Flexibility in supply chain financing is key for fast fashion businesses

Flexibility in supply chain financing is key for fast fashion businesses

Slow and cumbersome traditional financing does not fit the needs of dynamic, small-and-medium-sized enterprises (SMEs) in today's fast fashion-driven garment industry.

Rather, the trend is more towards simplified trade financing, says Christoph Rieche, CEO of London-based finance company iwoca.

"[We offer for example] one type of credit facility that gives control to the business owner instead of offering hundreds of different products with complex structures, allowing businesses to draw down instantly as they need the funds, with no fees or minimum terms and no need for assets as security," he explains.

Using inventory as security is not an option for many businesses faced with a quick turnover of product. "Many fashion retailers are only holding stock for a short time and are frequently changing suppliers – making it difficult to use the inventory as security against a loan," Rieche says.

Flexibility is key

Flexibility in supply chain financing for these businesses is key. Some SMEs have "very short term cash flow gaps of a few days or weeks. For instance, some of our fast-moving fashion clients only use iwoca for a couple of days at a time to bridge short-term gaps, while others take the funds for up to a year to fund refurbishments or other growth investments," he says.

The company has already lent more than GBP140m (US$169m) to thousands of businesses in the UK, according to Rieche, showing a huge demand for such products. 

James Sinclair, inventory and stock specialist at London-based Trade Finance Global, a company assisting SMEs to access finance via banks or alternative sources of funding, says companies like iwoca have succeeded in catering to a new and growing band of SMEs.

"iwoca recently increased their funding lines to e-commerce companies – for example fashion retailers selling online – and those with a good history of sales to provide secured and non-secured funding, particularly in the seasonal, fashion and inventory space," Sinclair told just-style.

He says supply chain finance has been embraced as "the new kid on the block" after the 2008 financial crisis led the majority of mainstream banks to turn their back on SMEs that were considered high risk. 

Moreover, he stresses that supply chain finance is often user-friendly and that simplicity works best: "Many funders [alternative finance institutions to banks] steer clear of the complexities of trade finance." 

Regulations reduce risk

Sinclair says regulations based on Basel II – the Basel Committee on Banking Supervision's standards requiring financial institutions to reserve cash to cover risks – have further tightened SME funding.

This in turn has created opportunities for alternative financial services to fill a gap for cash-strapped businesses, "not only by taking a small slice of the SMEs that can no longer access bank funding, but by also educating SMEs that they can access debt funding quickly to service working capital needs," he notes.  

And it is not as if SMEs are not getting bank finance at all. The Brussels-based global banking trade association World Savings and Retail Banking Institute (WSBI) - European Savings and Retail Banking Group (ESBG) secretariat said in a note in May this year that "for SMEs, bank lending remains, and will remain, front and centre in the European Union as well as in America."

Moreover, the European Commission's 'Survey on the Access to Finance of Enterprises' analytical report 2015 noted that bank loans were used by 19% of EU SMEs of all kinds between April and September 2015, up from 13% in the same period in 2014. 

Plan ahead

Deciding when to obtain a loan is important. Rieche advises garment SMEs to "look at the total cost of finance, rather than the headline interest rate" because some products can be "deceptively expensive for short-term gaps as they include up-front fees that are due even if you pay back after a couple of days".

It always pays to plan ahead rather than leaving things to the last minute, he notes. "Cash flow is king for SMEs in the apparel sector, managing working capital is key to success," Sinclair agrees.  Moreover, given the seasonal nature of fashion, "meticulous planning and attention to detail, particularly around shipping, invoices and logistics are key," he adds. 

Managing risk with regards to adverse foreign exchange movements is also not easy for SMEs without expert help. With successful planning, supported by a good business funding expert, a company can "secure future revenues [and] mitigate against unforeseen circumstances," Sinclair adds. 

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

Debtor finance products a growing niche in fashion

How planning is key to an effective inventory strategy

Software for financial planning and operations