die.”

Consignment occurs when an artist (the “consignor”) provides work to a gallery (the “consignee”), who agrees to pay the artist the proceeds from a sale minus the consignee’s commission (usually 40% to 50% of the sale price). If the work doesn’t sell, the consignee can return the work to the crafts artist. Under this arrangement, the consignee takes very little risk since it does not have to purchase the goods. The advantage of consignment is that it gives crafts artists access to sales outlets that might not otherwise be open to them.

Below I discuss three types of legal protection for consignors: the Uniform Commercial Code, state consignment laws, and written consignment agreements. You may find some of these legal principles difficult to comprehend, inconsistent, and expensive to enforce. Of the options provided below, I would recommend the use of written agreements as the best option.

By the way, regardless of these options, never forget to do some research and trust your common sense. Ask other crafts persons about their experiences with specific stores and galleries. Avoid large orders until you have built a level of trust with an unknown shop. And if you have doubts about a consignment, ask the store for references from other crafts people. If you’ve got a funny feeling about a shop, trust your intuition and don’t hand your work over to it.

The Uniform Commercial Code

Some version of the Uniform Commercial Code (UCC)—a set of model laws—has been adopted by every state. Under the UCC, if damage to your consigned crafts results from the store’s negligence, the store must pay for the loss. If the damage is not the fault of the store—for example, there’s a flood or fire—the store may or may not be liable, depending on how the courts in that state interpret the UCC.

Normally, under the UCC, if a store files for bankruptcy, the store’s creditors can seize your consigned goods as payment for debts. In other words, anyone owed money by the store can take your crafts as payment. You must stand in line behind the other creditors and hope that the judge awards you some compensation. However, the UCC gives crafts artists ways to prevent the creditor of a gallery from claiming your work as payment in the event of the gallery’s insolvency or bankruptcy. You can avoid this unhappy outcome by fulfilling one of three requirements:

• file a UCC form (known as UCC Form 1 or UCC-1) at the time of the consignment, in the county where the store is located
• have the store owner post a sign telling the public that the goods are consigned (not applicable in all states), or
• prove that the creditors were aware that the gallery sold consigned goods.

These efforts are referred to as “perfecting a security interest.” Having a security interest gets you certain rights over other creditors—for example, you can seize the property if the gallery doesn’t pay you. Although crafts people rarely use these cumbersome UCC requirements, you may find it worthwhile, in the case of high-ticket one-of-a-kind crafts items, to file the UCC form. The filing creates a lien (a legal claim over property) elevating you to the level of a “secured creditor” and putting you at the head of the line in bankruptcy court. If you do file the form and obtain the lien, you must remove the lien at the time of any sale.

Having the store or gallery post a sign—the second UCC requirement— is a troublesome request. In general, galleries prefer not to post such notices. However, some galleries are complying with such requests, and I have included an optional provision in the sample consignment agreement for this purpose. It requires that the gallery post a notice such as “Crafts at this gallery are sold under the terms of a consignment agreement.” As noted, this may not be effective in all states.

Most crafts workers will find the third requirement difficult to accomplish. It requires some legwork when it comes to obtaining proof that creditors of the store were aware of the consignment. Some consignors have accomplished this by sending creditors a copy of the consignment agreement. As you can imagine, the average crafts worker—who does not know who the store’s creditors are and who may not have a written consignment agreement—would find this impractical.

Keep in mind that in the event of a store bankruptcy you must prove to a bankruptcy court that you have met one of these three conditions— which usually means hiring an attorney.

State Consignment Laws

Because the UCC has proven to be a frightening trapdoor for crafts people, many states have passed special consignment laws to protect artists from gallery abuses and bankruptcy. So far, 31 states have passed art consignment laws—Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.

Each of these laws is unique, but all of them operate under one basic presumption: Whenever art is handed over to a gallery, store, or dealer, it’s presumed to be a consignment unless the artist is paid by the time of delivery. Most of these laws provide two benefits:

• any art held under a consignment arrangement or any money from a consignment sale is held in trust by the gallery for the artist (that is, the artist always owns the work and the proceeds), and
• the artist is shielded from bankruptcy, because creditors are prohibited from seizing consigned goods. (In reality, enforcing these laws usually requires hiring a lawyer and filing claims in bankruptcy court.) Half of the state laws require a written consignment agreement as a condition for enforcing the law.

The problem for crafts artists in these states is proving that their work qualifies as “art” under state laws. The determination can be confusing. Some state consignment laws apply only to “fine art.” Fine art is traditionally defined as a painting, sculpture, drawing, graphic art, or print, but not multiples. Many states—for example, Arizona and Ohio—specifically include crafts in the definition of “artwork” (defining them as any work made from clay, textile, fiber, wood, metal, plastic, or glass). Some statutes are vague, and it’s not clear whether crafts are covered.

Landing Consignment Accounts and Avoiding Consignment Problems

“Consignments can be an ideal situation for my riskier work,” says jeweler Alison Antelman (www.antelman.com), who has built her business with a combination of wholesale and consignment sales. “By taking it on consignment, the gallery takes less risk, and these works are available in outlets that might not buy wholesale. I also like consignments because I can pull back items or switch my line if I choose.” But, Antelman adds, “It’s a shared responsibility. The gallery has to make payments on time and has to keep track of the inventory, too.”

Antelman locates consignment accounts the old fashioned way, by visiting shops and investigating their inventory. “I check out galleries to see if my work fits with their taste and what they are trying to promote.

“Never assume they can see you when you drop in. I always ask if I can make an appointment. If they’re willing to see me then, that’s fine, too. I bring samples of my work and slides and literature such as an artist statement, bio, contact information, and tear sheets from magazine articles. The important thing is to always maintain a professional approach.”

And what about rejection or rudeness? “I always, always, act friendly and calm, leave, and thank them for the time. You can’t be insulted personally. You have to be thick-skinned. After all, my work is not suitable for all galleries.”

Here are some tips for assessing a gallery before committing to a consignment:

• If you can’t visit a gallery, ask someone you know in the area to check out the customer traffic and report back to you.
• Get names of other artists exhibiting at the gallery, preferably on your own rather than through the gallery owner. Then contact the artists and ask about the gallery’s practices.
• Be wary of a gallery that won’t give you financial or credit information.
• Check online about a gallery at crafts chat rooms (for example, www.craftsreport.com).
• After placing your work in the gallery, stay in contact. Regular communication may alert you to any financial problems and will also prepare you for success. You may need to get to work and build up stock to ship out because of ongoing sales.

In those rare cases when you have a problem, either because of late payments or suspicions that the gallery is having financial problems, follow Antelman’s simple strategy: “Take your work out. Put all of your energy and talent in another place.”

Written Consignment Agreements

Traditionally, consignments are made by written agreements, often furnished by the gallery, or through oral agreements. I recommend, when possible, using a written consignment agreement. It can provide benefits for you, obligations for the gallery, and, most important, it is required under many state consignment laws. A consignment agreement should cover:

• the inventory being consigned
• the retail prices for the goods
• the store or gallery’s responsibility for damage to the goods
• the gallery’s fees for consigned goods
• who pays for shipping
• whether discounting is permitted
• promotional responsibilities, if any, and
• the gallery or store’s obligation to post a sign regarding consignment (a condition that may protect you in the event of consignee bankruptcy).

I also recommend including an attorney fee provision (requiring that the loser pays the winner’s attorney fees) and an arbitration provision (requiring settlement by a private arbitrator, not a judge). These provisions create incentives for rapid settlement of all nonbankruptcy-related disputes. (A discussion of these provisions is provided in Chapter 11.)

Many galleries furnish their own consignment agreements. If you are furnished one of these agreements, compare it to the sample agreement below. It is possible that a gallery may refuse to modify its consignment agreement. If the agreement compares unfavorably to model consignments, you will have to decide whether there is any risk in proceeding. Usually, however, galleries are flexible about negotiating some terms and conditions.

How do you convince a gallery to use your consignment agreement? The best approach is to bring up the subject in your introductory conversation. Ask the gallery if they have a contract. If they do, ask them to send or fax it, and then compare it to the professional guidelines. If it’s unacceptable, or if the gallery doesn’t have a contract, tell the gallery you have a contract and ask if they’re comfortable reviewing your agreement.

Caution: Don’t use the sample agreement for vanity galleries or auctions. The agreement below is not intended for vanity galleries or auctions. Under a vanity gallery arrangement, the artist pays a fee for the right to exhibit works and may pay to rent the space, install his work, and use the gallery’s mailing list. The consignment agreement is also not intended for use at auctions. Auctions often involve more specialized financial arrangements covering advances or loans to an artist, catalog costs, reserves, and estimates of minimum payments. For more information on your legal rights in auctions, read Legal Guide to Buying and Selling Art and Collectibles, by attorney Armen R. Vartian.

Discounts: What are they? Discounts are used by galleries to provide special customers with an incentive to make regular purchases. For example, a gallery might give a favorite collector a 10% discount. When the practice started, discounts were usually only offered to collectors of higher priced crafts works, for example works valued at $10,000 or more. That’s changed, and galleries now may attempt to inflate prices to cover the discounts.

