What’s in Store for the Factoring Business With Fewer Stores on the Retail Landscape?


As of Thursday, May 2, 2019

The retail boneyard is piled high with store doors that closed last year, and many more may be on the way.

Last year, more than 7,000 store locations shuttered—one of the highest rates since the 2008/2009 recession, when nearly the same amount of stores closed in the United States.

Competition from online shopping sites will only get steeper, which means that factors and their apparel clients are going to have to adjust.

The California Apparel News recently spoke with several finance-industry executives about the challenges and bumps in the road this year and posed this question:

With thousands of stores closing last year and more expected to close this year, how is the factoring industry and your company changing with this retail shift and how has this affected apparel manufacturers?

Here are their answers.

Darrin Beer, Western Regional Manager, CIT Commercial Services

Without question, the retail industry is going through some fundamental shifts as it adjusts to significant changes in consumer buying habits. We have seen store closings, increasing online sales and the rise of an omni-channel experience that aims to make purchasing easy and seamless for the consumer.


Darrin Beer

Naturally, apparel manufacturers need to support their retail clients as they scramble to adapt to ever-changing consumer behavior. This could mean manufacturers need to implement new online or social-media strategies and work with retail partners to develop drop-ship and just-in-time inventory practices. In some cases, apparel manufacturers need to be financially prepared to carry inventories longer as retailers occasionally will defer orders.

Whatever the adjustments, the factoring services and other financing options can be valuable in helping apparel makers become more responsive and competitive. Such financing often is used to help companies increase sales, improve cash flow, reduce operating expenses and lower costs. That better positions them to respond to the changes that continue to ripple through the retail market.

Clearly, the ongoing market shift affecting apparel manufacturers and retailers is not going to end any time soon. As a result, it’s never been more important to work with a lender that understands the current retail landscape and works closely with its clients to develop tailor-made financing solutions.

Mark Bienstock, Managing Director, Express Trade Capital

The apparel industry (both at the retail and manufacturing levels) has gone through a tremendous shrinkage and transformation over the last few years. By all accounts we have been “over-stored” for some time.

The previous mall-based bricks-and-mortar model has changed significantly. We have adapted early on regarding the financing required in the new paradigm.

We are a leader in two dynamic arenas: e-commerce lending and eco financing. We are lending funds against consumer purchases to fund the inventory build needed for e-commerce platforms.

Our eco-financing model of financing and providing seed equity to socially responsible, dynamic companies is experiencing dynamic growth prospects. Unfortunately, the apparel industry continues to show signs of stagnation in a growing economy. This equation does not bode well for the manufacturers of apparel unless they create product uniqueness.

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

The retail landscape is definitely changing with a number of bricks-and-mortar bankruptcies and store closings.

While there is an upswing in e-commerce business—both B2B or business to business and B2C or business to consumer—it isn’t fully offsetting the lost revenues from store closings. While there are several companies continuing to perform well in the difficult retail environment, apparel manufacturers, as a group, have been affected as seen by declining sales.

Management needs to continue to be vigilant about containing expenses, monitoring inventory levels and sourcing product more efficiently. Those that are able to weather this storm will be rewarded when the retail environment stabilizes.

Bricks-and-mortar stores are not going away entirely. They are rightsizing after the retail expansion of the ’90s and early 2000s as well as shifting consumer spending.

Rosenthal has embraced the B2C model by offering increased inventory facilities, not tying the inventory borrowings to the receivable borrowings as well as offering inventory-only facilities to B2C business models.

Gino Clark, Managing Director, Originations, White Oak CommercialFinance

Retail stores continue to struggle with overcapacity issues and changing distribution channels. These conditions left a wake of retail bankruptcies last year that will spill into 2018.

Our analysts are busier than ever evaluating performance and monitoring liquidity. Our industry expertise allows us to keep apparel manufacturers well informed by reducing potential surprises.

The latest round of economic news is encouraging. It appears consumer optimism is growing, which bodes well for the retail sector and the factoring industry.

Rob Greenspan, President and Chief Executive, Greenspan Consult

We work with many apparel manufacturers, and this issue might be one of the biggest problems manufacturers are facing today.

There are less viable retailers to sell products to. In addition to having less retailers to sell to, the ones that have survived through these difficult times all have improved their financial performance. Many large and small retailers continue to have ongoing credit issues.

The factoring industry is not approving everyone and is being very careful about whom they are approving. This is leaving many manufacturers without credit coverage for some of their orders.

I have had to advise clients to seek alternative sources of credit coverage including credit insurance or “put” coverage, if possible, on some of the credit-challenged retailers.

As creditworthiness becomes more difficult, my clients are seeking to sell goods through different channels. This brings them back to continuing to figure out how to start or grow their online business where they become a business-to-consumer company.

