Financing a clothing line: is it time to borrow money?

Being a curmudgeon about borrowing money to start a clothing line, I thought it might be helpful to know why and also, when it’s time to consider that step. The other thing is, sure the economy is in the toilet but there’s tons of cash available for loans because interest rates on savings are abysmal (consider private lenders). You just have to be the right borrower.

First why I don’t like loans: I don’t like loans because many people think money is a magic wand that will erase their problems. So, because money is not a magic wand, running after it is mostly a time waster when one should be working on other things. Money is seductive but it’s a mistake to assign it that much power in your life. If you have the sense that money is the only thing standing in the way of you and your goals, consider reading a book called Wishcraft: How to Get What You Really Want. It could change your life (it changed mine). The majority of self-help books written over the past 25 years are based on concepts in this book but the original is best.

For the rest of you considering a loan, this may not be so risky depending on the circumstances. So how do you know if it’s time to take the step? Ask yourself these things:

  • How will the loan be repaid?
  • Have you borrowed a comparable sum for similar purposes?
  • What do you want the money for?
  • What is your risk aversion profile?

How will the loan be repaid?
If you have a going enterprise with sufficient receipts to cover monthly servicing of a loan, payments become just one of many payables you have in a month’s time. Congratulations, you’ll get a loan and come out on top. Depending on your receipts and the size of the loan, most lenders won’t care much about what you’ll spend the money on so the rest of this discussion is immaterial. Good bye and have a nice day.

Have you borrowed a comparable sum for similar purposes previously?
If you aren’t as established as someone above, a previous loan will show you understand the gravity of the loan even if you don’t have a track record in your current endeavor. You might want to stick around for more.

What do you want the money for?
Your intention for the loan becomes more important if you’re not in one of the two positions outlined above, this being the difference between the proverbial rock and a hard place.

Keeping in mind the topic -do you need to borrow money?- let’s say you want a loan to swing production of a large order. What is large? Is it twice your usual order? Four times? Unless you have considerable experience in the industry, consider financing the double order but not the quadruple one because success buries more companies than failure. If you’re that good, your buyers will come back when you’re better prepared to handle it. They will keep their eye on you, you’re less risky if you know your own limits and stick to them. Being honest about why you’re turning down an order can increase your opportunities (long story). Anyway, you can get a loan easier on the smaller of the two. It’s called purchase order financing and is discussed in my book. You don’t want to grow too fast because the quadruple order comes with strings attached, the costs of which you haven’t considered because you aren’t at the level to see them yet. Things like SKUs, barcodes, EDI and what not. Handle some of those double orders for awhile, build your credit history by financing your production with purchase order financing, strengthen your supply chain and relationships with contractors and then you’ll be better prepared to fill the larger orders. If you can’t fill them, you can’t pay back the money.

Do you need the money to upgrade your equipment or to get you to another level of efficiency? These loans can be dicier although it’s rumored that credit will soon be more free flowing. It is with these loans that being able to objectively define your anticipated ROI is more important. It used to be that securing loans for capital equipment was fairly easy but not so much anymore, particularly with lenders who know anything about the apparel industry because machines are a dime a dozen and not much security for a loan.

What is your risk aversion profile?
I am risk averse personally and professionally and with both small and large risks (consistent with Von Neumann-Morgenstern’s theory). I’m more risk averse professionally because I’ve seen too many people borrow money who shouldn’t have. Sure, you can argue my growth has stalled because I didn’t borrow money but money isn’t my problem (I would be lucky if I could spend my way out of it). I think the central conflict is the perception of risk. Maybe I know too much but on the other hand, most people are irrational about risk. I’m not saying I’m right and you’re wrong but if you throw good money after bad, you probably need to reconsider what risk means before you take out any loans. Again, if you’re in the privileged minority of those who don’t need loans (and shouldn’t have read down this far), this isn’t much of a risk either.

Caution is required if you are someone who would like to finance your way into a new job. Some people have done this by taking out second mortgages, spending their savings or borrowing from 401Ks. Tragically, more people than you’d imagine quit their jobs with the expectation of getting into this one from one day to the next. This is what I call the franchiser. Not that getting into a franchise is bad, not at all but when you fund your way into a franchise, it’s less risky because it’s turn key. The best franchises come with robust infrastructure with everything from training to purchasing already worked out. Apparel manufacturing is much riskier, it isn’t anything approaching a franchise unless you buy an already going concern. I don’t think securing a loan or taking out of your savings is a good choice if you have very tight deadlines, presumed income projections and expectations about when the money is going to start rolling back in.

If you suspect you might be a franchiser, don’t quit your day job even if you don’t need the income. You need something to occupy your time and it would be terrible if you had expectations of what the industry is like if you didn’t test it beforehand. Do it on the side for awhile, knock out some product development. Go to a few shows, buy some fabric. Talk to people. If the prospect continues to delight you, the door is open and we’re happy to have you join us.

Financing a fashion line
Selling clothes to stores
Why you don’t need to borrow money to start a clothing line

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  1. Cindy Graff Cohen says:

    Kathleen – Insightful as always, helpful, and just the right message at the right time for me, personally. Thanks much!

  2. Jay Arbetman says:

    As one who has reached into his pocket to repay a bank after a failed business venture (I just got a little ill because I remembered how much the check was for) I can list these important points that I wish someone would have told me about 25 yrs ago.

    1. Partners are for dancing.

    1a. I’ve never done this but I know people who have. Never….and I mean never…sign loan documents with someone you are romantically involved with or who you see naked on a regular basis. Worse still, never guarantee another person’s loan.

    2. When you look around the room and can’t figure out who the sucker is….that probably means its you.

    3. To a great extent, inventory is over valued. So while inventory may help collateralize your loan, it is unlikely to save your bacon in a pinch.

    4. Do you have an accountant and a lawyer? Do not sign loan documents without one of each.

    5. Do not borrow out of desperation. Don’t throw good money after bad.

    6. Most important is the following. If borrowing money does not frighten you, don’t borrow money.

    So if you are contemplating borrowing money, go back to the top of the page and read Mrs. F-I’s words of wisdom.

  3. Sandy says:

    Has anyone explored the newly authorized Crowd Funding options? Kathleen, this might make an interesting article, as this is really gaining momentum on the internet for all kinds of interesting businesses. There are no regulations yet, and apparently the SEC is supposed to issue some (no one knows when, yet).

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