If the consignment price is not inflated to absorb the “discount,” who absorbs this loss? Many artists believe that the gallery, not the artist, should take the hit because the discount reflects the relationship between the gallery and the collector. They reason that the artist and the collector usually don’t have an ongoing business or personal relationship. Obviously this is a matter of negotiation between the artist and gallery. The sample consignment agreement in this chapter provides three choices for the artist, ranging from no discounts to splitting the loss.

Form on CD-ROM: You’ll find a sample Consignment Agreement on the CD-ROM at the back of this book.

Here are explanations for certain important provisions of the consignment agreement:

• Introductory paragraph. Insert your name as artist and insert the name and street address of the gallery.
• Appointment of Gallery. This provision establishes whether your relationship with the gallery is exclusive or nonexclusive, and establishes the geographic area within which the gallery will represent your works. Exclusive means that while the agreement is in force, only the gallery (not you or another gallery) can represent the sale of the artwork within the territory you define. If the agency relationship is nonexclusive, then others (including you) could solicit potential sales within the territory. If it’s exclusive, insert a statement in the territory section to reflect the regions in which you have granted rights, for example, “New York State.”
• Fees and Payments. Under this provision, the gallery agrees to accurately account to you for your commission (a percentage of the sales income). There are two optional provisions: one provides for your right to audit the gallery’s books; the other provides that the gallery will provide contact information for purchasers.
• Discounts. The sample agreement provides two choices: subjecting all discounts to your prior approval, or having the artist and gallery split the difference. Check the choice that’s applicable.
• Shipping. Three choices are provided for shipping costs: an open choice in which you can describe your arrangement; the traditional approach of “whoever ships, pays”; and a negotiated approach that is established by using Attachment B. Check the choice that’s applicable.
• Insurance. This is standard language, requiring that the gallery’s insurance cover and protect your works.
• Termination. After the initial period of sale (within a reasonable time period that you establish), this agreement is drafted to permit your immediate termination of the consignment agreement.
• Ownership; Loss or Damage. This provision establishes the gallery’s legal liability for any damage that occurs to your work while it is consigned to the gallery. The reference to “secured parties” and the Uniform Commercial Code is to prevent the gallery’s creditors from seizing your work to pay the gallery’s debts.
• Miscellaneous provisions. The assorted provisions at the end of the agreement—“Entire Agreement,” “No Joint Venturer,” and so on—are explained in Chapter 9.
• Attachment A: Inventory Listing. Complete the inventory listing. It’s important to provide a detailed description of the artworks and to establish the price at which each item will be sold. You may need to determine the price with the assistance of the gallery, since the gallery is likely to better know the market and prices within the territory. But keep in mind that the final decision as to the price is up to you, not the gallery. If you are submitting this sheet when modifying consignments—for example, supplying new work—it’s wise to have the gallery sign and send back the new Attachment A (you don’t need to sign it). I have included an optional signature section on this Attachment.
• Attachment B: Expenses. This optional section establishes how any applicable expenses will be paid (or split, as the case may be). It’s more likely you will use this attachment if you are dealing with a lot of high-ticket crafts or if the gallery is providing a special exhibition, not merely offering your work for sale. You and the gallery should agree on estimates for each expense and insert that sum in the attachment. If certain estimates are inapplicable, insert “N/A.” You can also request approval of any expenses over a certain amount (for example, over $500). Send two signed copies of the agreement to the gallery. One copy is for the gallery’s records, and the other is to be returned to you with the gallery’s signature.

Omitted from sample chapter: Consignment Agreemen, Attachment A, and Attachment B

Custom Orders

“I love your work,” a customer tells you at a crafts fair, “but could you make it in mauve with chartreuse green trim?” Assuming you’re willing to prepare the work according to the customer’s specs, the best method of following up on the sale is with a commission agreement (also known as special or custom order).

Prior to pulling out any paperwork, you’ll need to agree on the basic terms, that is, get an agreed-upon estimate, schedule, and payment plan. Sometimes a custom order will cost more than the pieces you’re currently selling, for example, if it involves a limited production method or more expensive raw materials. Crafts artists often must explain how a work is made in order for a buyer to understand custom order prices. Once you’ve agreed on that, you should sign an agreement.

Form on CD-ROM: You’ll find a sample Commission Agreement on the CD-ROM at the back of this book.

Sample Commission Agreement

The sample Commission Agreement I’ve provided in this book is drafted in terms that are fair for both the buyer and the artist. Below I help you understand the provisions of the Commission Agreement and give you some tips on filling it out:

• Basic information. Include the names of the parties (you and the buyer), the relevant job information (delivery dates and fee), and a description of the job.
• Payment. Choose the method of payment that you have agreed upon with the buyer. Sometimes, in the case of larger, more expensive commissions, a buyer may spread the payment over several installments and also insist upon the right to approve the progress of the work at each stage.
• Additional Expenses [optional]. If you are to be paid for additional expenses that you incur in filling this custom order, insert the supplies and services for which you seek compensation. If the buyer is to pay for shipping, include that information here. Also included is a reference to repayment of sales tax.
• Credit [optional]. If the work will be shown and you wish to be credited, insert the appropriate statement. Although it is not mandatory to include any notice, the use of a copyright notice may provide some benefits in the event you are involved in an infringement lawsuit.
• Termination; Cancellation Fee [optional]. If you wish to give the buyer the opportunity to terminate after making the order, insert an amount that is equitable, usually one-fourth or more of the amount for the total job.
• Liability. This “legalese” section limits the amounts that buyer and artist would have to pay if a dispute arises under the agreement. With this provision, the only amounts due in the event of a breach would be the sum that would correct the problem, usually the fee paid for the artwork.
• Reservation of Rights; Ownership of Original. This provision makes it clear that you own the copyright in the work. If the buyer wants to own the copyright, that is a fundamental change to the agreement that can only be accomplished by adding an assignment provision (an example is provided in Chapter 6) or, if the work qualifies, making it a work made for hire (see Chapter 4).
• No Destruction or Alteration [optional]. In the case of certain highticket, one-of-a-kind crafts works, the artist may choose this optional provision that establishes that the works cannot be destroyed or modified. For some crafts works, this right may also be acquired without the contract under some federal or state laws.
• Miscellaneous Provisions. The remaining provisions are explained in Chapter 9.

Omitted from sample chapter: Commission Agreement

Shipping and Delays

The Federal Trade Commission’s Mail or Telephone Order Merchandise Rule, also known as the “30-Day Rule,” imposes basic shipping and refund rules on businesses. When you advertise merchandise online— for example at eBay—and don’t say anything about when you plan to ship, you’re expected to ship within 30 days from when you receive the payment and all the information needed to fill the order. If your listing does state when you’ll ship the merchandise—for example, within two days of payment—you must have a reasonable basis for believing you can meet this shipping deadline.

If there’s a delay, that is, it will take longer than 30 days for you to ship (or longer than you promised), you have two choices:

• You can ask for the customer’s consent. If you can’t get consent to the delay, you must, without being asked, refund the money the customer paid you for the unshipped merchandise.
• You can simply cancel the order, notify the customer, and refund the payment.

Keep a record of how you notified the customer about the delay, whether by email, phone, fax, or regular mail, when you gave it, and how the customer responded.

Returns and Refunds

The legal rules for returns and refunds are straightforward: Once a sale is complete, you don’t have to give a refund. The only exceptions are if:

• you broke the sales contract—for example, your goods were defective, or
• you have a policy that allows a refund for returns.

If you want to provide refunds and impose conditions on when merchandise can be returned, post your return and refund policy prominently at your shop, booth, with your listing in your catalog, or mailing, or at your online store or website. A typical policy might require the customer to return the merchandise within 30 days for a refund.

State rules on refunds. A few states have laws regarding refunds. It’s not always clear whether these laws apply to online retailers doing business with residents of these states. California’s law seems to apply to Internet transactions because it applies to “other sellers of goods at retail, and mail order sellers which sell goods at retail in California ….” New York’s law is silent on the issue. So far, there have been no cases enforcing this issue, but if you prefer to err on the conservative side, then sellers dealing with residents of these states should consider abiding by the retail rules as follows:

• California. You must post your refund policy unless you offer a full cash refund or credit refund within seven days of purchase. If you don’t post your policy as required, the customer is entitled to return the goods for a full refund within 30 days of purchase.
• Florida. If you don’t offer refunds, that fact must be posted. If the statement isn’t posted, the customer can return unopened, unused goods within seven days of purchase.
• New York. If you offer cash refunds, that policy must be posted, and you must give the refund within 20 days of purchase.
• Virginia. If you don’t offer a full cash refund or credit within 20 days of purchase, you must post your policy.

For more information about the FTC rules, call the Federal Trade Commission at 877-FTC-HELP or visit their website (www.ftc.gov). You also may get helpful information from the Direct Marketing Association (www.the-dma.org).

Ten Tips for Collecting Past-Due Accounts

One of the most frustrating aspects of running a crafts business is dealing with customers who are slow in paying. Should you pursue the debt aggressively, or write it off as a waste of time?

In a sense, getting paid is actually an element of your marketing. If you can work with people having financial problems, you may end up with devoted customers for life. Late-paying customers usually fall into three categories:

• customers who want to pay but, because of real financial problems, can’t do it on time
• customers who prefer to delay or juggle payments, and
• customers who will do whatever possible to avoid payment.

