Industry Focus: Factoring in the Age of Start-Up Apparel Companies and E-commerce


Ron Garber, Executive Vice President and Regional Manager, First Capital


Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.


Sunnie Kim, President and Chief Executive, Hana Financial


Robert Meyers,Chief Commercial Officer, Republic Business Credit


Donald Nunnari, Regional Manager, Merchant Factors Corp.


Dave Reza, Senior Vice President, Milberg Factors


Paul Schuldiner, Managing Director of Business Development, King Trade Capital


Jeffrey Sesko, Vice President, Rosenthal & Rosenthal


Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance


Ken Wengrod, President, FTC Commercial Corp.

The retail realm as we know it is being turned upside down by a growing proliferation of e-commerce sites that are acting as the new Main Street store.

Supplying these new websites are a proliferation of start-up apparel and footwear brands that just might skip selling to a traditional store or, then again, hedge their bets and sell online and offline.

Everyone is trying to figure it all out. Will online sites replace retail? Will bricks-and-mortar stores end up just being showrooms?

All this makes for a brave new world for the factoring community, which is financing these endeavors.

California Apparel News recently spoke with some finance-industry executives to find out how their companies approach financing new businesses and how selling to e-tailers differs from selling to a bricks-and-mortar retailer.

When a new apparel brand approaches you about financing, what do you look for to determine if you will factor it? If a brand sells to online sites, such as RevolveClothing, how does this affect its ability to get factoring?

Ron Garber, Executive Vice President/ Regional Manager, First Capital

The main criteria for when a “team” with a new brand approaches us for financing is the historical success record of management.

Committed capital and target customers are important determinants in evaluating the prospect’s qualifications, but experience and proven past competency in the apparel business is paramount.

A clever idea or name does not of itself assure a bright future, and only when pairing ingenuity with a strong business acumen and battles won under fire does a fledgling enterprise have a chance to succeed.

A sound financial plan, adequate investment to support long overseas production lead times, strong contacts with credit-worthy customers and realistic expectations in today’s tough retail environment are essential building blocks that must be in evidence to convince a lender/factor to proceed from prospect to client.

Although an online business can prove to be a profitable supplemental revenue stream, such enterprises that rely solely on such resources are not good candidates for factors. They customarily sell directly to the consumer while traditional factoring is primarily suited for a business-to-business model.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

In my consultations with clients about obtaining factoring, I almost always see the factors looking at various key points (in no particular order).

These points include the financial strength of the retail customers to whom the apparel brand will be selling. If the retail customer list is financially strong, the factor is more likely to propose better, less-costly rates than if the retail customers are weak.

If the factor cannot approve the credit of the retail customers (i.e., small, one-off stores who don’t issue financial information), then the factor might pass on the deal. So, retail customers’ credit-worthiness is very important.

The strength of the apparel brand’s balance sheet is also important. While the factor is lending against the company’s approved accounts receivables, the company’s financial strength is important for the potential factor.

While there will always be dilution of the factored accounts receivables, the factor/lender still has to rely on the company’s financial strength to help support the company if some of the accounts receivables are disputed.

The average size of the invoice is important to a factor. The larger the invoices, the fewer amount of transactions are required for the factor. This translates into lower factoring costs as well.

The amount of money an apparel brand needs to borrow from the factor is also a key point. The average borrowing loan against the accounts receivables is between 80 percent to 85 percent. If a company needs to borrow less than this amount, it makes it easier to attract a factor. If the company needs to consistently over-advance above the borrowing rate, that can make it more difficult to get factor financing.

The ability for a company to prepare accurate, timely financial reports to the factor is also important. No lender wants to be surprised. If a company cannot deliver timely financial data to the factor/lender, this makes it difficult to attract a factor.

If a company sells only online, there really should be no need for a factor. The factor’s primary function is to approve, buy and lend against eligible open accounts receivables. If you are selling online, you are most likely either being paid by credit card, PayPal or some other form of upfront money. All should be paid before your product is shipped, so there shouldn’t be any need to carry any accounts receivables.

Lastly, and this is a case-by-case basis, but many factors will consider lending against eligible inventory. But that is generally against finished-goods inventory. Most factors will not lend against production/purchase orders for inventory. Purchase-order financing is a business most factors are not in.

When it comes to selling to online retailers, you can factor these invoices, assuming the online retailer has acceptable credit.

Sunnie Kim, President and Chief Executive Officer, Hana Financial

When we contemplate bringing on a factoring prospect, we rely on the results of our due diligence to determine if it is the proper fit for our company.

It is our policy to not comment on specifics of that process, but in general terms we are interested in the industry or market in which our prospect is involved, as some industries are more prone to risk than others. But the underlying fundamentals of the company consume more of our focus.

This rings more true today given the current pressure our industry is now experiencing.

