Garment and textile businesses are among the most frequent customers of debtor or receivables finance

Garment and textile businesses are among the most frequent customers of debtor or receivables finance

Specialised debtor finance products for the garment industry is a niche area that continues to grow – with services increasingly being offered worldwide.

"We see entry level businesses who need as little as AUD50,000 [US$38,000] and larger businesses who need upwards of AUD50m, but the challenge is the same for both – how to keep trading when the cash cycle is so long in the apparel trade," Craig Michie, head of trade finance at Australasian debtor finance company Scottish Pacific, tells just-style.

A combination of debtor finance and trade finance products can be a solution for addressing the significant demand for cash within these businesses. Invoice discounting or factoring solutions including full debtor administration services are increasingly popular, reversing the trend of a few years ago, Michie says.

"There is no critical threshold for those; it depends where a business is in terms of maturity in the business cycle. For younger businesses, for example, it may be they want debtor administration – we send out monthly statements for them, approve credit limits and help with bad debt protection. If you are just starting out, this is the time you can least afford to take a hit." 

Garment and textile businesses are among the most frequent customers of debtor or receivables finance, the common practice of acquiring short-term cash loans or 'working capital' by using accounts receivable as collateral.

Factoring and invoice discounting

Although factoring and invoice discounting are often lumped together, there is a subtle difference.

  • In a factoring arrangement, a provider purchases the accounts receivable and provides a cash advance to a business as a percentage (that can range from 70-95%) of their accounts receivable and the balance, minus the factoring fee, once the invoice has been settled.
  • In an invoice discounting arrangement, a provider provides a revolving line of finance to a business, calculated as a percentage of their accounts receivable. Factoring is an agreement commonly disclosed to debtors, while invoice discounting is often not. 

Factors Chain International (FCI), an Amsterdam and Brussels-based global organisation of independent companies, estimates the turnover of the total global factoring market (intended as all kinds of debtor finance) reached EUR2.37 trillion in 2015, a 1.14% increase on the previous year and consistent with a pattern of growth since the year 2000 that has seen FCI members' volumes increase six-fold.

According to the latest FCI figures, Europe continued to dominate global factoring volumes, with more than 63% of the market share, followed by Asia, which accounted for 24%. The Americas made up just 8% of factoring volumes while Australasia accounted for 1% and Africa for less than 1%, according to the FCI.

More than 90% of the factoring industry in Europe is comprised of bank-owned subsidiaries and the industry is controlled mostly in Asia by banks.

The involvement of the banking sector has been a key element in the growth of factoring in these two regions, while other regions, such as the US, where factoring is largely unregulated, lag behind, explains a note from the FCI. Developed European countries are those with the highest factoring turnover, led by the UK, France, Germany and Italy respectively.

Tangible difference

Western Australia-based John Perpignani, director of the Neo Shoe Corporation, says debtor finance has made a tangible difference to doing business.

"If everyone paid their bills in 30 days then we wouldn't be having a conversation about this and companies like Scottish Pacific wouldn't be in business," he says, adding: "I have pushed bankers for more than 25 years to come up with a product like this, but they were only ever interested in real estate as collateral.

"Now, I plug the costs associated with the debtor finance into my business model...but it only works if there are margins in the product. I am effectively sharing these margins with [my debtor finance provider]."

Risk management is fundamental to success, particularly when cross-border trade is concerned.

Michie cites the example of the South Korea-owned Hanjin Shipping Company, whose recent financial woes have left vessels full of cargo stranded around the world – including clothing and textiles.

"New entrants to the garment business particularly can sometimes expose themselves to risk [in cross border transactions] without even realising it, and that is certainly something we consider and can help with," he says. 

That said, "the money is not free and it doesn't come risk free. If at the end of 90 days the client doesn't pay as they are supposed to, I own the debt...recourse is on me. If I have a client who is consistently slow in paying or who doesn't pay, then obviously I have to put a mechanism in place to make them faster...or stop selling them shoes," says Perpignani.

Click on the following links to read other articles on supply chain finance:

Why traditional financing is a misfit for fast fashion

How planning is key to an effective inventory strategy

Software for financial planning and operations