Getting financing for a fashion brand isn’t as easy as calling a lender and asking for money. The volatile apparel industry is often considered a red flag—inventory is seasonal, trends are fickle, margins are razor-thin and a big order can create a cash-flow crisis. Knowing your financing options can mean the difference between scaling and stagnation.
At a recent Sourcing by Informa financing panel How to Finance Your Orders: Vendor Financing & Smart Capital Strategies for Growing Brands, HGI founder Edward Hertzman assembled experienced bankers, factors and apparel accountants to discuss how to get your financial house in order before you need the money. Their advice could prove particularly helpful for younger companies:
#1 Know where your money is coming from before you start
Traditional bank financing will be an uphill challenge for emerging brands without a profitable track record.
“I always tell people if you’re going to start, you better have friends and family to loan you money,” said Ronald Friedman, managing director, CBIZ. “Then you can rely on the banks, the bankers, the finance companies to help finance you while you’re successful. If you’re making money, they’re going to work with you. If you’re not making money, they’re not a source of funds.”
#2 Get serious about inventory reporting
Inventory can be one of the most important assets when you’re trying to borrow money, but you need to have a precise handle on it.
“If you have a problem and want to borrow against your inventory, you need to know exactly what you have—and be able to report it accurately,” said Maria Contino, executive vice president, Rosenthal & Rosenthal, adding a lot of people use QuickBooks, but it’s worth investing in an inventory management system.
Appraisers will want to know your inventory at the SKU level, including which products are selling, which ones are sitting and how quickly SKUs are turning. “Which, as business owners, you should want to know this,” she said.
#3 Have a real business plan, not just a forecast
“Before you go ask for money, you better have a business plan. A business plan is not your theoretical ‘what do I expect for this business.’ No, a business plan is cash flows, balance sheets, projected income statements. And you have to really understand your business,” said Friedman.
That means knowing how much cash you need to purchase inventory, when you’ll have to pay factories, when customers will pay you and how much money you’ll have left in between.
#4 Understand the different types of financing
Match the financing tool to the problem, otherwise you might end up using expensive short-term money to solve a problem that could be financed more cheaply another way.
Supplier credit is often the cheapest form of financing. As a business grows, brands may use asset-based lending (ABL) against receivables, and inventory, factoring, purchase-order financing or supply-chain finance. Need money against existing inventory? An inventory-based facility may make sense. Need to finance a large confirmed order before you can produce it? PO financing may be an option. Selling to retailers and waiting 30 or 60 days to get paid? Receivables financing may help bridge the gap.
#5 A big order can be a dangerous moment if you’re not ready
“I had a company doing $300,000 a month in wholesale sales, and they suddenly received a $2 million order. I said, ‘Congratulations, but you’re going to lose money,’” said Chris DeRosa, vice president, new business development, CIT Commercial Services, a subsidiary of First Citizens Bank. “His people weren’t prepared for it. And the worst thing you could ever do is take an order you can’t fulfill because you don’t have the internal wherewithal to pull it off. Grow your business organically, slowly and steadily.”
Contino advised breaking the order into smaller pieces for quarterly deliveries. “Because what if it doesn’t sell?”
#6 Know the true cost of every sale
“When I see a client that has a cost sheet that says I’m going to have 72% gross profit, and then I see the financial statement at 40% gross profit. There’s a big disconnect,” said Friedman. “They need to fix that problem because you have to know the true margin.”
Freight, duties, chargebacks, markdowns, discounts, shipping costs, retailer requirements, marketing and other expenses all eat away at profitability. DTC has its own set of problems, including fulfillment, marketing and inventory costs that dramatically change the economics of an order.
#7 Be careful about who you sell to
“As a bank lender, we’re not only looking at your financials, but the composition of the retailers you’re selling. Then we’ll determine eligibility requirements of how much we are going to advance against [those retail accounts],” said DeRosa. He cites the Saks bankruptcy as a classic example of why a big order from a retailer with weak credit doesn’t pull much weight.
That’s one reason factoring can be attractive, he said, as certain non-recourse structures can provide protection against customer credit risk.
#8 Use expensive financing strategically
Purchase-order financing can be extremely helpful for a company to fulfill an order, but it can also become very expensive. Better to use it as a bridge and convert to a cheaper option later.
“You do not want to use PO financing for more than three months,” said Contino. “If it’s six months, that’s equity money. That’s money that you want to bring in. You don’t want to pay 2% per month for six months.”
#9 Build lender relationships before you need them.
Banks generally want to lend to businesses that are healthy and growing, so develop strong relationships with banks, factors and other financing sources while the business is performing well, and communicate, communicate, communicate.
“Don’t just call us when you’re in a panic and need something,” said Contino. “You want to establish that relationship up front. Communication is huge. If [lend your friend] money and can’t pay the next day or can’t pay the next month when they’re supposed to, you’re going to feel a lot better about it if they communicate with you versus not returning any of the calls. So if you’re communicating, there’s more flexibility. But if you don’t talk to us, or it’s information that doesn’t pan out to be true, the leash is going to be brought in very quickly.”
#10 Surround yourself with people who understand fashion
Apparel is not like every other industry, plus, wholesale and DTC have completely different economics and users of one model often don’t understand the other. Founders need to surround themselves with professionals who understand the industry—including an apparel-savvy accountant, attorney and financing partner.
“Our wholesale clients who try to do direct to consumer have failed miserably unless they bring the right people who understand what the right KPIs are,” said Contino.
#11 Don’t be afraid of borrowing because debt sounds intimidating
“Don’t give up ownership—you can borrow the money,” said Friedman. “It’s cheaper than having a partner who tells you what to do all day long. And I’ve never had happy clients that took on a partner where they gave up 30%, 40% of the company, and they have someone looking over their shoulder all the time.”
