Factoring invoices: Financing a fashion line

[This post was been amended]
Monday’s edition of WWD published an article entitled Small Businesses Face Start-Up Woes (sub req’d) describing the necessity of financing for start up fashion lines. Specifically, “factors” -financiers who lend based on the collateral of invoices (accounts receivables)- were highlighted as integral growth catalysts. In a nutshell, factoring can be described as borrowing money using your outstanding invoices to customers as collateral. With factoring, you’d contract with a factor to guarantee payment of amounts owed you by your customers. The mechanics of the deal work like this:

  • You produce your samples and take orders.

  • The factor would evaluate the credit worthiness of your buyers.
  • When it was time to do so, you’d ship your orders.
  • At the time of shipping, the factor would pay you a percentage (usually 80%) of the value of the invoice and manage your outstanding receivables, collecting payments from your retail customers.

That is not to say that the factor would retain the balance (20%) of the total value of the invoices but some funds are kept in a form of escrow in the event your customers return product to you for just cause. After an agreed upon discretionary period -your goods having been accepted- you’d receive the balance less any contractual fees owed to the factor.

Factoring is not to be confused with financing you may need to produce the goods. Factoring is not production related lending. You’d need to come up with the money to buy fabrics and pay your contractors ahead of time. However, factoring would cover the commissions you’d owe your sales reps as those fees are due within 30 days of delivery. By the way, 30 days is the outside limit for paying your sales people. You should make a high priority of paying those as soon as you possibly can, even if it means writing multiple checks monthly. Factoring’s greatest advantage is enhancing cash flow and fashion is nothing if not a cash industry. Put it this way; if your customers don’t pay on time, you can’t fund your next production season.

In the past, the factoring industry has not been without controversy but these attitudes are changing. From the February edition of INC magazine, Factoring gets a Face-Lift:

Often thought of as mercenary moneylenders, factors are undergoing a customer-friendly makeover…Gary Wassner is guaranteed a front-row seat when the fashion-design house Tuleh has its runway show during New York City’s Fashion Week this February. But unlike most of the audience members, Wassner isn’t a retailer, fashion editor, or celebrity checking out Tuleh’s fall 2006 line–he’s the clothing company’s factor. Why does Wassner merit such star treatment? Without him, there’s a good chance that New York City-based Tuleh wouldn’t be in business, never mind putting on a glitzy runway show. “With Gary as a financial partner, I can envision taking the company two or three times higher,” says Ira Rosenfeld, Tuleh’s director of operations.

Factoring varies significantly from traditional bank loans; each weighs different factors of a business’s financial health (I’ve been stunned to see some companies get bank financing whom I’d consider to be incredible credit risks). Factors weigh a company’s balance sheet in strikingly different ways. One dramatic example is inventory. Traditional banking perceives inventory as an asset while I consider inventory to be a liability -as does any lean manufacturing proponent. In my discussion with Gary Wassner, president of Hilldun Factors -who I would not expect to be familiar with the tenets of lean manufacturing (aka pull manufacturing)- I was surprised to learn he also considered inventory as a tremendous liability, again running counter to traditional banking wisdom.

Still, the average factoring client varies significantly from the sewn products industry as a whole. For example, most factoring clients produce bridge or designer apparel; the most fashion forward lines. Interestingly, Gary Wassner says that at least 75% of his clients have an apparel design degree, mostly from FIT or Parsons. This runs counter to at least half of the sewn products producers I’ve worked with who don’t have a design degree although they usually have a degree in another field.

Likewise, factoring isn’t appropriate for many sewn products producers. Factoring is most advantageous for companies selling to department stores because big retailers are known to pay their invoices in 45 days (6 months from the time of order), rather than the traditional net 30. If you take orders from department stores, it will become increasingly likely that you’ll need a factor unless you have the wherewith all to finance your own receivables.

Tomorrow I’ll be publishing another article in this series. I’ve spoken with Gary Wassner, the aforementioned president of Hilldun Factors who will explain the top 10 mistakes that he says new designers make. Tune in tomorrow for an enlightening interview.

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