For the first two categories, there is hope. You may be able to manage these debts and to convince the debtors to make partial or full payment. This is especially true if you have encouraged customer loyalty and your customers sincerely want to support you. As for the last category, you need to recognize this type as quickly as possible and take serious action—perhaps turning the account over to a collections agency. Here are ten tips:

• Get busy and stay at it. According to a survey by the Commercial Collection Agency Association (www.ccascollect.com), after only three months, the probability of collecting a delinquent account drops to 73%. After six months, it’s down to 57%. After one year, the chance of ever collecting on a past due account is a dismal 29%. Send bills promptly and rebill monthly. There’s no need to wait for the end of the month. Send past-due notices promptly once an account is overdue.
• Read about collections. Debt collectors can offer helpful tips, and you can learn many of them by reading either Collections Made Easy, by Carol Frischer (Career Press), or Paid in Full, by Timothy R. Paulsen (Advantage). Although these editions are both over ten years old, most of the information remains accurate, and helpful.
• Don’t harass debtors. It’s rarely a successful strategy and it’s sometimes illegal. If a customer asks that you stop calling, then stop calling. If a customer asks you to call at another time, find out the right time to call, and call then. Don’t leave more than one phone message a day for a debtor, and never leave messages that threaten the debtor or contain statements that put the debtor in a bad light.
• Be direct and listen. Keep your calls short and be specific. Listen to what the debtor says and keep a log of all of your collections phone calls.
• Look for creative solutions. If the customer has genuine financial problems, ask what amount they can realistically afford. Consider extending the time for payment if the customer agrees in writing to a new payment schedule. Consider entering into a simple promissory note with the debtor that details the new payment schedule. Call the day before the next scheduled payment is due to be sure the customer plans to respect the agreement.
• Write demand letters. Along with phone calls, send a series of letters that escalate in intensity. You can find sample collection letters (sometimes referred to as “demand letters”) on the CD-ROM that comes with this book and at various online resources. You may find it useful to develop a set of past-due notices to use when customers fall behind in their payments. Your first letter may suggest that perhaps the bill was overlooked, and that payment should be sent now so that the customer can maintain a good credit rating. Your second and third letters should be polite but increasingly firm. Vary the format of your letters; each one should look a little different. Samples are shown below. Save copies of all correspondence with the customer and keep notes of all telephone conversations (in case you hand the matter over to collections or take the customer to court). You can also pay a collection agency a fixed fee to write a series of letters on your behalf. (This is different than turning over the debt to an agency.)
• Deal with excuses. How can you tell if the customer is simply delinquent with a payment or whether the delinquency is a precursor of bigger financial problems? That is, how can you sift through the excuses given by a debtor without a lie detector? Carol Frischer considers excuses like a puzzle. You must solve each one and then stay a few steps ahead of the next one. If you’re given an excuse—the person writing checks is sick this week—then you must determine whether it is true or not. If it turns out not to be true—that is, another excuse arrives the following week—then you should become less tolerant and more aggressive. Always maintain your sense of urgency. For example, if the company is “expecting a big check next week,” insist on a partial payment this week and the remainder when the big check arrives.
• Offer a one-time deep discount. If an account is fairly large and remains unpaid for an extended period (say six months) and you’re doubtful about ever collecting, consider offering in writing a timelimited, deep discount to resolve the matter. This way, the customer has the incentive to borrow money to take advantage of your one-time, never-again offer to settle. You can finalize this with a mutual release and settlement, a legal document that terminates the debt. You can find such forms at Nolo’s website (www.nolo.com).
• Turn the account over to a collection agency. Turning a debt over to collections is your last resort. A collection agency will usually pay you 50% (or less) of what it recovers. Of course, in some cases, half is better than nothing. You’re likely to want the help of collection agency when the customer lies to you about the transaction or becomes a serial promise-breaker, assuring you on various occasions that payment is on the way, when it isn’t. The Commercial Collection Agency Association (www.ccascollect.com) provides more information on collection agencies.
• Consider a lawsuit. You can also take the debtor to court. Small claims court is inexpensive, though it can take a good chunk of your time. Furthermore, any judgment that you receive may be worthless if the debtor lacks a job or bank account. For an excellent guide to using small claims court and collecting after you win, see Everybody’s Guide to Small Claims Court, by Ralph Warner (Nolo). You can hire a lawyer for larger debts (say, over $5,000). But beware of filing a lawsuit to chase a debt; your legal fees may exceed the amount owed.

Form on CD-ROM: You’ll find sample collection letters on the CD-ROM at the back of this book.

Tip: If a customer goes bankrupt, pursuing a creditor into bankruptcy is rarely worth the effort. The worse your customer’s financial condition, the harder it is to recover any money. When a customer declares bankruptcy, you’ve got a big problem. A bankruptcy will effectively wipe out your debt unless you’re a secured creditor (the customer promised some property to secure your debt).

Omitted from sample chapter: Collection Letters

Intro

A few blocks from the Pacific Ocean in San Francisco’s foggy Sunset District, you’ll find The Last Straw, a small shop with an eclectic mix of jewelry, fabrics, and crafts. Marge Heard has operated the shop for over 30 years, buying and reselling crafts from locals. Heard defies many of the rules of retail crafts success—in some cases contradicting the advice provided in this chapter! For example:

• She doesn’t require ID from customers writing checks: “If a check bounces I call the person, and they usually come right over. In the history of the shop, I don’t think I’ve lost more than $100 total.”
• She doesn’t accept credit cards: “People say that they would buy a lot more if I would accept credit cards, but I don’t want to. I feel people will spend more than they can afford.”
• She allows people to take items home and pay for them in installments: “It works well for the more expensive stuff. I tell them, pay when you can, and please don’t die in the meantime!”
• She operates in a working class neighborhood with very little foot traffic. “Most of my business is word of mouth, although some customers don’t tell others because they want it for themselves.”

As The Last Straw proves, running a problem-free crafts shop can be accomplished using common sense, developing business radar, and doing business with artists and customers that you trust. “The thing is,” says Heard, “customers and artists who come into the shop become my friends. I don’t know if they feel like my friends, but that’s the way I feel—that we’re attracted to the same kind of things.”

The Pricing Dilemma: How Much Do You Charge?

Your price should reflect your costs and a reasonable profit. But how do you calculate costs and how do you measure a reasonable profit? Author Christopher Morley once said that when you sell someone a book “you don’t sell just twelve ounces of paper and ink and glue.” In other words, creative products have many costs that aren’t visible. For example, there’s your time, your overhead, and your training—all of which go into the costs of your crafts product. How do you sort through all those calculations and come up with the right price for your merchandise? And after you do this number crunching, will the customer consider your price to be fair, or say, “No thanks, it’s not worth it”? In this section, I’ll walk you through a few calculations that will help you determine your prices.

Overhead

Let’s start with overhead. Overhead refers to your fixed costs—that’s usually your rent, insurance, and other regular, set expenses. Here’s an example of overhead costs, broken down into monthly and daily expenses:

Omitted from sample chaoter: Overhead chart

Direct Costs (Material Costs)

Next consider the direct costs (sometimes referred to as “material costs”) for crafts goods that you make and sell. Direct costs refer to your cost of materials—the expenses that are directly attributable to the particular item you are selling. If you work with crochet, it would be your yarn, buttons, or fabrics incorporated in your work. Pick one item and focus on that. For example let’s say you make leather pouches with decorative leather buttons. your direct costs might look like this:

Omitted from sample chapter: Direct Costs (Material Costs) chart

Labor Costs

What’s your time worth and how long does it take to produce one of your crafts items? Many crafts artists underestimate the value of their time. If you’re not sure what your time is worth, why not start by using the minimum wage (currently $7.25) and multiply that times the number of hours it takes to produce one item. If you have an employee or independent contractor making this item for you, calculate the time spent by that worker.

Omitted from sample chapter: Labor Costs chart

Your labor costs also provide you with another piece of information— the number of those particular crafts items you can make in a day. In the case of the leather pouch, you can say conservatively—considering interruptions, meals, and other business—that you can make six pouches per day.

Putting Your Cost Together

Once you know your overhead, direct costs, and labor costs, you figure out your wholesale price. This the total cost to make the item—that is the price needed to reimburse you for all your costs.

Omitted from sample chapter: Cost Per Pouch chart

Markup and Profit

Markup is the difference between the cost and the price. Sometimes it is expressed as a percentage. For example doubling costs (a 100% markup) is common for many crafts items. Profit is the difference between your revenue and your costs. So, markup and profits are closely related.