Robert Meyers, Interim Managing Director, Bibby Financial Services

The first step is reviewing the credit of the brand’s major retail accounts along with the boutique shops they plan to sell.

Second, we look at the history of the ownership team, mainly focusing on their industry insight and prior experiences. From a financial statement perspective, we look more at their future projections than their prior year’s performance for new apparel brands.

The last key focus is on the vendor agreements and purchase orders to make sure they are receiving confirmed orders instead of potentially consignment or rights to return if they don’t sell well enough.

Finally, we look to see what accounting and law firms they have engaged to provide additional advising as they start their business.

There is no issue selling online as long as a business has the correct licensing agreements and is selling to other businesses. If they are selling directly to individuals, that’s perfectly acceptable but typically not factorable. It can be used to construct an over-advance for some lenders but wouldn’t be part of the normal factoring arrangement.

Don Nunnari, Executive Vice President/Regional Manager, Merchant Factors Corp.

Merchant is a leader in factoring designers and new apparel brands. Because we are a privately owned, entrepeneural company, we are very flexible in offering financing to new brands.

We pride ourselves on having a Los Angeles team located adjacent to the garment center to quickly meet new brands and evaluate their factoring needs. There are several types of factoring, but the oldest and best suited for the apparel industry is known as “old line” factoring. It is also known as non-recourse factoring.

The brand can use the factor for credit-and-collection services alone or in tandem with advances [financing]. Because factoring is a relationship business, it is in the mutual best interest of the brand and the factor to meet and get to know each other. Not all factors are the same.

If the new brands feel more comfortable meeting with someone more familiar with factoring, it’s a good idea to ask their financial adviser or accountant to join the meeting.

Next, it is critical to know the types of customers the brand is selling. If they haven’t received orders yet, the brand can share the names of customers they will solicit. We then get an understanding of the brands’ capital contribution and their financing needs.

When evaluating new brands, we seek to finance enthusiastic people, passionate for the apparel industry and who value the importance of having good credit.

If the brand is selling to online retailers such as Amazon, Overstock, Asos or Nasty Gal, each is a factorable, creditworthy account that we would finance. If the brand is only selling online directly to consumers, it is not factorable. If the brand had plans to expand its business to wholesale accounts, we would be happy to discuss if factoring can help them.

Dave Reza, Senior Vice President/Western Region, Milberg Factors Inc.

Determining whether a prospective client is a fit involves underwriting ownership, management, financial wherewithal and collateral quality.

Ownership/management: At Milberg we believe that “people” are the most important new-business decision criteria. Who are the shareholders and managers? What is their background? What industry experience do they bring to the table? What financial resources do they have? What relationships do they have with potential customers and vendors? Do they have a track record of success? Can we get references from outside professionals, such as accountants and lawyers?

Financial: Another component is the financial strength of the new company. How much capital or debt has been invested/advanced to the new entity? What is the scale of projected operations? Is the capital base coupled with any additional shareholder support (via loans or advances) sufficient to attract vendor support? Will suppliers support the new company with open-credit terms or will they require advance deposits or even security such as a letter of credit? Has management put together a short-term projection that realistically forecasts their revenues and expenses? In sum, have the owners and management clearly articulated their financial requirements of their business and put together a plan to meet these needs based on capital, vendor support and a factoring facility?

Collateral: Typically, we are advancing on factored accounts receivables and, in some cases, inventory. Who are the customers? Sales terms? Peak customer credit requirements? Sales by customer? Is the customer base concentrated or is it spread between department stores, mass merchandisers and specialty stores? Do we know all the customers? If not, is credit information available for those we don’t know? It’s important to both client and Milberg that we are able to approve a majority, if not all, of the customers so that the client’s customer credit risk is absorbed by Milberg. On the inventory side, we need to understand what raw materials are used, how they are sourced, seasonal attributes, key vendors etc? Most importantly, how much of inventory is purchased or made based on actual customer purchase orders, replenishment metrics as compared with production for stock.

We factor business-to-business accounts only. If someone has online sales that are direct to consumers, then the consumers would provide their credit-card information directly to the manufacturer.

If a client is selling online but to another business, then they would normally obtain payment via the customer’s business credit card. While Milberg has the ability to accept payments from our customers via credit cards, it is not a commonly used payment method.

Major retailers often request that vendors fulfill customer orders that the retailers receive on their websites. In those cases, our clients typically bill and assign to us either individual or bulk invoices (for multiple consumers) for the sale. However, our client is invoicing the retailer in that circumstance, not the individual consumer(s).

Paul Schuldiner, Managing Director, Business Development, King Trade Capital

As we provide purchase-order financing, which is a form of pre-sold inventory financing that works in tandem with factoring, we are often approached by apparel brands that are either rapidly growing or those that have hit a bump in the road and are in transition.

