The U.S. Republican party has been waxing nostalgic about Ronald Reagan. And so it’s fitting that the current Administration’s trade actions have made one of the former president’s most famous sayings more relevant than ever: trust but verify.
Even before the U.S. tariffs threatened to blow up the industry’s balance sheets, fashion had been struggling with working capital woes. With demand down and the cost of money up, there suddenly seemed to be too little to go around. And the trade tensions certainly aren’t helping in that regard. The geopolitical climate has resulted in brands taking smaller bets, partners swapping allegiances and orders evaporating in most-hit nations. For companies that entered the current disruption undercapitalized, it was—or may still be—the final thing to push them into insolvency. In this interdependent industry, the potential Domino effect has buyers and suppliers wondering just who they’re in bed with. And that concern has led some to start asking more questions.
For Ranjan Mahtani, founder & executive chairman of Hong Kong-based Epic Group, which operates 13 production facilities across Bangladesh, Sri Lanka, Jordan, Ethiopia and soon India, it’s about time.
“It’s something that I have been personally saying since Covid. And it should be for both sides. We saw in Covid, a lot of brands going bankrupt, and similarly, we also saw factories closing down,” he told HGI. Just as brands vet their production partners on their practices, compliance and sustainability, Mahtani says there needs to be visibility into each other’s financial health. “I think it’s also a good idea that you should see that we are capable of delivering your business. We’re capable of withstanding a bad season. We have shock absorbers for that, and otherwise it becomes a more transactional relationship.”
He’d like to see a Dun and Bradstreet type of reporting, particularly on small to medium sized players upstream. It’s an imperative that goes beyond potential bankruptcy, Mahtani said. Factories that are financially stable have the ability to work with buyers when they need flexibility. “So, it’s not only about extreme cases, but also about how does it translate into becoming a service to the customer? If I have the financial means, then I’m able to service the customer better,” he said. “I can hold goods for them in the U.S., if I have that relationship with them, if I’m delivering DDP or LDP. “
The need for brands to have better insight into their partners has intensified as the current financial situation pushes production companies to the limits.
Outside of the larger, well capitalized operations, more and more factories are underwater as energy prices rise, inflation balloons and demand sags across the U.S. and EU—and it all translates into fewer orders and/or lower order volumes. The result is open capacity.
Couple that with the discounts U.S. brands and retailers are seeking to help cover tariff duty costs and the opportunistic buyers from other markets seeking to capitalize on the potential for good deals, and these companies are losing money on every order. It’s no wonder that some are disappearing either through closures, consolidation or shifting strategies that have them exiting the export business.
Munir Mashooqullah, founder of M5 Groupe, a network of 10 leading supply chain companies, said on an HGI Call in July that the current environment is leading buyers to increase their due diligence around factory health.
“My company, and some of those companies and retailers who have offices in some of these larger sourcing countries have now put [financial compliance] in a ‘things to do list’,” Mashooqullah said. “Financial compliance is going to be an essential part of sourcing starting now. It should have started yesterday, but I am aware of certain large European retailers who have already initiated that aspect from actually the end of last quarter.”
“Financial compliance is going to be an essential part of sourcing starting now.”
—Munir Mashooqullah, M5 Groupe
Less guesswork
Jabed Hossain Bhuiyan, director of Padma Apparels Industry Limited and Padma Satel Arab Fashions LTD exporters in Dhaka, agrees that factories are taking a beating.
“Recently, so many factories are shut down because they cannot survive due to low prices, and situations we are facing like U.S. tariffs and other costs like energy costs and inflation,” he told HGI. “So, yes, we are passing a very tough time.”
But, he said, brands and retailers are also struggling and if those businesses falter, it can be disastrous for upstream partners as well. Currently though, the buyer-supplier relationship is often opaque.
Bhuiyan said it’s not uncommon to be approached by a buyer that his factory has no frame of reference for. They don’t know if they’re reputable, and they certainly have no visibility into the company’s financial health. That scenario means taking the order becomes a gamble. But not taking the order isn’t an option when there are hundreds or, in some cases thousands, of workers to pay—all of whom have families to feed.