Putting Your Price Together

If you are selling the item yourself—for example at a crafts show—the typical markup is double the wholesale price. So if your costs for your pouch were $22.69, you would be selling your pouches for $45.00. Things get more complex when you place your crafts on consignment. Galleries and shops usually mark up your price further, so your $45 pouch may sell for $90. If it sells for $90 in shops, should you raise your direct price when selling to customers? Or should you lower your profit margin so that consignment prices will be more appealing? Here are a few things to consider:

• Is your pricing based on your own wallet or the consumer’s? As Barbara Brabec, author of Handmade for Profit, writes, “Beginners look at their product and say ‘I wouldn’t spend more than $10 for this ….’ Which is a very big mistake because most crafters aren’t very rich. What they have to do is research the marketplace and see what others who are making similar products are charging for their wares.”
• What do people pay for similar crafts? You can get a bead on this question by checking the Internet, walking through a typical crafts show, or by checking local consignment shops and galleries for similar items.
• How strong a motive is money? You may have sufficient savings or income so that you don’t need to live off your crafts. You may not need a generous profit as long as you don’t lose money. If that’s the case, lower your markup to reflect a price that is appealing to consumers. Keep in mind that you don’t want to also disrespect yourself by setting your price so low that it reflects poorly on your work (see below).
• Is price considered a measure of artistic value? This is a doubleedged question. Some crafts artists believe that the only way to get customers to take their crafts seriously is to charge a high price. Others may believe that their work is so inspiring that it deserves to be recognized and priced like fine art. This is a decision you’ll have to make on your own, but regardless whether either theory applies to your work, consult competitor’s pricing to be sure you’re not over- or under-pricing your work.
• Consider using formulas. Many crafts artists adopt formulas for pricing. For example, if consignment shops are selling your work at a final markup of 200%, perhaps you can sell your crafts at fairs at a 150% markup (raising it from 100%). For some crafts artists, formulas don’t work. “I have no formula for pricing,” says jeweler Susan Brooks. “I may do a little bit of market research, but I rely more on intuition. Through trial and error, I hit a price that’s comfortable for galleries.”

How to Increase Your Profit

Besides raising prices, here are two simple and time-tested methods for increasing your profit.

• Become more efficient. For crafts artists, one of the largest expenses is labor. Can the time you spend creating crafts be streamlined? Step back and look at your production process. Consider the sequence of events for each piece. Can you do the work in a piecemeal fashion, concentrating on batches? Can you organize your work space better so that there is less moving things or looking for things? What can you do to be able to make just one or two more items a day?
• Cut costs and inventory. You may think you have already cut costs to the bone but maybe you just need to take a fresh look at your operation. Is there any way you can spend less on materials by buying in bulk with a group of artists? Can you cut overhead costs by subletting your space? Can you cut labor costs by using contractors instead of employees? The same approach should be taken with unsold inventory. Items that are not selling are actually adding to your costs because they take up space that might be better used for new hotter selling work. If that’s the case, lower prices on slow selling inventory (and increase your cash flow, as described in “Cash Flow Management,” below).

Your Break-Even Forecast

Another way to look at pricing is to consider how much you’ll need to earn each month to break even. For example, how many $45 pouches do you have to sell each month to break even? To calculate your “breakeven,” you’ll need to determine your gross profit percentage. This is a percentage based on what’s left after you deduct the direct costs for each sale. In the case of your pouches, you would calculate it as follows:

Omitted from sample chapter: Calculating Gross Profit Percentage chart

To calculate your break-even amount, divide your monthly overhead expenses by your profit percentage (as a decimal). For example, if your crafts business has fixed monthly costs of $620 and your profit percentage is 57%, then you will need total sales revenue of $1,087 a month to break even.

So, as a practical matter, if you were selling pouches at $45 apiece, you would need to sell approximately 24 pouches a month to break even—that is, to avoid losing money. (24 pouches @ $45 a pouch = $1,080.)

Omitted from sample chapter: Calculating Monthly Breakeven chart

If this amount is below your anticipated sales revenue, then you’re facing a loss—and you’ll need to lower expenses, increase prices, or increase sales (or some combination) to break even.

Cash Flow Management

You’ve probably heard people complain about cash flow and maybe wondered what exactly that means. Simply put, the money that comes in and goes out of your crafts business is your cash flow. Business cash flow is really no different from personal cash flow. For example, when you’re in a furniture store trying to decide whether to spend money on a new futon, that’s a cash flow decision. If you use the money on the futon, you may not have enough to pay for your new laptop.

Proper cash flow management is the key to profitability for your crafts business (and for its survivability). Think of cash flow as your business’s lifeblood. If it is interrupted—and this is true even for highly profitable ventures—it can lead to your crafts business’s demise. The four most common reasons that crafts businesses have cash flow problems are:

• Accounts receivables are late. When people are not paying you in a timely manner, you’ll always be short of cash. Are you reluctant to approach your customers? I discuss how to deal with collections later in this chapter.
• Inventory is turning slowly. Inventory—the crafts work you sell—is cash transformed into products. So when you’re holding unsold inventory, you’re really preventing access to cash. In addition, inventory costs create a financial burden. That’s why it’s sometimes wise to sell inventory at break-even prices rather than have it take up space without generating revenue.
• Expenses are not controlled. It may be axiomatic, but your failure to control costs can be a major factor in cash flow problems. Always look for ways to lower expenses. Throughout this book I provide tips on lowering fixed and variable expenses. You’ll be surprised: Even the leanest business can shed a few pounds.
• Bills are paid before they’re due. When possible, I recommend paying your bills early. Often, however, there are benefits to waiting—say, 30 days—and then paying the bill. In fact, in terms of holding on to your cash, it’s even better to get longer terms for paying back your suppliers.

Selling Wholesale

Okay, now that you have an idea how to price your work, you’re ready to sell. Let’s start with wholesale transactions—where you sell quantities of your work to a dealer or a retailer, usually at a discount. In other words, you charge your costs plus a markup that generates a profit (although usually not as large a markup as when you sell the item directly to consumers). That dealer or reseller resells your work to the general public.

Don’t expect to get a check as soon as the wholesale deal is made. Payments for wholesale sales are traditionally made 30, 60, or 90 days after the goods have been transferred. In effect, your crafts business is extending credit to the retail outlet. You may not feel like you’re extending credit—after all, you’re just waiting for payment—but from a legal perspective, you’re making an unsecured loan to the store or gallery. (The intricacies of unsecured loans are explained below.) Your “creditor” status can have a significant impact on your business, particularly if you extend a lot of credit to a store that has financial problems. (I talk about collections later in this chapter.)

Can You Trust the Retailer?

When People’s Pottery, the 47-store chain specializing in Americanmade crafts, filed for bankruptcy in December 2001, it claimed $20 million in debts. That sum included $3 million that remained owing to approximately 250-300 crafts vendors. An attorney working on the case told one of the crafts artists that it would be a victory if the crafts businesses got 1% of the amount owed them.

What happened to the $8 to $10 million in assets that the company still had when it declared bankruptcy? It was used to pay secured creditors—lenders who had demanded that their loans be secured with property. If the debt wasn’t paid, the secured creditors could demand that the bankruptcy court sell the assets and turn the proceeds over to the creditors. Crafts artists who had used Net 30 or Net 60 terms were considered unsecured creditors and would only be paid if money remained after paying the secured creditors. In other words, the crafts artists were left holding an empty bag!

It would be difficult, perhaps impossible, for a small crafts vendor to avoid the results of the People’s Pottery debacle. Unless a crafts business has somehow secured its loan, that is, required in writing some collateral as a condition of a wholesale purchase, the purchaser’s bankruptcy will effectively wipe away the debt.

Since there’s not much you can do once a store goes into bankruptcy, you’ll need to minimize your risks beforehand. Below are some suggestions:

• Avoid putting all your eggs in one basket. In the case of People’s Pottery, crafts artists who had a range of retail accounts suffered less than those who had relied exclusively on People’s Pottery. On the same note, don’t ditch your smaller retailers because of large orders from one retailer. Loyal smaller accounts give a business a constant, reliable source of income.
• Don’t wait to pursue those who owe you money. Some vendors managed to successfully pursue People’s Pottery before it went under. Manufacturers Credit Cooperative (MCC) began taking claims against People’s in the summer of 2001. “We had 16 clients,” said Jim Dempster, CEO of Manufacturers Credit Cooperative (www.mcccredit.com), “and all of them obtained some payments. Four collected in full. The earlier they came in, the greater percentage they received.”
• When in doubt, don’t extend credit. Some larger retailers will promise you anything to get your merchandise into the store under a Net 30 or 60 arrangement. That’s because the store may have an “asset-based” loan with its bank. Under this arrangement, the more merchandise in the store, the more money the store can borrow. Don’t play into a failing store’s problems. There’s no sense extending credit when you have doubts. In these cases, obtain prepayment or payment upon receipt of the goods.

The Wholesale Order Form (Invoices)

When selling wholesale, you don’t need a custom-made wholesale order form. Perfectly suitable order forms can be purchased at an office supply store. You can personalize these forms, if you wish, with a rubber stamp with the name of your business. Alternatively, many business software accounting suites include customizable forms and invoices.

Form on CD-ROM: In the event you want to create your own custom invoice, you can find an Invoice template on the CD-ROM at the back of this book.

At a minimum, your order form should include:

• information about your company (name, address, phone, and so on).
• date of the order
• information about the buyer, including customer account number, “ship to” address, sales tax number, and “bill to” person
• order number
• ship date and method of shipping, and
• order information including quantity, item number, description, price each, and total cost.

It’s normal to include a statement in the invoice that the order cannot be canceled. After all, a deal is a deal, and most stores understand that. If you want, you can seek compensation in the event of cancellation. For example, in the sample invoice, check the box, “Buyer agrees that in the event the order is cancelled, there is a cancellation fee of __% of balance due.” Although some crafts businesses use such language, always keep in mind that if a store fails to pay it, you must go to court to enforce the agreement. The same is true for the optional statements regarding interest payments and collection fees. When preparing your own invoices, you can decide whether to use this language in (or delete it from) your invoice.

