California Apparel News

Recently, 4-year-old contemporary streetwear brand RVCA made news when it secured its first-ever factoring deal with Wells Fargo Century. Strong word-of-mouth marketing helped fuel the growth of the Newport Beach, Calif.–based company, even as its founders struggled to keep up with the demand.

There are lessons to be learned from RVCA’s experience, which has been echoed by many Southern California start-up apparel companies trying to overcome financial hurdles as their businesses grow. Likewise, there are lessons to be learned from the experiences of apparel companies at their mid-range, as well as from mature companies with a long history of reacting to economic and fashion cycles.

California Apparel News Executive Editor Alison A. Nieder recently asked several Southern California finance companies to consider three fictitious apparel businesses: a small start-up, a growing contemporary label and a more-established misses company looking to launch a new line. The factors discussed the risks involved in factoring each company and what each business could do to minimize or counteract that risk and become more attractive to a potential factor. This three-part series begins with a small start-up company.

Streetwear start-up

This 3-year-old streetwear brand for young men and juniors has strong brand-name recognition, thanks to logo-driven basics and product placement with up-and-coming musicians. The business is growing but still has annual sales of less than $10 million, primarily to independent retailers nationwide. It employs five full-time staff members as well as several part-time seasonal employees and contracts locally for all its production.

Getting started

Kevin Sullivan,Wells Fargo Century

What you see with smaller companies is the founders are usually on the design or sales side of the equation. They are typically going to be very creative individuals who are capable of tapping into a very specific marketplace. If they do that successfully, they generate a good buzz around the product, and sales usually follow in a strong way. I think [Rvca founders] Pat [Tenore] and Conan [Hayes] definitely fit that bill. They’re very creative individuals who seem to be able to tap into the artistic energies of some pretty well-known artists and translate that over to the apparel side. Typically, what happens is you see this big spike in sales growth, [and] sometimes it isn’t always accompanied by the infrastructure necessary to support that. What we—and any factor—look to do in that situation is step in and enable companies at that stage of growth to essentially outsource the credit collections aspect of what they do. In a lot of different industries, the trend nowadays is outsourcing as much as you possibly can. Companies will outsource the logistics, they outsource credit collections to a factor and they’ll try to get it down to what their core competencies are. But in the initial growth stages, it can be tough. You essentially have the creative management team that knows how to design; they may know how to make the product and may know how to ship the product, but there are always going to be gaps in any small company’s management team.

Ken Wengrod,FTC Commercial Corp.

In terms of a small company, a medium company and a large company, every company has risks. All risk is basically the same—it’s just the magnitude of the risk. For each company, no matter the size, there has to be a strong management team. There has to be a strong infrastructure.

We’re relying on the goodness of the collateral that we’re lending against. The most important thing is that you’re dealing with people who are honest and have the ability to move to the next level.

David M. Reza,Milberg Factors

For a factor, a lot of the risks inherent in factoring are the same for companies regardless of size. But as you get bigger in size or you offer additional products to the client, you may take on different degrees of risk or nuances of risk.

Clearly a small company in the incubation phase has risk, some of which could affect the factor, some of which could affect the business. Is it sufficiently capitalized so that it can meet its obligations to pay its suppliers on time? Does it have people with some experience [who] understand how to get goods produced, how to get goods shipped, [and] how to deal with EDI requirements for retailers?

Paul Herold,First Capital Western Region LLC

The biggest hurdle for small companies these days is initial capitalization. It’s not cheap to compete—especially in streetwear or surf. You’ve got the majors, like Volcom and Billabong and Quiksilver and Hurley. They have done such a great job with merchandising their product and marketing it through the surf magazines. It’s really difficult for a small company to come in and earn the shelf space that they need to compete. The way that they have to do it is to come in with serious capitalization. It’s really tough. Rvca is definitely an exception. It’s hard for a company that starts in a garage to get off the mark because they’ve got to build point-of-sale displays to put at the retailers in order to get the space.

