California Apparel News

Financing the small start-up and the growing mid-size importer or manufacturer can be like learning a foreign language for many company owners. They are often merchandisers and or sellers by trade, so financial “know-how” is something that is missing from their experience.

But there are several avenues owners can take to prepare their companies to acquire appropriate and cost-effective financing—which will benefit their ability to purchase more goods and keep cash flowing.1. Hire an accountant—but not just any accountant.

Many companies rely on their accountants for guidance—as they should—but you need to have the right accountant. The first step is to hire an accountant and firm whose client base includes wholesalers that import or manufacture consumer products and ship to retailers—just like your business. These accounting firms will understand the specific issues of planning and buying inventory, billing, shipping, and collecting from retailers. They will appropriately prepare your financial statements, cash flow and sales projections and then present your company to the financial lending trade. Using your college buddy’s brother—whose practice is royalty administration for the entertainment industry—to do your taxes is probably not going to guide you in managing your inventory cost and markdowns. Also, having an accountant firm whose practice is in your industry means it will likely have many working relationships with other professional services that support your industry—such as attorneys, consultants, insurance agencies, etc.2. Consider your financial options—even if you think you don’t qualify.

Unless you have an ample supply of cash or a rich uncle who funds your business unconditionally, consider doing “receivable financing” —i.e., giving or assigning your invoices to a lender, such as a factor or bank, who then lends cash to you by advancing a portion of your invoice value (the “advance”) the same week you ship. You’ll want the advance against your invoices to get you the money now, when you ship—not in 45 to 60 days, when your retailers pay. You need to keep turning your cash to pay your supplier invoices that are now due and who otherwise won’t ship until you’re current, to fund your payroll and to pay your office rent.

Many wholesalers don’t have receivable financing because they don’t know if or how they can qualify with a commercial lender. Instead, they carry their retailer’s invoices on their books—and, because of it, are always tight for cash.

Also common are companies that factor some of their invoices but still carry many invoices on their books because they ship mostly specialty-store retailers, who disproportionately are deemed not credit worthy. As a result, these companies either don’t receive an advance or have a reduced advance for those invoices. This lack of cash flow stagnates growth. But you do have options—and all for modest and competitive fees.

Lenders are not all the same, they do not use the same criteria to lend, and several specialize in small and growing companies. Just like your business has a niche, so do different lenders. 3. Know the alternatives.

There are a few different ways to do receivable financing. Factoring, probably the third-oldest profession, is when the factor will guarantee and collect your invoice. The factor will “credit approve” a retailer for you to ship. If you do ship but then that retailer “goes south,” the factor will still pay you on that invoice—thus sharing some of your risk. However, if the factor does not credit approve a retailer, the wholesaler may still opt to ship, but it may be at all its own risk.

Factors that offer this service, known as “non-recourse factoring,” can also offer additional financial services.

Then there is “recourse factoring,” where the factor makes no guarantee as to the retailer’s credit worthiness but will still advance and collect on all its invoices. In this case, all the credit risk and the potential loss of the invoice is on the wholesaler. However, a wholesaler that ships lower-dollar-value invoices and/or ships to many retailers may be better able to absorb the losses of a few unpaid invoices. In this case, the wholesaler could benefit from recourse factoring if non-recourse doesn’t suit its needs. Recourse factors tend to offer no other financial services.

Banks, along with the many financial services they offer, can also offer receivable financing and additional financing based on a company’s net worth. But again, all the risk of the invoices being paid is on the wholesaler. However there are credit services that help wholesalers determine a retailer’s credit worthiness. And a company can purchase credit insurance to help secure against potential losses if a retailer cannot pay.

To secure a bank loan, a company needs to have financial statements that meet the bank’s criteria. Factors look more to your invoices to secure their loan and rely less on your financial statements. And some recourse factors may not consider your financial statements at all and just rely solely on your invoices to secure the loan. 4. And then there’s purchase-order financing.

If you have receivable financing but your cash flow is still too tight to be able to accept and fund that “next big order,” there is still another financing option besides locating another rich uncle—purchase-order financing. P.O. financing does cost a bit more than receivable financing, but because the fees are based upon your cost of goods, not your wholesale price, the higher cost may have minimal effect on your gross profit while providing you with vital new cash or credit for inventory purchases to fund that next big order. It is your retailer’s purchase order (hence the name P.O. financing) that you borrow against. The P.O. later turns into your invoice, which generates your advance when you ship. Some P.O. financiers may want the loan repayment directly from your lender as their added security. In those cases, a portion of your advance (meaning the amount borrowed to cover the cost of goods) goes directly to the P.O. financier to repay the loan. P.O. financing needs to be carefully administered to fund growth and not to replace cash from losses. If your cash flow or your gross margin cannot absorb the fees of this short-term funding, then you’re probably dealing with much larger issues affecting your long-term success, and those issues need to be addressed first.5. Keep shopping around.If you shopped a few potential lenders and have been turned down, then you may need to shop a bit more with lenders who have different lending criteria—ones that fit more closely to your needs. But you may need to come to accept that your company may not qualify for your ideal borrowing agreement. You may decide that, for now, you are willing to accept more risk for your borrowing needs. See if that doesn’t jump start the lender’s conversation with you. These different options of borrowing all serve your ability to maintain and grow your business by shipping complete orders on time. And while borrowing has a cost, shipping a hard-earned customer on time is priceless. It sounds corny, but you know it’s true. And the credo for wholesalers is “Ye who ships on time today lives to ship another day.”Steven Goldman is the president of Apparel Industry Consulting Services and has more than 20 years of experience in managing and consulting with apparel, home furnishings, jewelry and light manufacturing companies. He can be reached at sbgoldman@earthlink.net.