WAYS OF FINANCING A FASHION BUSINESS

WAYS OF FINANCING A FASHION BUSINESS

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There are other options to finance your fashion business:

LOANS

To borrow money from a person or a financial institution means taking on debt, which you must repay with interest. 

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VENTURE CAPITAL

An investor provides money to a startup that they believe has long-term growth potential in exchange for a return on their investment. An “angel investor,” as in a high-net-worth individual, or a venture capital firm that provides a “seed round” of funding could be the source of funding for a more early-stage company. 

Investing in a startup company when it is small and remaining invested until it experiences exponential growth is the dream of any venture capitalist, as was the case when Facebook was just getting started.

In exchange for the funds, the investor is typically granted a portion of the company’s equity. 

Since the investor controls some aspects of the company and makes decisions may be a deterrent to some. This is because the investor has some control over the company. 

Depending on the circumstances, such as when the investor has previous experience growing similar businesses, this can actually be advantageous. 

For brands that want to reach their full potential quickly, venture capital can significantly accelerate growth while also assisting with scaling. An investor-startup relationship is typically initiated when a startup presents its business plan to potential investors.

FRIENDS AND FAMILY

When a company launches, it is common for friends and family members to lend money or invest in it, allowing the company to have enough funds to get it off the ground. Naturally, this method allows for greater flexibility than other options, but it’s always important to inform your customers that it may take some time before they receive their money back.

CONTESTS, INCUBATORS, AND HOLDING COMPANIES 

Several organizations and platforms have been established to fund emerging brands, each with its own niche and its own set of requirements and entry barriers. 

In addition to cash prizes, there are contests with time constraints, such as the CFDA/Vogue Fashion Fund and the LVMH Prize. The application process alone can be time-consuming — and sometimes it’s more than a small brand can handle while also running its day-to-day operations. 

Incubators and accelerators, which can be found all over the country, typically provide entrants with less than $1 million in cash and a year or two of mentoring and other services in exchange for their participation. They are under the impression that once they leave, they will be on the right track to make it.

A digital version of the CFDA’s well-known incubator program, called “Network,” was recently launched to provide all members with business mentorship and other resources, such as access to workshops and investors, among other things. 

As a result of industry shifts, the network was primarily a result of the fact that all brand levels were struggling, not just up-and-comers.

CROWDFUNDING

Funding a clothing line through online crowdfunding platforms such as Kickstarter, GoFundMe, and SeedInvest, which didn’t exist just a few years ago, is one of the more recent methods of funding a clothing line. 

With a crowdfunding platform such as Kickstarter, you create a page that convinces people how amazing your product will be. People pledge money until you reach a predetermined goal that will allow you to produce your line or product, and in exchange, they are guaranteed something — usually the product itself. 

In that case, they are essentially customers who are placing an order in advance. As much as $3.9 million has been raised by apparel companies through the crowdfunding platform Kickstarter. These companies are not typically aesthetically-driven fashion brands in the traditional sense but instead focus on specific products that feature some unique innovation.

FACTORING

Factoring is extremely common, especially among brands that sell in bulk to retailers. 

The method of financing does not constitute investment, but rather a method of providing brands with access to working capital. 

In most cases, when a designer receives an order from a retailer, the designer must produce and ship the order before receiving any payment from the retailer. This is a fast way for a brand that isn’t massively profitable or that doesn’t already have a lot of funding to run out of money very quickly. 

One of the most well-known factors in the industry is Hilldun, which advances designers around 80 percent of their orders once they ship and then collects the money from the retailer directly; the client receives the remaining 20 percent once the factor collects. Hilldun and Merchant Financial Group are both well-known in the industry. 

An additional service that a factor provides is performing a credit check on retailers before a client agrees to ship an order in order to ensure the retailer is actually capable of paying; when a retailer is past due, the factor will act as a collection department. 

The factor acts as credit insurance for the retailer and is still responsible for paying the designer in accordance with the terms of their agreement. This is a problem that is becoming more common with the closure of brick-and-mortar stores and the filing of bankruptcies.

PRIVATE EQUITY

Private equity has been a popular and long-standing method of funding fashion brands, in which a brand may sell a minority stake to a private equity firm in exchange for cash. These brands are typically more established than those that would seek venture capital (and in some cases, they already have), and they require financing to continue to grow. However, they are not yet large enough to go public or interested in acquiring a company in its entirety. 

For example, General Atlantic recently acquired a 45-percent stake in the French contemporary label Sézane, while Castanea Partners acquired a minority stake in Proenza Schouler, and Berkshire Partners acquired a minority stake in Opening Ceremony. 

This type of investment typically involves the investor taking on a long-term, strategic role in the brand’s expansion.

Elizabeth J. Harless