Related topic: Using PayPal to create invoices. In Chapter 3, I discuss how to use PayPal (an online payment system) for creating invoices that are emailed to customers.

Selling Retail

Retail sales are when you sell directly to the public, whether at a crafts fair, an open studio, or as the result of a special custom order. Such sales are the bread and butter of the crafts industry and the source of more than half of the money made by crafts artists. The good news is that you probably won’t need much legal advice for retail sales. All you need is a trusty receipt book and a system for accounting for your income. This section provides advice on the few areas of retail sales that sometimes raise legal red flags—sales tax, handling checks and credit cards, and returns.

Omitted from sample chapter: Invoice sheet

Sales Tax

Did you ever dream of working as a tax collector? If your state has a sales tax law and you sell directly to customers, then your dream has come true. Sales tax is added to your selling price, usually after you ring the item up. You will need a permit from the state authorizing you to make sales and collect sales tax from customers within the state. Sometimes, the permit lets you buy items from wholesalers (for resale to customers) without paying sales tax. Some states call this a seller’s permit; others call it a resale permit or something similar. (Note: You might need a permit even if your state doesn’t have a sales tax. Even in the handful of states that don’t impose a sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon—local governments sometimes impose sales taxes, which you may be required to collect and pass on.) If you’re caught doing business without a permit, you could be subject to a number of penalties—such as having to pay the sales tax you should have collected from your customers, along with a fine. Also note that you may be subject to sales tax if you live on the border between two states or regularly sell in a neighboring state—some states have arrangements with neighboring states for combined tax certificates.

Accepting Checks

Considering that over 200 million checks bounce each year, it’s best to follow some commonsense procedures for minimizing your risks. For example, check your state’s law regarding what ID you can demand. Some states, such as California, have established limits on the types and number of identification that can be requested from a customer. For information, check with your state attorney general’s office. Other tips:

• Avoid taking checks that lack the person’s name or address.
• Require ID, preferably a driver’s license—and really look at it, for example, by comparing the address on the ID with the address on the check.
• Never accept a postdated check.
• Never accept two-party checks (checks written by someone other than your prospective buyer).
• Never accept the following as identification: membership cards, library cards, any card or ID that appears to be altered, Social Security cards, or temporary driver’s licenses.
• Record the buyer’s license number and phone number on the check.

Accepting Credit Cards

Though some retailers such as Marge Heard don’t like to use them, many small crafts businesses find that accepting credit cards is a business necessity. More and more customer’s wallets contain only plastic, and the ATM machine may be nowhere in sight at your local crafts fair.

Handling credit cards is fairly straightforward when the customer is physically present (not online). You’ll need to establish a merchant account, set up through a bank associated with a credit card processing company. The latter handles the actual credit card orders. You must pay application fees, which can range from $200 to $600.

The percentage you have to pay Visa or MasterCard (usually 2% to 3% of sales)—depends on your expected sales revenue and the bank. Although the percentage takes a cut from your revenue, there’s an upside to it—payments by credit cards don’t require collections or a credit check. Because banks may reject your merchant application if it seems suspicious (you’re estimating way-high sales revenue), it’s wise to estimate conservatively. Expect bank approval to take one to two months.

Credit card fees can eat into your profits, so you need to check them thoroughly before you sign up to be a credit card merchant. You can do comparison shopping on the Internet (type “merchant credit card compare” into your search engine).

Going Online With Credit Cards

If you’re taking credit card orders online, you’ll need an e-commerce provider who manages your shopping cart and credit card acceptance. The credit card processing is handled by the provider’s credit card transaction clearinghouse, a company that collects money from a customer and then pays the credit card companies their percentage of the sales. The balance is then deposited into your bank account within three days. There’s a simpler solution (see the discussion of PayPal and Google Checkout, in Chapter 3) but for more information on e-commerce providers, type “shopping cart services” into a search engine.

Credit Card Fraud

In the offline (real) world, where a person must show you the credit card, it’s sometimes easier to avoid fraud. You have an opportunity to judge the customer’s demeanor and (in most states) to verify with identification that the customer and card owner are one and the same. If in doubt, you can call the issuing bank and check that the credit card is in good standing.

Although fraud is harder to prevent online, the good news is that credit card transaction clearinghouses use fraud prevention systems that can flag risky transactions—for example, they may use Card Identification Codes, the three- or four-digit numbers that are printed on the back of the credit card in addition to the 16-digit embossed number. Ask your e-commerce provider or credit card transaction clearinghouse about its antifraud protection.

Nevertheless, when accepting credit cards in person, here are some precautions:

• If at all suspicious, require proof of identity, check a “Hot Sheet” (a list of bad cards), or telephone the issuing bank for authorization.
• Avoid any transaction where a card has been altered, has expired, is not yet valid, or shows a signature that doesn’t look like the one the customer writes on the sales slip.
• Always be careful processing an order from a new customer— especially if the customer places a large order or wants overnight delivery.
• Consider rejecting purchases when a bank in a foreign country has issued the credit card. This may seem harsh, but foreign credit cards are reported to have a higher fraud rate than those issued by U.S. banks.
• When you ship merchandise, choose a shipment method that requires the card owner to sign upon receipt. This approach adds some expense to the transaction, but you’ll know whether or not the shipment arrived—thereby preventing claims by the customer that it didn’t.

As for online purchases, “gateway software” or a transaction clearinghouse can also provide additional fraud protection services. Some popular software add-ons include:

• Fraud protection. This system lets you rate the chances that a particular transaction will be fraudulent based on criteria that you select. If a transaction is flagged as especially risky, you can seek further information from the customer or reject the transaction entirely.
• AVS. This system (short for Address Verification Service) takes the first five numbers of the street address and the ZIP code information from the customer’s stated billing address and compares that data to the billing address the card issuer has. You’re told if there’s a good match. If not, you can decide to reject the sale.
• CIC. Every credit card has a Card Identification Code, a three- or four-digit number that’s printed on the credit card in addition to the 16-digit embossed number. You can minimize fraud by including a feature that checks this number, since only someone who actually has the card in hand will know the number. Some companies call the number a CVV2, CVC2, or CID.

Credit Card Chargebacks

Look out for excessive chargeback fees—the money a bank takes out of your business account when a customer disputes a credit card transaction. Disputes about online transactions can pop up in several ways. For example, a customer may order merchandise, get it and keep it—but dispute that it was ever received. Or a customer may have some other complaint about the transaction. Unfair as it may seem, a bank typically can take a chargeback in any situation in which the customer is dissatisfied. In a retail store, chargebacks are rare, accounting for a mere 0.14% of credit transactions; but at an online store it’s 1.25% of transactions. In other words, chargebacks are nine times more frequent in online transactions than in traditional store transactions. So compare chargeback rates at merchant banks before signing with a merchant bank.

Getting Paid via PayPal

Some crafts artists use PayPal (www.paypal.com), an automated online payment system that enables anyone with an email address to make payments from across the country or around the world. Because the system works so well, it is the clearly preferred way to pay for many online purchases. Sending money via PayPal is free, but receiving money may be subject to a fee depending on the type of PayPal account you have.

Although developed and owned by eBay, PayPal is not just for use in eBay transactions. You can also use your account to accept payments via your website regardless of whether you have an eBay account. As part of its Merchant Services program, PayPal offers a free PayPal Shopping Cart system.

Selling at Crafts Shows

Although this book, like many crafts artists, uses the terms crafts fairs and trade shows interchangeably, the term “crafts fair” often refers to a retail show where the artist sells directly to the consumer. “Trade show” commonly refers to wholesale shows where the artist takes wholesale orders to be completed and delivered at some future date. By the way, for practical advice about entering and exhibiting at crafts fairs, check out the CraftMaster News Guide (www.craftmasternews.com).

Crafts shows are like small communities that spring up overnight and disappear a few days later. And as in a small community, a wide range of problems can develop as artists try to sell their wares. For example, while attending one outdoor crafts show, I watched the customers quickly disappear as a Bible-toting evangelist confronted them about sin and damnation. For two hours he continued while the ten booths in the vicinity saw little or no sales. The crafts show promoters explained that they could do nothing, since the law guaranteed the man the right of free speech in a public place. At another outdoor crafts show, I watched sales dissipate when the smoke from a nearby barbecue stand poured through a line of booths. Another time, participants at a crafts fair spent many hours in the dark after the electricity blew in the convention center.

It’s difficult, if not impossible, to resolve disputes like these during the two to three intense days of a crafts show. An artist who has paid hundreds of dollars in booth fees and traveled quite a distance wants to generate revenue, not get embroiled in battles with a promoter. And once the show is over, most artists can’t afford and don’t want to waste time traveling to an out-of-state courtroom or endanger their relationship with the promoter. The tendency is to chalk it up to a bad show, express an opinion on a crafts message board, and factor the experience into the decision whether to attend next year. Not only that, many crafts show agreements contain provisions that relieve the promoter from damages in situations like those I’ve described. For example, one promoter’s agreement states:

I agree not to hold [Promoter] responsible for personal injuries or property damage and I agree not to be party to any legal action against [Promoter]. All exhibit personnel, merchandise fixtures, etc., on the premises are my sole responsibility and I agree to indemnify and hold harmless [Promoter] from all liability stemming from their presence or their acts.

