Working Capital Lines for Apparel Companies

Working Capital Lines for Apparel CompaniesIf you own an apparel company, the fact that many clothing retail stores pay for orders in 60 or even 90 day can be somewhat aggravating. Usually it means that all your working capital is tied up in your items or in the accounts receivable. But you often find yourself needing cash now to pay the salaries of your employees, to manufacture clothes, and to pay for overhead and utilities. Fortunately, it is possible (though not always likely) to obtain working capital lines for apparel companies.

How a Line of Credit Works

The way a line of credit works is simple, as it is much like using a credit card. You have a preapproved limit, and you can borrow any amount of money up to that limit. The lender usually has no say as to how you spend the money, unlike a mortgage or a car loan in which the money you get has to be used to buy a house or a car. You only pay interest for the amount of money you actually borrow, but there may be some fees even if you don’t use the line of credit at all. The fact that it is available for you to use has to be paid for. You also have to pay a minimum amount towards the loan each month, with the balance carried over and generating interest.

However, for a line of credit the amount you can borrow is often more than what a credit card will grant you, and the interest you have to pay is also lower with a line of credit.

Advantages of a Working Capital Line of Credit

A line of credit can be very useful, especially for your apparel company if the sales are unpredictable and there is a significant delay in the payment for your products. The line of credit offers you the money you need immediately, and you only borrow what you need. If a lot of money has come in, then you don’t have to borrow more than what is really necessary. But if the money is still all tied up, then you have the line of credit to use for your business expenditures.

Disadvantages of a Line of Credit

Keep in mind, however, that a backup plan is almost always crucial. Lines of credit can be very rare, and especially if you don’t have any collateral to offer. A line of credit is also very easy to abuse. The rules are very stringent as to who can avail of this type of financing. Often your apparel company has to be well-established already, with at least two years under its belt and revenues approaching half a million dollars. Your own credit history will also be investigated as well.

Your limit is also usually set to about 10 to 15 percent of your gross revenue, and if that’s not enough then you may want alternative methods of financing. Finally, often banks may review the terms of working capital lines for apparel companies and then decide not to renew the privilege. You should make sure that you have backup plans so that you don’t run out of money to keep your operations going.

How Essential is Factoring for Apparel Companies?

Factoring for apparel companies has always been popular. The textile and apparel company is the first industry in which the factoring method of obtaining fast cash through the sale of accounts receivables became virtually a standard practice. That’s primarily because of how clothes manufacturers and retailers do business. A clothing line offers a set of clothes to a retail store, but the retail store will pay for the clothes anywhere from 30 to 90 days. But with factoring, the clothes manufacturer gets most of the money right away (anywhere from 70% to 80%).

Today, factoring services are expanding in the business sector as many companies across a wide range of industries have come to appreciate the convenience and other advantages of factoring. Yet the textile and apparel industry is still the major player in factoring. According to one study, the majority (54%) of the factoring volume in the US is still with the textile and apparel industry.

While factoring advantages for apparel companies have always been recognized (such as greater cash flow and convenience), many apparel companies are also using due diligence as a way to help predict the future.

Assessing your Future

If you are a designer who sells clothes to retailers, one of the things you may have tried in order to get the capital you need is going to the bank to borrow money. Banks have always been the go-to lenders for working capital. What they will do is investigate your financial health (such as your credit rating) in order to assess the likelihood that you’ll pay back the loan plus the interest.

But because of the current economic climate, banks nowadays are not really in a lending mood even if your credit history is satisfactory. You probably need to put up sizable collateral in order to secure the loan you need. But chances are your loan application may be denied. That’s not really saying that your company has very little chance of succeeding. It only means that banks are quite wary about lending these days.

On the other hand, with factoring services, you may get a more accurate assessment of how your company will perform in the future. The factors will also investigate your company and if they think it is a viable partner, then they will be willing to purchase your invoices. It’s only when factoring companies reject your application that you should really be concerned about your future.

Customer Creditworthiness

Factors also check out the creditworthiness of the retail stores that owe you money. You have to do your own due diligence, of course, but here, the factors perform the same task as well. And if the factor refuses to purchase an invoice involving a smaller retail store, that may be a red flag concerning your future relationship with that particular retail store.

There are many advantages to factoring for apparel companies. If you want your business to operate smoothly and steadily in spite of some challenges, then factoring is certainly something you should consider.