By passing or supplementing the traditional retailer distribution model, the manufacturer is able to get paid by the consumers’ credit card, which results in avoiding the retail credit issues that seem to be expanding.

Due to these continuing credit issues, factors are looking at other methods to finance these retailers. More and more factors are now looking at ABL [asset-based lending]structures to continue to finance their apparel clients. Many factors are seeking ways to finance and facilitate credit-card transactions to enhance a portfolio of products.

Kee Kim, Chief Executive Officer, Finance One Inc.

Closure of many retail chain stores has undoubtedly impacted the factoring business negatively because the overall purchasing volume by retailers has declined.

Although there are a few retailers—for example, Marshalls and Ross Stores—that have done well in recent years, their increases have not been enough to make up for the loss of business from the faltering retailers.

Online businesses such as Amazon.com, Stitch Fix and Fashion Nova have noticeably increased, but again they have not made up for the lost business of traditional retail stores.

A proliferation of foreign entity–owned retailers—namely Zara, H&M and Uniqlo

—also took away part of domestic manufacturing and retail businesses. With mostly downward pressure on the domestic apparel business, most of our clients experienced sales declines in 2017.

With a continuing fundamental shift in the retail industry, we are focusing on an expansion of our business with exporters in China, Vietnam and India to capture the factory-to-retailer businesses.

Sunnie Kim, President and Chief Executive, Hana Financial

Apparel manufacturers are absolutely having a challenging time as there are fewer options for them to do business in the traditional arenas and as many bricks-and-mortar retailers are closing their locations.

Some manufacturers are looking at other prospects such as online customers where there are greater opportunities. Many manufacturers are also shifting business toward off-price players, which have not been impacted in the same manner as mainline department stores. Although that helps to serve the revenue issue, obviously this could be deleterious to margins because pricing will change.

True, the market is soft, but it is uncertain that the fundamentals of our business model are actually changing because of the retail dynamics. As in any business cycle, we manage our risks accordingly. We continue to make the decisions according to our internal policies and guidelines.

Additionally, we continue to actively seek opportunities beyond the apparel/textile industries in order to broaden our industry concentrations and become innovative in our thinking and process.

Robert Meyers, President, Republic Business Credit

Throughout the past decade, factoring companies have supported apparel manufacturers through retail challenges and industry changes.

We provide both non-recourse and recourse credit facilities to borrowers. The non-recourse product is particularly beneficial to companies in the apparel industry because it provides credit protection on performing retailers as the factor guarantees the risk.

Additionally, recourse factoring supports apparel companies that are willing to take more risk than their factoring company can guarantee. Apparel manufacturers can utilize recourse factoring to receive funding on retailers if they are willing to forgo the credit protection.

Republic evaluates retailers based on their available cash, not just their recent profits.

Recent industry trends show apparel manufacturers shifting away from traditional retail channels because they no longer rely on a handful of retailers to drive the future of their brands.

Apparel manufacturers are segmenting their brands and increasing SKUs across more diverse channels. These channels often include premium products, mid-range offerings, boutique specifics, limited-release products and horizontal expansion or integration into other high-growth categories.

One of the hardest adjustments for apparel manufacturers is refusing sales from long-term partners or previous industry stalwarts that no longer have the ability or intention to repay their liabilities.

While secured creditors are typically repaid, often the unsecured suppliers and trade payable lose everything when retailers file bankruptcy. Therefore, apparel companies should rely heavily on their factoring companies to ensure they are taking acceptable trade risk.

Dave Reza, Senior Vice President, Western Region, Milberg Factors

The continuing disruption in the retail market requires factors to be even more vigilant, prudent and creative in servicing their clients’ needs.

Leverage, operating losses and consolidation, which have been ongoing dynamics since the ’80s, has accelerated in the past few years. Excess and underperforming capacity coupled with a shift in consumer buying patterns have intersected in a sort of perfect storm.

This tempest has roiled the public and private equity markets as it pertains to retailer support and created tremendous challenges for vendors and, by proxy, their factoring resources.

Despite being short-term, unsecured credit grantors, factors have to increasingly forecast long-term retailer health—or lack thereof. Understanding a retailer’s current position is critical, but we are taking a much longer view than in the past. This is not only necessary to make a decision on this season’s orders but to also better provide our clients with guidance so they can manage future production and purchases.

The influx of private equity into the retail marketplace has also changed the way in which distressed retailers are handled. Years ago, vendors and factors alike could typically assume that even retailers that sought the protection of bankruptcy would reorganize and emerge. This dynamic meant that more often than not factors supported retailers almost or even up to the day of filing for bankruptcy so that their clients would be positioned to service their customers when the dust settled. Today, we have seen a number of high-profile chains go into bankruptcy and disappear from the landscape.