(Note: The statement “and I agree not to be party to any legal action against [Promoter]” may not be enforceable in some states. In such cases, the provision would probably be severed from the agreement.)

Other crafts show promoters’ agreements shield the promoter from lawsuits through what is known as a Force Majeure (or “Acts of God”) contract provision. For example, one promoter’s agreement says:

[Promoter] will not be liable for refunds, loss of profits and out of pocket expenses, or any other liabilities whatsoever for the failure to fulfill this contract due to any of the following reasons:

• The facility in which the exhibition to be produced is destroyed by fire or other calamity.
• By an act of God, public enemy or strikes, the requirements of statutes, ordinances, or any legal authority, or any cause beyond the control of [Promoter].
• The bankruptcy or insolvency of the facility.

Just in case such broadly written clauses aren’t enough, many contracts itemize the ways in which the promoter holds all the cards, such as:

• Prohibition on refund of booth fees. Most crafts show agreements contain a provision stating that there will be no refund of exhibit space fees.
• Penalties for unqualified exhibitors. Crafts show agreements often contain language allowing the promoter to remove the exhibit if it is not “up to show standards.” In reality, most promoters will not act on infractions during the show; they will wait until after the show to decide how to investigate and resolve the matter. And in general, enforcement of show rules by promoters is inconsistent.
• No recourse for lack of promotion. If a show is not properly promoted, there’s not much that a crafts artist can do. Crafts show agreements sometimes contain statements indicating that the promoter makes no promises as to sales or attendance.

Selling on Consignment

Consignments to galleries are the third-largest method of craft sales in the United States. Consignments account for over $3 billion in annual U.S. crafts sales. But consignment obviously comes with risks and obligations. What if the store doesn’t pay? How do you retrieve unsold merchandise? Who’s responsible when crafts are damaged? And—dread of dreads—what do you do when a gallery goes belly up?

Consider the crafts people left holding the bag when a Minneapolis gallery filed for bankruptcy while owing artists a total of $97,000. Said one crafts artist at the time, “We’re the canaries down the coal mine. When the gas comes we’re the first to die.”

Consignment occurs when an artist (the “consignor”) provides work to a gallery (the “consignee”), who agrees to pay the artist the proceeds from a sale minus the consignee’s commission (usually 40% to 50% of the sale price). If the work doesn’t sell, the consignee can return the work to the crafts artist. Under this arrangement, the consignee takes very little risk since it does not have to purchase the goods. The advantage of consignment is that it gives crafts artists access to sales outlets that might not otherwise be open to them.

Below I discuss three types of legal protection for consignors: the Uniform Commercial Code, state consignment laws, and written consignment agreements. You may find some of these legal principles difficult to comprehend, inconsistent, and expensive to enforce. Of the options provided below, I would recommend the use of written agreements as the best option.

By the way, regardless of these options, never forget to do some research and trust your common sense. Ask other crafts persons about their experiences with specific stores and galleries. Avoid large orders until you have built a level of trust with an unknown shop. And if you have doubts about a consignment, ask the store for references from other crafts people. If you’ve got a funny feeling about a shop, trust your intuition and don’t hand your work over to it.

The Uniform Commercial Code

Some version of the Uniform Commercial Code (UCC)—a set of model laws—has been adopted by every state. Under the UCC, if damage to your consigned crafts results from the store’s negligence, the store must pay for the loss. If the damage is not the fault of the store—for example, there’s a flood or fire—the store may or may not be liable, depending on how the courts in that state interpret the UCC.

Normally, under the UCC, if a store files for bankruptcy, the store’s creditors can seize your consigned goods as payment for debts. In other words, anyone owed money by the store can take your crafts as payment. You must stand in line behind the other creditors and hope that the judge awards you some compensation. However, the UCC gives crafts artists ways to prevent the creditor of a gallery from claiming your work as payment in the event of the gallery’s insolvency or bankruptcy. You can avoid this unhappy outcome by fulfilling one of three requirements:

• file a UCC form (known as UCC Form 1 or UCC-1) at the time of the consignment, in the county where the store is located
• have the store owner post a sign telling the public that the goods are consigned (not applicable in all states), or
• prove that the creditors were aware that the gallery sold consigned goods.

These efforts are referred to as “perfecting a security interest.” Having a security interest gets you certain rights over other creditors—for example, you can seize the property if the gallery doesn’t pay you. Although crafts people rarely use these cumbersome UCC requirements, you may find it worthwhile, in the case of high-ticket one-of-a-kind crafts items, to file the UCC form. The filing creates a lien (a legal claim over property) elevating you to the level of a “secured creditor” and putting you at the head of the line in bankruptcy court. If you do file the form and obtain the lien, you must remove the lien at the time of any sale.

Having the store or gallery post a sign—the second UCC requirement— is a troublesome request. In general, galleries prefer not to post such notices. However, some galleries are complying with such requests, and I have included an optional provision in the sample consignment agreement for this purpose. It requires that the gallery post a notice such as “Crafts at this gallery are sold under the terms of a consignment agreement.” As noted, this may not be effective in all states.

Most crafts workers will find the third requirement difficult to accomplish. It requires some legwork when it comes to obtaining proof that creditors of the store were aware of the consignment. Some consignors have accomplished this by sending creditors a copy of the consignment agreement. As you can imagine, the average crafts worker—who does not know who the store’s creditors are and who may not have a written consignment agreement—would find this impractical.

Keep in mind that in the event of a store bankruptcy you must prove to a bankruptcy court that you have met one of these three conditions— which usually means hiring an attorney.

State Consignment Laws

Because the UCC has proven to be a frightening trapdoor for crafts people, many states have passed special consignment laws to protect artists from gallery abuses and bankruptcy. So far, 31 states have passed art consignment laws—Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.

Each of these laws is unique, but all of them operate under one basic presumption: Whenever art is handed over to a gallery, store, or dealer, it’s presumed to be a consignment unless the artist is paid by the time of delivery. Most of these laws provide two benefits:

• any art held under a consignment arrangement or any money from a consignment sale is held in trust by the gallery for the artist (that is, the artist always owns the work and the proceeds), and
• the artist is shielded from bankruptcy, because creditors are prohibited from seizing consigned goods. (In reality, enforcing these laws usually requires hiring a lawyer and filing claims in bankruptcy court.) Half of the state laws require a written consignment agreement as a condition for enforcing the law.

The problem for crafts artists in these states is proving that their work qualifies as “art” under state laws. The determination can be confusing. Some state consignment laws apply only to “fine art.” Fine art is traditionally defined as a painting, sculpture, drawing, graphic art, or print, but not multiples. Many states—for example, Arizona and Ohio—specifically include crafts in the definition of “artwork” (defining them as any work made from clay, textile, fiber, wood, metal, plastic, or glass). Some statutes are vague, and it’s not clear whether crafts are covered.

Landing Consignment Accounts and Avoiding Consignment Problems

“Consignments can be an ideal situation for my riskier work,” says jeweler Alison Antelman (www.antelman.com), who has built her business with a combination of wholesale and consignment sales. “By taking it on consignment, the gallery takes less risk, and these works are available in outlets that might not buy wholesale. I also like consignments because I can pull back items or switch my line if I choose.” But, Antelman adds, “It’s a shared responsibility. The gallery has to make payments on time and has to keep track of the inventory, too.”

Antelman locates consignment accounts the old fashioned way, by visiting shops and investigating their inventory. “I check out galleries to see if my work fits with their taste and what they are trying to promote.

“Never assume they can see you when you drop in. I always ask if I can make an appointment. If they’re willing to see me then, that’s fine, too. I bring samples of my work and slides and literature such as an artist statement, bio, contact information, and tear sheets from magazine articles. The important thing is to always maintain a professional approach.”

And what about rejection or rudeness? “I always, always, act friendly and calm, leave, and thank them for the time. You can’t be insulted personally. You have to be thick-skinned. After all, my work is not suitable for all galleries.”

Here are some tips for assessing a gallery before committing to a consignment:

• If you can’t visit a gallery, ask someone you know in the area to check out the customer traffic and report back to you.
• Get names of other artists exhibiting at the gallery, preferably on your own rather than through the gallery owner. Then contact the artists and ask about the gallery’s practices.
• Be wary of a gallery that won’t give you financial or credit information.
• Check online about a gallery at crafts chat rooms (for example, www.craftsreport.com).
• After placing your work in the gallery, stay in contact. Regular communication may alert you to any financial problems and will also prepare you for success. You may need to get to work and build up stock to ship out because of ongoing sales.

In those rare cases when you have a problem, either because of late payments or suspicions that the gallery is having financial problems, follow Antelman’s simple strategy: “Take your work out. Put all of your energy and talent in another place.”

Written Consignment Agreements

Traditionally, consignments are made by written agreements, often furnished by the gallery, or through oral agreements. I recommend, when possible, using a written consignment agreement. It can provide benefits for you, obligations for the gallery, and, most important, it is required under many state consignment laws. A consignment agreement should cover:

• the inventory being consigned
• the retail prices for the goods
• the store or gallery’s responsibility for damage to the goods
• the gallery’s fees for consigned goods
• who pays for shipping
• whether discounting is permitted
• promotional responsibilities, if any, and
• the gallery or store’s obligation to post a sign regarding consignment (a condition that may protect you in the event of consignee bankruptcy).

