ADVICE TO ASPIRING DESIGNERS: GET SMART BEFORE GETTING STARTED
Byline: Valerie Seckler
NEW YORK — Talented designers too often underestimate the importance of business skills when seeking financing for their young businesses.
This was the consensus of factors, the most common source of funding for designers whose companies are in early growth stages.
These entrepreneurial ventures are often rich in design and sales talent, said factors interviewed by WWD, but sorely lacking in crucial back-room support like production proficiency, accounting expertise and sales organizations.
Such shortcomings typically undermine a designer’s efforts to obtain financing and often explode the fledgling enterprise, factors noted.
Miles Stuchin, president of Access Capital, a factor that counts apparel designers among its clients, said, “We sometimes see design expertise but weak production skills. Often a company can produce, but is weak on bookkeeping. In smaller companies with limited funds, these can be big problems.”
Observed Walter Kaye, president of Merchant Factors, “We don’t see lots of designers going into business as we did in the past. Many who try don’t know how to go beyond line development.”
“They’re not as able to market themselves and find funding as their predecessors,” added Kaye, who founded Merchant 10 years ago at age 57.
In order to win the confidence and financing of factors, a young designer firm must build the proper business foundation and get at least one successful retail season under its belt.
After sinking $10,000 to $15,000 of their own money into their businesses, designers’ next infusion of funds can come from a variety of sources, factors explained. They include family members, investors with roots in the apparel business, contract manufacturers seeking to boost production to cover overhead and joint ventures established with apparel companies that are looking to segment or trade up.
“All too often designers lose their initial investment because the new company doesn’t have staying power,” cautioned Kaye. “We’ve seen budding designers with lots of ideas but little capital, and we discourage them. They need adequate capital to develop their samples line, buy supplies and stay afloat until the money from their first season comes in.”
A joint venture is one of the best ways for young designer firms with limited capital to get started, according to Kaye. The joint venture partner gets “very big leverage” in exchange for its business and financial support, resulting in “many deals that work out very well,” he noted.
“Existing Seventh Avenue companies tend to be frequent and good sources of money,” Stuchin agreed, assessing the joint venture route. “Complementary businesses and players tend to know and trust each other.”
The good news for young designer firms is that their gross margins of 35 to 40 percent are far stronger than, say, the 15 to 20 percent achieved by mass market startups. So if they can survive the first season or two, designers’ chances of finding funding from factors brighten considerably.
Factors lend money to young designer companies against their accounts receivable, typically offering financing for firms with sales ranging from $1.5 million to $5 million.
“Our average client has sales of about $2 million, but we’ve started funding $800,000 companies that are doing $15 million today,” said Kaye.
Such firms can generally borrow 75 to 80 percent of the face value of their credit-approved receivables from factors. The fee is usually the prime rate plus a single-digit percentage. The percentage is determined by the principals’ previous experience and the quality of the company’s receivables and retail accounts, among other considerations.
Gary Wassner, president of Hilldun Corp., a niche factor for designer apparel resources, said his firm lends anywhere from $50,000 to $700,000. “The majority of our loans are about $150,000,” he stated.
Assuming the business basics are in place, the criteria factors use to determine lending fees also help them to decide whether to lend money to a designer company in the first place. The most crucial: the ability to produce well-finished clothes that fit properly and deliver them on time to a range of quality retailers.
“We look for designers who are able to sell to a number of stores rather than to a guardian angel,” said Stuchin.
For this reason, he noted, “We greatly prefer designers selling to department stores than to specialty boutiques. They take about the same amount of time to sell, and the department store has the much bigger pen.”
When Hilldun’s thinking about lending to a designer company selling $1,000 suits, for instance, “We have to be certain about the fit, finishing and timeliness of delivery,” said Wassner. “The only way to know is if they’ve shipped for a season and the stores liked the merchandise.”
As for on-time deliveries, the chief culprit creating slowdowns is the late arrival of supplies. “Designers have to be careful about their fabric suppliers,” Wassner stressed. “This is where most of their delivery problems lie.
“Designers also have to know their factories will produce on time for them and not push them to the bottom of the heap,” he added. “They need to use smaller shops where their orders carry more clout and to put an employee on site to monitor operations.”
Another plus for designers seeking financing, said Stuchin, is the employment of an accountant specializing in the apparel business. “Credit suppliers look to see who’s preparing a company’s financials,” he noted.
Most factors said it’s usually harder for designer firms to secure funding than it is for other apparel businesses, because their higher cost results in a greater concentration of sales on fewer items.
“The odds of getting paid by a company making 10 dresses for $100 apiece are better than for a company making a single dress for $1,000,” reasoned Stuchin. “If there’s one rip in the $1,000 dress, that’s it.”
Moreover, even if factors are paid consistently, the size of the factoring volume generated by designers is far smaller than that of moderate or mass resources.
“Lots of factors avoid designer companies due to their lower overall sales volumes — factors won’t do $50 million in volume with clients making $1,000 garments,” said Wassner.
Nevertheless, Merchant’s Kaye insisted, “It isn’t necessarily harder for young designer companies to get financing, but they often lack the business acumen to secure the funds.
“Many times they get bad advice,” he added. “They can only get started seeking loans from factors after their first season of orders are in from good retailers.”
— Fairchild News Service