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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14 comments

  1. Karen C. says:

    Very interesting article, Kathleen. If you haven’t already conducted the interview, maybe you could ask him how a newbie DE would get factoring whose personal credit might not be stellar, i.e. what would improve your chances.

  2. jinjer says:

    I really like how you’ve started to mention what types of designers your topic of the day is applicable for–for example, better, bridge, designer. Not that I know where I fit in all that yet, but it really helps me put the plethora of information in perspective!

  3. Ann C. says:

    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.

    No offense but Kathleen, getting paid from a department store in 45 days? Is this for real? Maybe 4 to 5 months but 45 days?

    I look to this blog for the truth. some of it I like, some of it I don’t like but I know it’s the truth. I’ve never heard of anybody getting paid within 45 days from a department store. In my DREAMS I get paid in 45 days. 6 to 9 months is more like it.

  4. Kathleen says:

    No offense but Kathleen, getting paid from a department store in 45 days? Is this for real? Maybe 4 to 5 months but 45 days?

    ~sigh~ It’s funny you bring this up. Miracle and I had a whole conversation on this exact issue. Originally I’d written 6 months. Then, I got an email from Gary Wassner who corrected that figure to 45 days so I corrected my post. After all, he’s the expert. So what do I know? Everybody’s always said pretty much what you said (6-9 months) but he’s saying 45 days.

    Anyway, what Miracle said was interesting. She says it’s like anything. If you have a ‘heavy’ on your side (a factor), they pull enough weight with big box retailers that their orders are paid pronto. The little fish, handling their own AR get waylaid. A couple of people brought up the same issue as you did. In the end, I’d have to agree that -based on what Miracle says- that if you have a factor, you get paid faster. If you don’t have a factor, department stores pay when they “feel like it” (there’s a reason I don’t sell to B&N and Borders who are no different). Honestly, when Gary corrected me and said 45 days, I thought, “what’s the big deal with getting a factor then?” I mean, if you have to carry AR for 30 days for established accounts anyway, why couldn’t a DE weather an additional 15 days beyond that and save themselves some money (what they’d pay the factor) -provided they could tighten their belts to do it? I mean, that’s what I’d do. But Miracle says it’s more likely that the weight of the factor pushes up payment to 45 days but if you don’t have one, servicing your own rec’s, you’re stuck waiting it out. In the end, it’s a wash. It seems that if you want to sell to department stores you either have to have the wherewithall to finance your own rec’s or you have to pay a factor. Again, that’s just too much hassle for me. I wouldn’t do either of those things; too much work and worry. I guess it comes with the territory. If you want to be so big that you sell in big box stores, you’ll have to either have a factor or have the resources to sit on aging receivables. That’s a choice I can’t make for you.

  5. PINK CAT, Tom Myrdahl says:

    Hello Kathleen, your article reinforced my view that
    I & my partner, Ms. Vivien Scott-Mumby, a talented and experience European designer for 25 years, will
    need a factoring company to buy our orders and subsequent invoices which will be accumulating on January 12th, as our Rep, Salt & Pepper Sales begin
    to close department store buyers for orders…we have a great line and a very secure manufacturing arrangement in Sri Lanka, where Vivien worked for three years as an advisor on bring a factory up to European standards… So since we will be dealing with deaprtment sotores and our marketing goal is large orders , we do not need a slow “ramp-up” to be successful…. question is can you send me a list of up-right factoring companies…don’t want to start out with a disreputalble one…so can you offer some recommendations or point us to someone who may know…..our website is going thru a “line” change so by the 12th we will have our new Spring/Summer’07 line available for preview at
    pinkcatdesigns.com…currently our old ’06 line is still up and showing. Look forward to your recommendations…. Tom Myrdahl

  6. FRANCIS AVADU says:

    Thanks for your useful advice on Factoring.

    However,being new in this Business, we would very much appreciate it,if you could kindly provide us with trustworthy Factoring companies and Sales Reps.

  7. vee says:

    THIS IS INTERESTING INFORMATION. I FEEL THIS IS SO MUCH WORK THAT I DO NOT WANT TO SELL TO BIG COMPANIES BUT TO SMALL BOUTIQUES BUT IT’S GOOD TO KNOW.

  8. Karen Judge says:

    Just wanted to point out that in my 6 years in apparel/accessories I’ve always understood that sales reps do not get paid until their account/store pays. Every contract I’ve ever signed with a rep has stated this and I’m quite sure it’s standard.

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