I also recommend including an attorney fee provision (requiring that the loser pays the winner’s attorney fees) and an arbitration provision (requiring settlement by a private arbitrator, not a judge). These provisions create incentives for rapid settlement of all nonbankruptcy-related disputes. (A discussion of these provisions is provided in Chapter 11.)

Many galleries furnish their own consignment agreements. If you are furnished one of these agreements, compare it to the sample agreement below. It is possible that a gallery may refuse to modify its consignment agreement. If the agreement compares unfavorably to model consignments, you will have to decide whether there is any risk in proceeding. Usually, however, galleries are flexible about negotiating some terms and conditions.

How do you convince a gallery to use your consignment agreement? The best approach is to bring up the subject in your introductory conversation. Ask the gallery if they have a contract. If they do, ask them to send or fax it, and then compare it to the professional guidelines. If it’s unacceptable, or if the gallery doesn’t have a contract, tell the gallery you have a contract and ask if they’re comfortable reviewing your agreement.

Caution: Don’t use the sample agreement for vanity galleries or auctions. The agreement below is not intended for vanity galleries or auctions. Under a vanity gallery arrangement, the artist pays a fee for the right to exhibit works and may pay to rent the space, install his work, and use the gallery’s mailing list. The consignment agreement is also not intended for use at auctions. Auctions often involve more specialized financial arrangements covering advances or loans to an artist, catalog costs, reserves, and estimates of minimum payments. For more information on your legal rights in auctions, read Legal Guide to Buying and Selling Art and Collectibles, by attorney Armen R. Vartian.

Discounts: What are they? Discounts are used by galleries to provide special customers with an incentive to make regular purchases. For example, a gallery might give a favorite collector a 10% discount. When the practice started, discounts were usually only offered to collectors of higher priced crafts works, for example works valued at $10,000 or more. That’s changed, and galleries now may attempt to inflate prices to cover the discounts.

If the consignment price is not inflated to absorb the “discount,” who absorbs this loss? Many artists believe that the gallery, not the artist, should take the hit because the discount reflects the relationship between the gallery and the collector. They reason that the artist and the collector usually don’t have an ongoing business or personal relationship. Obviously this is a matter of negotiation between the artist and gallery. The sample consignment agreement in this chapter provides three choices for the artist, ranging from no discounts to splitting the loss.

Form on CD-ROM: You’ll find a sample Consignment Agreement on the CD-ROM at the back of this book.

Here are explanations for certain important provisions of the consignment agreement:

• Introductory paragraph. Insert your name as artist and insert the name and street address of the gallery.
• Appointment of Gallery. This provision establishes whether your relationship with the gallery is exclusive or nonexclusive, and establishes the geographic area within which the gallery will represent your works. Exclusive means that while the agreement is in force, only the gallery (not you or another gallery) can represent the sale of the artwork within the territory you define. If the agency relationship is nonexclusive, then others (including you) could solicit potential sales within the territory. If it’s exclusive, insert a statement in the territory section to reflect the regions in which you have granted rights, for example, “New York State.”
• Fees and Payments. Under this provision, the gallery agrees to accurately account to you for your commission (a percentage of the sales income). There are two optional provisions: one provides for your right to audit the gallery’s books; the other provides that the gallery will provide contact information for purchasers.
• Discounts. The sample agreement provides two choices: subjecting all discounts to your prior approval, or having the artist and gallery split the difference. Check the choice that’s applicable.
• Shipping. Three choices are provided for shipping costs: an open choice in which you can describe your arrangement; the traditional approach of “whoever ships, pays”; and a negotiated approach that is established by using Attachment B. Check the choice that’s applicable.
• Insurance. This is standard language, requiring that the gallery’s insurance cover and protect your works.
• Termination. After the initial period of sale (within a reasonable time period that you establish), this agreement is drafted to permit your immediate termination of the consignment agreement.
• Ownership; Loss or Damage. This provision establishes the gallery’s legal liability for any damage that occurs to your work while it is consigned to the gallery. The reference to “secured parties” and the Uniform Commercial Code is to prevent the gallery’s creditors from seizing your work to pay the gallery’s debts.
• Miscellaneous provisions. The assorted provisions at the end of the agreement—“Entire Agreement,” “No Joint Venturer,” and so on—are explained in Chapter 9.
• Attachment A: Inventory Listing. Complete the inventory listing. It’s important to provide a detailed description of the artworks and to establish the price at which each item will be sold. You may need to determine the price with the assistance of the gallery, since the gallery is likely to better know the market and prices within the territory. But keep in mind that the final decision as to the price is up to you, not the gallery. If you are submitting this sheet when modifying consignments—for example, supplying new work—it’s wise to have the gallery sign and send back the new Attachment A (you don’t need to sign it). I have included an optional signature section on this Attachment.
• Attachment B: Expenses. This optional section establishes how any applicable expenses will be paid (or split, as the case may be). It’s more likely you will use this attachment if you are dealing with a lot of high-ticket crafts or if the gallery is providing a special exhibition, not merely offering your work for sale. You and the gallery should agree on estimates for each expense and insert that sum in the attachment. If certain estimates are inapplicable, insert “N/A.” You can also request approval of any expenses over a certain amount (for example, over $500). Send two signed copies of the agreement to the gallery. One copy is for the gallery’s records, and the other is to be returned to you with the gallery’s signature.

Omitted from sample chapter: Consignment Agreemen, Attachment A, and Attachment B

Custom Orders

“I love your work,” a customer tells you at a crafts fair, “but could you make it in mauve with chartreuse green trim?” Assuming you’re willing to prepare the work according to the customer’s specs, the best method of following up on the sale is with a commission agreement (also known as special or custom order).

Prior to pulling out any paperwork, you’ll need to agree on the basic terms, that is, get an agreed-upon estimate, schedule, and payment plan. Sometimes a custom order will cost more than the pieces you’re currently selling, for example, if it involves a limited production method or more expensive raw materials. Crafts artists often must explain how a work is made in order for a buyer to understand custom order prices. Once you’ve agreed on that, you should sign an agreement.

Form on CD-ROM: You’ll find a sample Commission Agreement on the CD-ROM at the back of this book.

Sample Commission Agreement

The sample Commission Agreement I’ve provided in this book is drafted in terms that are fair for both the buyer and the artist. Below I help you understand the provisions of the Commission Agreement and give you some tips on filling it out:

• Basic information. Include the names of the parties (you and the buyer), the relevant job information (delivery dates and fee), and a description of the job.
• Payment. Choose the method of payment that you have agreed upon with the buyer. Sometimes, in the case of larger, more expensive commissions, a buyer may spread the payment over several installments and also insist upon the right to approve the progress of the work at each stage.
• Additional Expenses [optional]. If you are to be paid for additional expenses that you incur in filling this custom order, insert the supplies and services for which you seek compensation. If the buyer is to pay for shipping, include that information here. Also included is a reference to repayment of sales tax.
• Credit [optional]. If the work will be shown and you wish to be credited, insert the appropriate statement. Although it is not mandatory to include any notice, the use of a copyright notice may provide some benefits in the event you are involved in an infringement lawsuit.
• Termination; Cancellation Fee [optional]. If you wish to give the buyer the opportunity to terminate after making the order, insert an amount that is equitable, usually one-fourth or more of the amount for the total job.
• Liability. This “legalese” section limits the amounts that buyer and artist would have to pay if a dispute arises under the agreement. With this provision, the only amounts due in the event of a breach would be the sum that would correct the problem, usually the fee paid for the artwork.
• Reservation of Rights; Ownership of Original. This provision makes it clear that you own the copyright in the work. If the buyer wants to own the copyright, that is a fundamental change to the agreement that can only be accomplished by adding an assignment provision (an example is provided in Chapter 6) or, if the work qualifies, making it a work made for hire (see Chapter 4).
• No Destruction or Alteration [optional]. In the case of certain highticket, one-of-a-kind crafts works, the artist may choose this optional provision that establishes that the works cannot be destroyed or modified. For some crafts works, this right may also be acquired without the contract under some federal or state laws.
• Miscellaneous Provisions. The remaining provisions are explained in Chapter 9.

Omitted from sample chapter: Commission Agreement

Shipping and Delays

The Federal Trade Commission’s Mail or Telephone Order Merchandise Rule, also known as the “30-Day Rule,” imposes basic shipping and refund rules on businesses. When you advertise merchandise online— for example at eBay—and don’t say anything about when you plan to ship, you’re expected to ship within 30 days from when you receive the payment and all the information needed to fill the order. If your listing does state when you’ll ship the merchandise—for example, within two days of payment—you must have a reasonable basis for believing you can meet this shipping deadline.

If there’s a delay, that is, it will take longer than 30 days for you to ship (or longer than you promised), you have two choices:

• You can ask for the customer’s consent. If you can’t get consent to the delay, you must, without being asked, refund the money the customer paid you for the unshipped merchandise.
• You can simply cancel the order, notify the customer, and refund the payment.

Keep a record of how you notified the customer about the delay, whether by email, phone, fax, or regular mail, when you gave it, and how the customer responded.

