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.