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White Oak Commercial Finance: Innovating Apparel Industry Financing in the Age of Disruption

Fashion is a glamorous business. It is also a tough one. There are long lead times, products sourced from around the world, big swings in seasonal demand and the constantly changing tastes of consumers that have to be anticipated. All of that uncertainty ex- plains why banks traditionally have shied away from lending to the apparel industry, creating an opening for lenders like White Oak Commercial Finance. The firm has been providing capital to this industry for three decades, making sure companies striving for and deserving success have the cash flow they require when they need it.

White Oak Commercial Finance (White Oak) is an alternative lending company that began in New York during the 1980s as Capital Business Credit and, as an affiliate of White Oak Global Advisors, now provides its services to clients across three continents and in multiple currencies. The company’s experience and scale enables it to help businesses to tackle everything — from turnarounds to rapid expansion to acquisition.

Historically, much of the apparel industry’s working capital has come in the form of factoring and lending against receivables. Factoring remains an important tool for White Oak, but in the past few years — as the industry has responded to the pandemic and major shifts in technology — the firm has added more tools to its tool kit.

The pandemic has strained supply chains globally, driving up prices and stretching out delivery schedules. The growing popularity of e-commerce as a source of information and a go-to destination for retail shoppers has blurred the lines between manufacturers and retailers.

The changes have created challenges for the industry and lenders alike. White Oak has had to be creative and flexible, coming up with innovative solutions for new trends and marketplace demands. There has been no script to follow, because both lenders and the industries they serve are in unchartered waters. Consider a few examples of how White Oak has evolved to meet the shifting needs of customers.

The Explosion of E-commerce

The apparel industry was an early adopter of e-commerce. Even before COVID-19 struck, online retail accounted for 27% of U.S. apparel sales in 2018 and 30% in 2019. In 2020, that number leaped to 46% as consumers largely avoided the stores due to health and safety concerns, according to Digital Commerce 360, a research firm. It is not an exaggeration to say e-commerce kept the fashion industry afloat last year and this year.

But, e-commerce is a very different business model from brick-and-mortar. Instead of selling to big retailers, many apparel firms sell either through platforms like Amazon and Shopify or directly to the public through their websites. The direct approach is appealing, because it cuts out the intermediary and offers the promise of bigger margins.

However, it also requires a significant commitment from and increased risks to apparel businesses, who may feel it is the equivalent of operating without a net. Apparel makers who once received orders and a measurable degree of certainty from retailers now have make their own real-time decisions about demand. Will they make enough product? Will they get stuck with unsold inventory? Both the risks and rewards are higher.

The same holds true on the finance side. Because there are no receivables, lenders like White Oak have had to shift to a model in which they do more asset-based lending against inventory and other forms of collateral. That requires a deep understanding of a client’s business and management team and getting comfortable with the risks that are being shouldered. White Oak is also able to provide advice on the digital transformation based on its know how and hands-on experience in this area.

White Oak has gotten creative about the types of collateral it evaluates in making lending decisions. Successful websites can have value as collateral, as well as brand names — even the brand names of companies that have gone out of business. You can’t run your hands over these assets the way you could with a sweater — they are in the realm of intellectual property — but in the digital era, intellectual property is a critical piece of the value equation. Lending against so-called intangible assets is a relatively recent phenomenon, but as these assets become a bigger part of a company valuations, this type of financing may become more important. In all cases, and with all types of collateral, White Oak’s goal is the same: to optimize the amount of available working capital that clients can use to run their operations.

Online retailing has had one more important impact: it has made everything go faster. Gone are the days when the fashion world had three predictable seasons. “Today, if a pop star or influencer on Instagram is photographed wearing a distinctive fashion item, it can become an overnight sensation, forcing the apparel maker to crank up production,”said White Oak Executive Vice President Gino Clark.

Similarly, the new work-from-home fashion trends that are made to accommodate the growing remote-yet-professional crowd have required quick pivots — the shorter the fashion cycle, the greater the risk that an apparel maker will get stuck with unsold inventory. The end result: both manufacturers and their lenders need to be very flexible.

