E-commerce is not just changing the way customers shop — it is also shifting how apparel companies finance their operations. Recognizing the value of a strong e-commerce brand and other types of intellectual property (IP), creative lenders are now broadening their approaches to asset-based lending to allow companies to convert intangible assets into effective borrowing power.
For decades, factoring has been the apparel industry’s go-to option for quick access to working capital. This traditional mode of funding allows companies to sell their accounts receivable in order to collect cash immediately to purchase supplies, restock inventory, meet debt obligations or fund growth. For importers and wholesalers, this time-tested financial tool has been essential in offering longer payment terms to customers and cover seasonal cashflow needs.
When it comes to financing e-commerce operations, however, a different approach is needed. As online sales account for an ever-growing share of the apparel market, the lines between manufacturers, importers and retailers are blurring. Because companies are increasingly selling their goods directly to consumers, receivables are becoming less of an option for apparel makers to use as collateral. In this case, it becomes all about inventory.
This is where things get tricky — and more importantly, risky — for apparel makers and lenders alike.
Typically, in a traditional brick-and-mortar business model, apparel makers receive orders from retailers, which provides them with a certain degree of predictability. These accounts receivable are an asset to the company that serve as an important source of working capital, when needed, through factoring and invoice discounting.
With e-commerce, apparel firms sell either through platforms like Amazon and Shopify and/or directly to consumers through their own websites. This direct approach is appealing because it cuts out the intermediary and offers the promise of bigger margins. However, it also involves increased risks as companies must make their own, real-time decisions about supply and demand. Essentially, they are operating without a net.
The same uncertainty holds true on the financing side. If apparel companies cannot borrow against the value of their receivables, what can they use as collateral to back their loans? The answer may require a new way of looking at their assets.
When people think of asset-based lending (ABL), they often think of borrowing against physical assets like real estate, equipment, accounts receivable or product inventory. Today, many companies with an established or growing direct-to-consumer, e-commerce business model may borrow against their IP or “creations of the mind” which can include everything from technological inventions to patented processes to online brands and websites. While not something you can easily see and touch, these assets can hold tremendous value. In turn, creative lenders are now allowing companies the flexibility to borrow against them. In fact, in the digital era, IP is a critical piece of the value equation.
White Oak Commercial Finance is experienced in funding businesses without traditional assets, including a recent $50 million credit facility provided to a leading digital media company whose revenue stream came from a combination of both advertising and online services. The value of its burgeoning brand in an expanding digital media ecosystem contributed to its net worth in the marketplace.
In addition to your brand, your intellectual property can also include the way that you distribute your goods, such as through an e-commerce website. Successful websites with large retail audiences can maintain value as collateral even when the companies themselves have gone out of business.
This was the case with a deal White Oak financed in late 2020, involving the acquisition of two well-known women’s apparel brands and their related IP from a retailer that was undergoing bankruptcy proceedings. We were able to provide the buyer with an asset-based loan facility that included traditional and non-traditional assets, allowing them to proceed with plans to incorporate and promote the legacy brands and increase their global e-commerce footprint.
While many traditional banks shy away from the uncertainty of these types of transactions, there are many alternative lenders skilled at recognizing the value of the IP behind successful e-commerce brands who are willing to be flexible and creative in structuring financing solutions to support them. With our long history in the apparel industry, we have in-depth understanding of the nuances of the market (both in-store and online) and are well positioned to meet the funding needed by these digitally focused companies to accomplish their unique objectives.
Today’s apparel industry is filled with both increasing complexity and opportunity posed by the age of e-commerce. Succeeding in such a rapidly evolving marketplace requires unprecedented nimbleness and adaptation by both apparel companies and their lenders.
Martin Efron is managing director of portfolio management at White Oak Commercial Finance, an affiliate of White Oak Global Advisors.