Company infrastructure

K.W.: The most important thing to consider about a small company is to assess the infrastructure. If you have a young company that’s growing, there probably wasn’t much time and effort put into building the infrastructure because they were more concerned with selling and merchandising and getting the goods out the door. As they are growing to the next level, they must have certain plans in place and build an infrastructure and keep their overhead as low as possible and put certain internal controls in place.

I’d have them look at the infrastructure and make sure they have enough capital and wherewithal to make it to the next level. Do they have their strategic alliances lined up with their fabric supporters and contractors?

The one thing I would look at is how fluid is the design change? How often do they come out with new designs? Probably every 30 days. Most likely, the most important thing to a small company selling to independent retailers is making sure the accounts receivables are well-dispersed.

P.H.: For us, most of our credit positions are distilled down to what’s contained on the balance sheet and what we see on the income statement. One of Jim [Morrison, president of West Coast factoring for First Capital]’s famous quotes is: “Good companies can go bad, but good people never do.” That’s something that has been a stalwart of his lending philosophy. What that means is somebody can come to you with an idea, and if the people behind it have a proven track record and the people behind it have sufficient capitalization to manage the business to the size they are anticipating that it will become, then, generally, we’re going to want to move forward with them.

If we don’t have direct knowledge [of the company or its principals], then usually the people who are going to start up the company will have an industry-recognized CPA, who will vouch for them on paper by saying: “This is a reviewed statement. We’ve looked at the books and records.” A lot of times, for us, that will make the difference in an unknown company.

Production considerations

D.R.: If they are showing a collection where there are related separates, they want to make sure their production hooks up so that when they are taking delivery on the tops, the bottoms are coming in, too. That’s when you get cash-flow pressure: [when] they are waiting for the bottoms, they paid for tops they can’t ship [and] they can’t get an advance from the factor.

Companies that I find that have lowered their risk typically ship at the beginning of the shipping window. They get on the [sales] floor for a longer period of time; they have a longer period to sell through. And their dilution is lower because they are selling through at a greater level. Guys that ship at the end of the delivery window aren’t on the floor that long, and the buyer will say, “I think we need to mark down.”

Distribution

D.R.: The factor typically looks at a couple of things. We look at distribution. We’re looking at the customers that the company sells to and what’s the composition of the customer list—is it dispersed? If you are a small company selling to specialty retailers, the good news is you may have a very dispersed customer base, so you don’t have a lot of risk in any one customer. Where there are a lot of different [retailers], typically for a factor there’s a dispersal of risk so no one [retailer] is going to really set us back if it goes bad.

From a cost standpoint, there are handling issues for us—meaning lots of smaller [retailers] require more handling. In some cases, you can automate that. In some cases, you can’t. So that goes to our gross profit and our costs associated with a client. But from a risk standpoint, our risk is dispersed.

A company with logo-driven basics [needs to be] on top of what’s going on in the fashion world in their product’s spectrum. Because if they’re not, they could find out that the buying patterns of their customers have shifted; their goods aren’t selling, and that could translate to a few things. One, cancellations. Two, they’re building the wrong goods that they can’t get orders for. And three, if they sold the goods, there could be deductions and various allowances, which we call dilution. If the factor is advancing 80 percent and the customer is paying net 70 percent, then obviously that creates a deficiency for us, and that’s how we lose money. The two major reasons factors lose money are [lending] more than the collateral is worth and fraud—those are the big risks for a factor. So the fashion risk can translate to dilution.

Contacts:Paul HeroldSenior Vice President of MarketingFirst Capital Western Region LLC 700 S. Flower St., suite 2325Los Angeles, CA 90017(213) 996-2610Ken WengrodPresidentFTC Commercial Corp.1525 S. BroadwayLos Angeles, CA 90015-3030(213) 745-8888David M. RezaSenior Vice PresidentMilberg Factors655 North Central Ave., 17th floorGlendale, CA 91203(818) 649-8662Kevin SullivanExecutive Vice PresidentWells Fargo Century333 South Grand Ave., suite 4150Los Angeles, CA 90071(213) 443-6003