It is worth pointing out that even as e-commerce expands, traditional in-store retailing remains an enormous business. In August, apparel sales climbed 43% from a year earlier, driven by big increases in both online and in-store sales, according to Retail Dive. For in-store sales, factoring remains a common form of finance for the same reasons that it has historically benefitted the apparel industry: it provides a quick source of cash, can be easily scaled for businesses of all sizes, helps companies deal with seasonal swings and outsources the jobs of credit checking and debt collection to those with the expertise to handle it.

“Our customers still ship product to stores and we still do a considerable amount of factoring to finance those transactions,” said White Oak Executive Vice President Martin Efron. “Factoring and receivable financing remains a reliable form of working capital that can help businesses across many distribution models.”

COVID-19 and the Supply Chain

The pandemic has infected the global supply chain and the symptoms are easy to see: long delays in shipping products, unpredictable delivery schedules and soaring transportation costs. All have created cash flow problems for apparel makers and new challenges for the lenders they rely on.

The problems are most acute in Asia, where the vast majority of apparel is sourced. In August, China shuttered a key terminal at Ningbo-Zhoushan, the word’s third busiest port, after a single worker tested positive for coronavirus. At the end of August, Vietnam, a huge producer of footwear for U.S. markets, imposed strict lockdowns on factories. Those new bottle-necks came on top of another festering problem: a shortage of shipping containers that has dramatically boosted container prices when those containers are even available. Logistics experts say it may take until the first quarter of 2022 before the situation begins to resolve itself.

The resulting congestion means apparel producers cannot be sure when their goods will arrive or when they will be paid. To cope, many companies have been forced to order supplies much earlier than usual, which has meant they have had to borrow more money or borrow for longer than they normally would.

Once again, lenders have had to be flexible, creative and adaptable. One strategy that has become more popular is lending against goods in-transit. As the name implies, this is a type of loan that is tied to inventory while it is on a ship — say, while traveling from Shanghai, China to Los Angeles, California. This type of financing requires good visibility on the part of a lender who must have the ability to track the movements of products at every stage along the journey.

“Not all lenders are willing to do this,” said White Oak Executive Vice President Charles Sharf, “perhaps because they do not have the ability to monitor it. At White Oak, we are comfortable with the arrangement and have used it where appropriate.”

Advice has also been critical in this period. “We have used our sourcing expertise to make clients aware of suppliers in Mexico and Latin America that aren’t facing the same degree of disruption as their counterparts in Asia,’’ said Efron. “It is one more way we can help customers navigate the current crisis as smoothly as possible.”

Learning from Apparel Clients

If White Oak has learned one thing during this era, it is that its apparel clients are remarkably nimble. They have anticipated problems and reacted quickly. They have ordered goods earlier, found workarounds for bottlenecks and kept products flowing to market. When necessary they have cut costs on entertainment, travel and space — both for offices and showrooms — and have found ways to stay in business.

White Oak has tried to take its cues from its customers. “We have asked a lot of questions and listened to what our apparel clients are telling us,” said Sharf. “We have come up with solutions and closed a long list of financing deals, sometimes with companies that may not have qualified for bank loans because they did not meet all the required metrics. If we are convinced a company has what it takes to survive and grow, we will find a way to supply the capital they need.”

Part of White Oak’s edge comes from experience. Team leaders on its New York sales team including Sharf and Efron, and its Los Angeles-based executives, Clark and Earnhart, have decades of proven success in both factoring and asset-based lending as well as a long history of work- ing with the apparel industry.

White Oak has also deepened its national coverage with the addition of Bill Kearney and his team located in Atlanta, Georgia; Charlotte, North Carolina and Boston, Massachusetts. “These professionals can call on the resources of the rest of our firm which has similar expertise,” said Gino Clark. “All of us have lived and worked through other periods of economic stress and disruption, and that experience has helped guide us this time around.”

The future remains unpredictable — and rarely more so than today. “No one can say how long the pandemic will linger, how long it will take for supply chains to return to normal or what the mix of in-store and online sales will look like,’’ said Efron. “But we are confident that our apparel customers will figure out a way to get from here to there and that we will be there — right alongside them — with the innovative solutions that they need to keep growing.”

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