For every fashionista that must have the latest trends in her closet, there is a designer creating clothing as quickly as possible. A manufacturer makes the garments and sends them out to buyers and stores. One thing that holds true with the fashion industry is that today's trends can quickly become tomorrow's cast-offs. Fashion is a fast-paced industry, so companies must be ready and able to pump out the latest fashion trends quickly, while they're still in demand. Anything not sold before the season ends is unlikely to move off the racks. For designers and manufacturers, having the funding available to create clothing ensures survival in a competitive market.
Challenges of Production
Companies in need of additional supplies or workers sometimes find themselves in a difficult position. In order to meet production, the materials and workforce must be in place. Garments can't be made without both of them. However, some manufacturers may have difficulty buying the new material to make the items in demand. Using last season's fabric to make this season's must-haves is simply making a product that won't sell, which causes the company to lose money. The funding must be available in advance.
Promise of Sale
While the industry is fast-paced, one option for designers and manufacturers of clothing is to have some promises or agreements in place for clothing sales. Boutiques and department stores may secure an advance order or may regularly buy items based on previous popularity of fashion designs from that manufacturer. These businesses can be used as a gauge on initial demand.
Making fashion clothing in advance sometimes requires creative financing. For companies that don't have the resources on hand and are not in a position to get a traditional business loan, there are other possibilities. Asset-based lending, for example is one way that designers and manufacturers can bridge the gap between purchasing the materials an paying workers that will provide the future income for the company. The company can typically receive the funds from a lender that is familiar with the fashion industry. This allows the manufacturer or designer to get a loan, purchase the materials and pay the workers so that the garments can be made quickly and efficiently. The lender will be paid back through an asset-based loan. Asset-based loans are driven by machinery and equipment, inventory and accounts receivable. The company won't have to give up any equity. The lender may run a credit check on some of the borrower's clients, accepting payment from the manufacturer's customers.
By using non-traditional financing, the manufacturer and designer can afford to create some of the season's greatest hits, capitalizing on popularity and creating a profit that not only covers the funding, but enables the company to improve its profit margin.