These sea changes have required factors to become increasingly sophisticated in their handling of large, high-profile retailers. With credit exposures in the tens of millions of dollars, the amount of due diligence in terms of information flow from the debtor along with monitoring of collections has grown commensurate with the increased risk. In addition to requiring more frequent and detailed information, factors have to manage their overall risk by obtaining security or reinsuring a portion of the risk.

The shrinking number of retailers and the shuttering of many individual doors, coupled with the challenge of getting all of their credit requirements covered, make the life of the typical clothing vendor increasingly difficult.

Furthermore, it creates customer concentration issues, just-in-time inventory, replenishment and global sourcing/logistics requirements that are not easily managed. These challenges have and will impact the number of startups in the apparel world and make the near and long term difficult for even the best operators.

Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance

We’re in a period of significant realignment of the channels of distribution in the apparel industry. As e-commerce becomes a more accepted manner of purchasing apparel and other consumer goods, one natural result is that retailers need to reconsider how many bricks-and-mortar locations are really needed to achieve profitability and how those remaining stores operate in conjunction with their own e-commerce strategies.

One of the issues that some of the major retail chains have faced is a high level of leverage that ultimately doesn’t allow a business to pivot and react to the significant changes that have taken place within the market. Many of the recent high-profile bankruptcies can be tied directly to the combination of high debt levels and the need to rightsize.

While we and many of the other factors tend to see higher rates of retail charge-offs during periods such as this, it also underscores the need for apparel companies to continue to be mindful of the risks inherent in today’s retail marketplace and consider taking advantage of the credit and collection services offered by a factor to better protect themselves from the downside the bankruptcy of a major customer can produce.

We also see increased opportunities in the form of e-commerce—direct-to-consumer businesses that also need financing. While it’s certainly a different business model in relation to what factors and asset-based lenders would typically finance within the apparel industry, we’ve adapted what we do to provide solutions to this rapidly growing market segment.

Given the choice that consumers have in deciding how they buy products, we only see that segment growing. Many of our clients have also shifted to becoming a valuable resource for this channel. The economy remains fundamentally strong and consumers are buying.

The challenge for our clients lies in identifying new customers to replace others who are either downsizing or liquidating. Many are finding great success in finding new customers who may provide better growth opportunities than former customers.

Ken Wengrod, President, FTC Commercial Corp.

First, we need to understand why these stores are closing and how consumer buying habits have shifted.

Over the last decade, we have seen a retail environment of bricks-and-mortar stores that were overbuilt with cheap money and saturated merchandising.

Today, consumers are looking for “authentic” merchandise that they can select and receive easily and quickly, which is valued-based and certainly sustainable.

Secondly, I believe the question should be how has this retail shift affected apparel manufacturers, and what is the factoring industry doing to support its clientele?

It is imperative for the manufacturers to never be complacent. They must always be searching for new markets and not be idle until a turmoil affects them.

Shrewd apparel operators have been diligently working to expand their distribution network internationally and domestically by changing their business platform. These companies know the importance of truly understanding their customers—the ultimate consumer—and quickly adapting to the ever-changing landscape.

For instance, 95 percent of all potential customers are outside of our geographic boundaries. Foreign markets such as Europe and parts of Southeast Asia have strong demand for California-designed merchandise, and there is less competition to sell these accounts.

Smart manufacturers have also adapted to direct-to-consumer sales. They are developing their own analytics about their customers via sophisticated website platforms such as Shopify. Plug-and-play websites won’t cut it anymore.

Many have adapted to do more domestic manufacturing so that they can cut their lead times and reduce their production-cycle time—non–value added and idle time—goods in transit/sitting in their warehouse.

With that said, factors also need to go through a significant paradigm shift. We must create products that easily finance and approve credit for foreign sales. We must establish consumer-direct, platform financing to support manufacturers.

Through my experience, history has shown me that foreign customers do have a better payment record with less disputes and discrepancies compared to large domestic retailers. Furthermore, we developed a financing vehicle for our clients that allows them to have direct-to-consumer sales employing existing technology.

This industry is perpetually changing. But we will always have consumers. Factors and manufacturers must also be constantly searching for the right place to be.

Adam Winters, President and Chief Executive Officer, Merchant Factors Corp.

Retail remains a robust industry with growing consumer demand. Manufacturers just have to be savvy in determining how they connect with customers.

We have seen no dip in our business because we have adapted as our clients have adapted. We now finance companies that are either exclusively selling directly to consumers or have a portion of their business that is direct to consumers.

However, we have seen an uptick in the number of companies seeking us out for credit protection on their accounts receivable. Through our services our clients have been able to proactively protect themselves by diversifying their business and adapting to the ongoing evolution of retail.