Invoice Finance: Regulating cash flow in the textiles and apparel industry

POSTED: 25th March 2014
IN: Guides

In the UK, the textiles industry has a long and rich history. But what people don't often realise is that fashion was one of the earliest adopters of invoice finance.

undefinedBasically, the processes involved in successfully creating and distributing a clothing line are so reliant on ready-cash that without a healthy working capital, it would be almost impossible for any label to thrive. 

For that reason, invoice finance has been adopted wide-scale within the industry for decades, helping brands to fund their own brand management, take on new business and opportunities, keep the production line moving, and protect themselves in the event of late payment.

Allow us to elaborate…

-         Why is cash flow so important?

Cash flow is absolutely paramount to any business model. In the words of Alice Magos from America's Online Business Toolkit:

"Cash flow is king. Even if profitability has eluded you, survival can be attained if cash flow is maintained. Planning around cash flow is essential."

However, this applies to some industries more than others, and anything that relies on a production line - like fashion and apparel - are the ones generally most affected.

In this industry, the way that transactions are generally undertaken is based on 'supply and demand.' That is to say, clothing is not manufactured until it has been ordered, at which point it will be created to specification.

From start to finish, this process is:

1)     A high-street retailer or department store decides they would like to stock a brand's product, so they get in touch and place an order.

2)     To fulfil the order, the brand realises that more stock needs to be manufactured.

3)     They source the raw materials required and place an order.

4)     The raw materials are delivered to the manufacturing plant or factory where the clothes will be produced (this is very often a third party contracted to make the garments designed by the brand).

5)     Once the order has been manufactured, it can then be delivered to the client.

6)     The client pays for their order.

This process is fairly typical of the fashion industry, and highlights just how essential it is for clothing brands to have a healthy and accessible working capital.

Note how the brand owner doesn't actually see payment until right at the end (usually on 30-day invoice terms)? This is despite them having to shell out for raw materials and production throughout the manufacturing process in order to fulfil the order.

As a clothing brand, it is absolutely paramount to retain a healthy working capital in order to be able to take advantage of new business opportunities and protect yourself financially in case of late payment from clients.

-         The changing face of the textiles and apparel industry

The last few decades has seen much of the textile trade that had previously been undertaken in the UK move to China and other Asian continents, as a result of the cheaper labour costs. This allowed brands to manufacture the same clothes at a much lower cost, and therefore reducing the market price of clothing.

However, with great cost reduction comes much greater lead-times, meaning that from the point of order until point of payment, the amount of time greatly increased.

For a while, the reduced costs were worth the longer lead-time, but in recent years, inflation in these countries has outstripped that of the UK, causing some manufacturing to come back.

-         Easing the pressure with invoice finance

undefinedDespite huge advances in technology and the shifting geographical focus of the industry, the industrial process itself is age-old. The cash-flow conundrum facing the textiles industry today have been present for many years and aren't likely to be going away any time soon.

According to Textile World, this is endemic amongst textile owners who, "get so caught up in the day to day operations of the business that thy fail to devote enough time to the 'big picture' of cash-flow management."

Invoice finance refers to an agreement between a business and a lender that allows for capital tied up in unpaid invoices to be released for an instant cash-flow boost. For businesses facing long periods without payment or that need to steady their cash-flow in order to keep functioning to optimum capacity, invoice finance can be a lifeline. It essentially allows fashion and apparel brand owners to oil the proverbial wheels of their business and concentrate on steering it into the future.

Still wondering how invoice finance could work for your business? If you'd like some expert advice for your brand, or simply want to know more about the process as a whole, visit our business finance page or get in touch with one of our expert advisors.

Images used courtesy of Wikipedia and Joseph Brent on Flickr

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