I hear your urgency!  I’m sure all startup entrepreneurs can sympathize with your frustration.  You’re eager to get in the game, but don’t yet have all the gear in hand to play ball.

Coaches often take the time to teach emerging athletes the broader aspects of a sport to give them tactical advantage.  Similarly, my answer to you will focus on the background rules of financing soft goods apparel.

Let’s start with some terminology. Accounts receivable relates to the invoice value of goods that have already been shipped from a warehouse.  A purchase order is a written request to buy goods for immediate shipment, or as often the case in the garment industry, some specified date.   

Which is more valuable?  Clearly the accounts receivable, because it represents more reliable cash value to prospective financial partners. Unfortunately many first time entrepreneurs learn quickly that large retailers often cancel or change purchase orders based on their current retail needs.  For this reason, financial institutions don’t typically finance retail purchase orders.  They also turn away opportunities to finance finished soft goods inventory because of the risk of fast “inventory obsolescence” – a fancy phrase that means unwanted, out-of-style garments with little or no salable value.

Here’s a little more background information.  Commercial lenders that finance accounts receivable will cherry pick your customers that preferably pay in less than 45 days and have strong credit ratings.  Lenders call these customers “good credits” or “eligible receivables.” 

Then lenders will advance only 70% to 80% of the value of your company’s total eligible receivables.  So, if you ship $300,000 of merchandize to a good credit retailer, expect the lender to provide only $240,000 of financing.  Adding to your startup pain, most commercial banks will wait a year or so for you to prove your business viability before establishing credit lines.

For less restrictive business relationships, garment manufacturers have traditionally turned to “factors.”   Factors are willing to work with younger companies or even previously bankrupt companies.  And, they accommodate slow paying customers too. 

Factors operate differently than traditional lenders.  Factors don’t lend money to you; rather they buy a percentage of your receivables outright at a discount.  The discount represents their service fee.

The good news for all young companies is factoring is available for a wider range of manufacturing and service businesses too, not just textile and garment suppliers. The International Factoring Association offers a service to match growth-oriented businesses with their member factors which you may need once you begin customer shipments.

So, where does this leave you in your quest for startup production money? Instead of financial institutions, approach private “angel” investors who have professional experience in retailing, sporting goods or active wear.  Another possibility is to solicit underutilized knitwear mills in the Southeast and Appalachian region for production assistance. 

While I appreciate financing terminology can be tricky, learning it should be a part of your pre-game preparation.  You don’t want to lose credibility with investors and lenders by asking for one thing, but really wanting something entirely different. 

Don’t give up on your journey.  After all, clothing and active wear remain one of the strongest consumer purchasing categories in America.  You can do it!