Returns and Refunds

The legal rules for returns and refunds are straightforward: Once a sale is complete, you don’t have to give a refund. The only exceptions are if:

• you broke the sales contract—for example, your goods were defective, or
• you have a policy that allows a refund for returns.

If you want to provide refunds and impose conditions on when merchandise can be returned, post your return and refund policy prominently at your shop, booth, with your listing in your catalog, or mailing, or at your online store or website. A typical policy might require the customer to return the merchandise within 30 days for a refund.

State rules on refunds. A few states have laws regarding refunds. It’s not always clear whether these laws apply to online retailers doing business with residents of these states. California’s law seems to apply to Internet transactions because it applies to “other sellers of goods at retail, and mail order sellers which sell goods at retail in California ….” New York’s law is silent on the issue. So far, there have been no cases enforcing this issue, but if you prefer to err on the conservative side, then sellers dealing with residents of these states should consider abiding by the retail rules as follows:

• California. You must post your refund policy unless you offer a full cash refund or credit refund within seven days of purchase. If you don’t post your policy as required, the customer is entitled to return the goods for a full refund within 30 days of purchase.
• Florida. If you don’t offer refunds, that fact must be posted. If the statement isn’t posted, the customer can return unopened, unused goods within seven days of purchase.
• New York. If you offer cash refunds, that policy must be posted, and you must give the refund within 20 days of purchase.
• Virginia. If you don’t offer a full cash refund or credit within 20 days of purchase, you must post your policy.

For more information about the FTC rules, call the Federal Trade Commission at 877-FTC-HELP or visit their website (www.ftc.gov). You also may get helpful information from the Direct Marketing Association (www.the-dma.org).

Ten Tips for Collecting Past-Due Accounts

One of the most frustrating aspects of running a crafts business is dealing with customers who are slow in paying. Should you pursue the debt aggressively, or write it off as a waste of time?

In a sense, getting paid is actually an element of your marketing. If you can work with people having financial problems, you may end up with devoted customers for life. Late-paying customers usually fall into three categories:

• customers who want to pay but, because of real financial problems, can’t do it on time
• customers who prefer to delay or juggle payments, and
• customers who will do whatever possible to avoid payment.

For the first two categories, there is hope. You may be able to manage these debts and to convince the debtors to make partial or full payment. This is especially true if you have encouraged customer loyalty and your customers sincerely want to support you. As for the last category, you need to recognize this type as quickly as possible and take serious action—perhaps turning the account over to a collections agency. Here are ten tips:

• Get busy and stay at it. According to a survey by the Commercial Collection Agency Association (www.ccascollect.com), after only three months, the probability of collecting a delinquent account drops to 73%. After six months, it’s down to 57%. After one year, the chance of ever collecting on a past due account is a dismal 29%. Send bills promptly and rebill monthly. There’s no need to wait for the end of the month. Send past-due notices promptly once an account is overdue.
• Read about collections. Debt collectors can offer helpful tips, and you can learn many of them by reading either Collections Made Easy, by Carol Frischer (Career Press), or Paid in Full, by Timothy R. Paulsen (Advantage). Although these editions are both over ten years old, most of the information remains accurate, and helpful.
• Don’t harass debtors. It’s rarely a successful strategy and it’s sometimes illegal. If a customer asks that you stop calling, then stop calling. If a customer asks you to call at another time, find out the right time to call, and call then. Don’t leave more than one phone message a day for a debtor, and never leave messages that threaten the debtor or contain statements that put the debtor in a bad light.
• Be direct and listen. Keep your calls short and be specific. Listen to what the debtor says and keep a log of all of your collections phone calls.
• Look for creative solutions. If the customer has genuine financial problems, ask what amount they can realistically afford. Consider extending the time for payment if the customer agrees in writing to a new payment schedule. Consider entering into a simple promissory note with the debtor that details the new payment schedule. Call the day before the next scheduled payment is due to be sure the customer plans to respect the agreement.
• Write demand letters. Along with phone calls, send a series of letters that escalate in intensity. You can find sample collection letters (sometimes referred to as “demand letters”) on the CD-ROM that comes with this book and at various online resources. You may find it useful to develop a set of past-due notices to use when customers fall behind in their payments. Your first letter may suggest that perhaps the bill was overlooked, and that payment should be sent now so that the customer can maintain a good credit rating. Your second and third letters should be polite but increasingly firm. Vary the format of your letters; each one should look a little different. Samples are shown below. Save copies of all correspondence with the customer and keep notes of all telephone conversations (in case you hand the matter over to collections or take the customer to court). You can also pay a collection agency a fixed fee to write a series of letters on your behalf. (This is different than turning over the debt to an agency.)
• Deal with excuses. How can you tell if the customer is simply delinquent with a payment or whether the delinquency is a precursor of bigger financial problems? That is, how can you sift through the excuses given by a debtor without a lie detector? Carol Frischer considers excuses like a puzzle. You must solve each one and then stay a few steps ahead of the next one. If you’re given an excuse—the person writing checks is sick this week—then you must determine whether it is true or not. If it turns out not to be true—that is, another excuse arrives the following week—then you should become less tolerant and more aggressive. Always maintain your sense of urgency. For example, if the company is “expecting a big check next week,” insist on a partial payment this week and the remainder when the big check arrives.
• Offer a one-time deep discount. If an account is fairly large and remains unpaid for an extended period (say six months) and you’re doubtful about ever collecting, consider offering in writing a timelimited, deep discount to resolve the matter. This way, the customer has the incentive to borrow money to take advantage of your one-time, never-again offer to settle. You can finalize this with a mutual release and settlement, a legal document that terminates the debt. You can find such forms at Nolo’s website (www.nolo.com).
• Turn the account over to a collection agency. Turning a debt over to collections is your last resort. A collection agency will usually pay you 50% (or less) of what it recovers. Of course, in some cases, half is better than nothing. You’re likely to want the help of collection agency when the customer lies to you about the transaction or becomes a serial promise-breaker, assuring you on various occasions that payment is on the way, when it isn’t. The Commercial Collection Agency Association (www.ccascollect.com) provides more information on collection agencies.
• Consider a lawsuit. You can also take the debtor to court. Small claims court is inexpensive, though it can take a good chunk of your time. Furthermore, any judgment that you receive may be worthless if the debtor lacks a job or bank account. For an excellent guide to using small claims court and collecting after you win, see Everybody’s Guide to Small Claims Court, by Ralph Warner (Nolo). You can hire a lawyer for larger debts (say, over $5,000). But beware of filing a lawsuit to chase a debt; your legal fees may exceed the amount owed.

Form on CD-ROM: You’ll find sample collection letters on the CD-ROM at the back of this book.

Tip: If a customer goes bankrupt, pursuing a creditor into bankruptcy is rarely worth the effort. The worse your customer’s financial condition, the harder it is to recover any money. When a customer declares bankruptcy, you’ve got a big problem. A bankruptcy will effectively wipe out your debt unless you’re a secured creditor (the customer promised some property to secure your debt).

Omitted from sample chapter: Collection Letters

Selling and Buying Outside the U.S.

Selling Across the Border

If you’re selling outside the U.S., here are two tips: Get the payment up front, and get the payment up front. You don’t have the ability to chase down rubles, drachmas, or pesos in a faraway land. These payments can be made by credit card, bank transfers, or bank letters of credit. To avoid confusion about currency conversion, keep your dealings in U.S. dollars. For more information on exporting goods, check out the U.S. Trade Information Center (www.export.gov).

Importing Crafts for Sale in the U.S.

Have you ever traveled to another country and thought, “This is an inspiring place to create handcrafted works!”? That’s what happened to designer Andrea Serrahn when she traveled to India in 1990. “When I got there, I felt like I had arrived.” Inspired by the vivid colors and fabrics, she worked with Indian tailors to create her unique clothing. There was only one catch—bringing her radiant designs back to the U.S. to sell.

“I think the average traveler would be daunted by what you have to go through to bring work from India to the U.S.—the red tape and bureaucracy. There’s a lot of protocol, and you can’t just walk into the post office and ship it back with the same expediency as one would in the States. On both sides—U.S. and India—you have to hire people to move it in and out. Textiles need proper visas, and the U.S. government is a stickler. There’s also a quota for fabrics. One way to do it is to find an exporter, or another way is to use a courier. Sometimes I’ve actually dragged it back (over 100 kilograms) on the plane with me.

“Be prepared for surprises when you ship,” warns Serrahn. “I’ve had packages broken into. Nothing is missing, but everything is rearranged. And customs agents slice not only the boxes with their cutters! People want to look through it for antiques or drugs.”

Andrea was able to fund part of her work when she qualified for a Fulbright Foundation grant for artists that gave her “cachet and clout, which goes a long way for a woman trying to do business in India.”

After ten years of shuttling back and forth, Serrahn decided to open a shop in Oakland, California. At her shop, called Serrahna (www. serrahna.com), she offers her passionate, colorful clothing designs for men and women.

“You’ve got to have a couple of screws loose to try something like this,” says Serrahn. “It really takes a true dedication to bring your work in from a foreign country. I think you could benefit from taking a course on import/export, but I did it through the school of hard knocks.”

For more information on importing and exporting, check out: the U.S. Small Business advisor website (www.business.gov), and U.S. Customs (www.customs.gov).