The keys to our evaluation of an apparel brand seeking purchase-order financing include: (a) the quality of the customer base they are selling into and can the factor we work in tandem with approve the credit of the retailers? (b) the price point of the merchandise and gross margin that the company is earning on the sales orders; (c) the product quality and reliability offered by the manufacturing/production partners that are making the garments; (d) the reputation of the brand and sell-through history, including whether the brand has been licensed; and (e) the quality and reputation of the management team and their ability to execute the trade cycle they are seeking our form of financing to support.

While we look at online sales, we only would potentially support direct-to-consumer (online) as a small percentage of an overall business plan that is predominantly “business-to-business” sales. This could be a wholesale brand selling to a bricks-and-mortar retailer or a wholesale brand selling to an online catalog retailer.

Jeffrey Sesko, Vice President, Rosenthal & Rosenthal

Anyone involved in the apparel industry is aware that the lifespan of today’s fashion trends and styles can be very limited.

Due to this ever-changing landscape, apparel companies (both young and old) need to keep pace with recent fashion trends or they’ll inevitably face the risk of shutting down their business.

As a result of this precarious climate, we assess a variety of criteria that influences our decision to move forward with a potential factoring relationship.

Some of these pre-qualifiers include, but are not limited to, the following: previous work experience of the owners/operators of the new company, credit quality of the customer base with whom they anticipate shipping and the amount of initial start-up capitalization.

Because Rosenthal is a privately held organization, we are able to capitalize on our entrepreneurial spirit and thin layers of hierarchy. This affords us the chance to be flexible in our approach when it comes to evaluating new business opportunities.

Factoring is most common for businesses that have other businesses as customers. Should the company sell to other online businesses, we proceed using the same aforementioned criteria.

If a company is exclusively selling through the channels of e-commerce and is billing the consumer directly on their invoice, special consideration would have to be provided to entertain a factoring relationship because there are different legal regulations governing business-to-consumer invoice financing.

Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance

The first two things that we seek are a management team that can deliver as it relates to marketing, sales and distribution of the company’s product, and a product that can stand out within a very crowded marketplace.

In a market that tends to be increasingly dominated by larger players with multiple sources of production, it’s also helpful if a company has identified a niche that isn’t quite as crowded as others might be.

If we have a strong management team and an interesting product, the next thing that we look for is the professionals that the company has selected. A good accountant and a strong attorney can be invaluable at all stages of a company’s growth but are particularly important in the early stages.

In the example that’s mentioned, most lenders will want to know that the company has developed some diversity within its customer base. It’s not really a function of whether a company is online, bricks-and-mortar or both. It’s more a question of the concentration risk associated with doing a large percentage of business with one customer.

A company needs to understand what the implications of losing that account would mean and how that business would be replaced. With the continued consolidation at retail, even established companies face the dilemma of addressing customer concentrations.

While it’s not uncommon for a company to start out with a strong concentration in one account, a smart management team realizes early on the importance of making sure that the business isn’t too heavily dependent upon one customer.

The issue for us isn’t whether it’s an online retailer or a bricks-and-mortar retailer: it’s that they have a concentration to one customer. We would still perform the same due diligence on the retailer.

Ken Wengrod, President, FTC Commercial Corp.

The most important elements are character, character, character. It’s more than just looking at a specific credit rating. I also look to see how the owners have been handling themselves when there was a problem.

Are they the type to come up with stories and blame others or do they take responsibility for their actions? It’s very comforting to know when an individual has been through extreme adversity and overcame it. Adversity builds character.

It’s important to see if owners have the strategic vision to distinguish themselves from their competitors. The owners need to know what the company does best and understand the rules of engagement. Then break those rules and create their own. They need to be leaders, not followers and stay focused.

The owners need to surround themselves with people with complementary skill sets. Successful companies have a team of great designers/merchants along with competent businesspeople.

Second, the management has to have the ability to execute its business plan and take ownership of it. Management needs to be on top of its financial numbers. If the owners tell me to “go speak to my outside bookkeeper or accountant,” it’s a red flag.

They should know firsthand what’s going on with their financial status and understand their capital limitations. It’s very important to grasp the financial creativeness of the management team and its ability to leverage its supply chain.

The mindset of the owners needs to manage funds as if they were their last cent. They need to have a conscious strategy of knowing the end game and refrain from excessive spending (e.g., spending too much on sampling and creating an excessive number of items in a line).

The team needs to truly understand its ultimate consumers and inspire them. Consumers tend to get confused when there are too many selections.

If the company sales are with online distribution sites, such as Amazon and Net-a-Porter, we treat these sales the same as if you were selling your products to some other bricks-and-mortar stores.

We have, however, noticed that there are fewer chargebacks for vendor compliance and markdowns in these online distribution sites. If the company is selling directly to consumers via its own online site, then it’s difficult to provide traditional factoring.