Many industries in North America—including apparel—continue to face financing challenges due in no small measure to the pullback from today’s more risk-averse national banks. This post-Covid era trend is part of the reason for an increase in distress and bankruptcy filings among retailers and wholesale distributors.
In many cases, distressed companies are operating with higher-than-optimal inventory levels—a holdover from the supply-and-demand instability that occurred during and immediately after the pandemic. The higher cost of fundamentals like labor, rent, insurance, construction, shrink/shoplifting and digital ads/customer acquisition contribute to tighter margins as well. Particularly smaller e-commerce retailers have been feeling this squeeze.
Higher demand for asset-based financing
Asset-based lenders (ABL) are helping fashion and other companies cope with such challenges. For the first quarter ended March 31, Tiger Finance, for one, provided a total of $102 million to various borrowers, including $20 million to a national retailer of women’s apparel and $40 million to another fashion retailer.
Stretch asset-based lenders like Tiger provide advances against borrowers’ working capital, machinery and equipment, fixtures, real estate and intellectual property. In Tiger’s case, that means predominately serving middle-market borrowers and private equity firms.
Borrowers in the ABL sector can include:
• pre-revenue startups
• private-equity firms looking to make strategic acquisitions
• distressed retailers in need of bridge financing
• companies in need of financing for single-asset projects
In response to higher demand, Tiger ramped up its financing platform in 2019 and has since deployed more than $400 million of capital across more than 50 deals. The platform grew 35% last year.
‘New lease on life’
Despite today’s headwinds, there is good news for the fashion industry. Not too long ago, distress was more likely to lead to liquidation. However, today’s asset-based lenders are far-better equipped to help distressed operators uncover opportunities to save jobs and get a new lease on life. Chalk it up to the ABL’s growing focus on advanced analytics and multidisciplinary collaboration specifically oriented toward such sunnier outcomes.
Typically, these projects center on isolating key drivers of distress—for example, inefficient inventory-management leading to a surfeit of slow-moving, excessively aged stock keeping units, (SKUs)—and then developing an action plan to address this, supplying the capital and, if advisable, additional consulting expertise.
Asset-based lenders occasionally purchase promising operators and then retain and team with their best in-house talent to stabilize the balance sheet. These reformed companies become attractive targets for healthy buyers looking to grow, whether in the brick-and-mortar or online channels.
In its report, The State of Fashion 2024, McKinsey & Co. noted that “the most prominent sentiment among fashion industry leaders is uncertainty, reflecting the prospect of subdued economic growth, persistent inflation and weak consumer confidence. Against this backdrop, businesses will be challenged to identify pockets of value and unlock new drivers of performance.”
But shifting consumer priorities, McKinsey added, can create opportunities for those with the right strategy. Meanwhile, the worst disruptions created by the pandemic are heading toward a resolution. In this transitionary environment, seeking and obtaining asset-based financing can be a direct path to unlocking higher value and performance, now and over the long term.
Bradley W. Snyder is an Executive Managing Director at Tiger Group and a leading corporate advisor on global business strategies in the commercial world; bsnyder@tigergroup.com