Most times the bets pay off. Sometimes they don’t, as was the case at the end of 2024 for Bhuiyan and more than 20 other factory executives in Bangladesh. In October, the saga of Mosaic Brands made headlines for all the wrong reasons. The Australian fast fashion company reportedly tried to get its suppliers to give discounts of up to 60 percent before ultimately falling into insolvency, leaving behind $30 million in unpaid orders.
Ohmar Chowdhury, owner of Hydroxide Knitwear, told ABC media that he expanded his workforce to fulfill orders from Mosaic, only to have payment terms pushed out to 120 days, which he called unsustainable. The “hypocrisy is staggering,” he said. “We in Bangladesh can’t do anything. They demand transparency from us, but they evade accountability.”
Padma Satel Arab Fashions was out $3 million. Bhuiyan said companies like his have no capacity to learn about potential partners. Just as brands and retailers will ask questions about a factory’s performance and other relationships, he said suppliers need to know if buyers will be able to pay for their goods. “We have less opportunities to get to know about the financial strength of the brand and buyers,” he said. “They keep us almost blind.”
“We have less opportunities to get to know about the financial strength of the brand and buyers. They keep us almost blind.”
—Jabed Hossain Bhuiyan, Padma Apparels Industry Limited and Padma Satel Arab Fashions LTD
More than a contract
In some cases, these business relationships have become riskier now that the industry has largely moved away from letters of credit (LCs), which were an instrument that helped both sides feel secure in the deal. For buyers, they protected them from receiving late orders or poor quality. On the supplier side, LCs ensured there’d receive payment. But some have pointed to the costs and documentation associated with LCs as reasons why they’ve gone out of fashion.
“Everyone’s concerned that they’re going to get the product they want at the time they want, with the quality they want,” said Eric Fisch, national sector head of retail and apparel, corporate banking at HSBC.
Though Fisch hasn’t seen an uptick in financial due diligence, he acknowledged that the phasing out of LCs results in transactions that can be “amorphous” in nature. “Especially for these new relationships, it does create a little bit of a ‘trust me’ that I think is concerning some people. They prefer to have that LC in place, because for the brand in the U.S., it provides them a little bit extra incentive to the factory to deliver on time and in the right quantity, because that’s what keeps the LC valid,” he said.
Fisch believes the industry is less reliant on LCs because it’s more relationship based and less transactional than it once was. Also, he said today’s technology allows buyers to communicate with sellers and receive photos throughout the production process. In essence, Fisch said. “The world has become smaller.”
Operating on contracts with open terms, though means there are little to no protections in place when a factory doesn’t hold up their end of a deal or a buyer backs out.
“It’s nothing but a paper, so if they deny this sales contract, there is no way to catch them,” Bhuiyan said. “It puts us in a much worse position.”
In the past, Bhuiyan said factories either received funds to produce the goods upfront through a TT (a deposit via wire transfers) or could secure a loan against the LC. Now loans are necessary—and much riskier because there’s no guarantee the payment’s coming or when it might arrive. “This is really hard for us if I don’t get payment on time, and we have to pay interest for the bank loan,” he explained.
For large brands, LCs have given way to supply chain financing. In this scenario, brands and retailers establish relationships with financial institutions that pay upstream partners for goods once they ship, allowing them better cashflow, for a fee. Typically, though, smaller buyers can’t offer this tool.
In these instances, Fisch said credit insurance and factoring are two products that can reduce supplier risk, though he acknowledged they have their limits. “It’s difficult, because especially with companies that are experiencing instability, it then becomes more difficult to get that insurance coverage on them,” he said.
So, as it stands, the industry is leaning, potentially too heavily, on the trust part of the equation with too few tools to help parties verify that their partners have solid financials. It’s a situation that Mahtani said has to change—the question is how.
“If you discuss the pain point with anybody, they’ll all agree. But where does the industry set as a norm? It’s not going to stick with one retailer doing it, or one brand doing it. It has to become an industry norm, like compliance became a norm. Financials have to become a standard,” said Mahtani. “I think we’re very far away from it.”
