1. A designer or a young brand makes samples to show prospective buyers.
2. Orders come in from boutiques, speciality and department store retailers with set payment terms that will see a designer paid up to 45 days after delivery (generally about six months after an order is placed).
3. Unable to operate without payment for so long, a designer can secure financing from an individual or company known as a “factor” that will take order invoices as collateral for a loan, so long as the retail buyer proves credit-worthy.
4. Once the designer produces the goods (cost of raw materials is usually not covered by a factor) and ships to the retailer, a factor will hand over an agreed-upon percentage of an invoice’s value, often around 80 percent, allowing a brand to continue operating while waiting for payment from a retailer.
5. When the factor receives payment from the retailer, of the likely 20 percent difference remaining to the designer, a portion will be kept by the factor as a fee and to cover agreed-upon costs and another portion could be put into escrow as protection against future nonpayment.
6. New orders roll in and the factoring process can begin again.
Key Factors to Know:
Bluevine Capital Inc., Capital Business Credit, CIT Group Inc., Hildun Corp., Milberg Factors, Rosenthal & Rosenthal, Wells Fargo Capital Finance