Like any other business, fashion industry companies, as well as young designers, need financial resources to develop their projects. In this short article, we will look at the main ways to attract financing with a focus on the fashion business.
In General Terms
It is generally accepted that all sources of financing are divided into two types: (1) debt financing (debt) and (2) raising funds for equity.
(1) Debt Ffinancing
Debt financing refers to obtaining loans and borrowings. In this case, the investor (creditor) only provides funds, but does not become a participant in the project and does not claim a share in the profits. The creditor's profitability is limited to the interest on the debt. Even if the project succeeds, the investor will only receive interest, which is not related to the size of the net profit. Debt financing can be obtained from banks (loans) or from third parties (borrowings).
(2) Equity Capital
If a project raises funds through equity, the investor becomes a party to the project and has the right to claim a share of the net profit. In Russian reality, this is done by granting the investor a stake (in an LLC) or shares (in a JSC). For example, an investor may purchase a 10% stake in an operating LLC for 1 million rubles, which will be used to purchase new equipment or materials. Before entering a project, the investor evaluates the value of the business and their potential return. The evaluation of young projects is inevitably speculative. The assessment is positively influenced by the large market potential, the unique product, the team's experience, the availability of assets, and other factors.
Bank Loans
Traditionally, banks play the role of lenders in the debt financing market. Banks primarily focus on the repayment of the principal amount of the loan and interest. To ensure their security, banks seek to obtain some form of collateral to limit their losses in case of default.
Personal guarantee from the project founder and property collateral are among the most common forms of collateral. In the fashion industry, collateral can include intangible assets (trade marks) and claims against third parties (accounts receivable).
Investors
In addition to banks, which focus on lending, there may also be individuals among financiers who are willing to invest in equity. These financiers can be of various types, including investment funds, venture capitalists, business angels, and even family and friends.
It may seem that financing deals for companies in the fashion industry are not common. However, this is not the case. Just consider the fashion brands that are owned by funds, such as Dr. Martens, Jimmy Choo, Reiss, and Canada Goose.
For small companies and just beginning designers, it will be relevant, for example, to seek investments from business angels. These are wealthy citizens who would like to invest in the industry they are interested in. As a rule, these are people who are familiar with the industry and can provide direct support in business development.
The best investors will be able to offer you the so-called "smart money", which implies not just investments, but also missing competencies, connections, and resources. For example, Burda magazine offers its startups advertising space on the pages of their magazines.
Financing Under the Assignment of Monetary Claims
Rights of claim to third parties can act not only as a subject of pledge, but also as an independent object of sale. This is especially relevant for companies that are actively engaged in B2B trade: for example, a fashion house regularly supplies its clothes worth 500,000 RUB to a multi-brand boutique on the terms of payment within 60 days. In this case, the fashion house will have a right of claim to the boutique for the specified amount. Instead of waiting for payment, the supplier can assign its claim to a third party. Such a third party, of course, will want to purchase the claim only at a discount, for example, for 480,000 RUB. For the supplier, there are advantages: instead of waiting for 60 days for payment, they can receive part of the amount immediately. This is especially relevant for companies that need money to replenish their working capital (paying employees' salaries, ordering new products, etc.).
This transaction is known as factoring, and the person who purchases the claim is called a factor. In the Russian market, factoring services are mainly provided by banks, but there are also specialized companies, such as Life Factoring.
Crowdfunding
Finally, it is worth mentioning the relatively new method of financing, crowdfunding. The essence of crowdfunding is that businesses can raise funding in "small pieces" from a large number of internet users. Funding can be provided either on a non-refundable basis (i.e., as a gift) or in exchange for a small share in the project. In Russia, there is a platform called StartTrack, where promising projects from various industries are looking for like-minded individuals. There is also an interesting platform called I AM LA MODE in France, which is specifically designed for young designers. When seeking this type of funding, it is important to try to connect with your potential investor pool on a personal level, as many investors are motivated by a desire to make a positive impact rather than solely seeking financial gain.
Every successful project at some point in its development needs to consider funding. While it is important not to be afraid of investors, it is crucial to understand their mindset and read the documents carefully before signing. In the meantime, you can improve your financial planning skills: the article "Fashion Business Financial Planning Tips for 2015" provides some useful practical tips, and the article "Your 2015 Fashion Business Financial Plan Checklist" ensures that you don't miss any important details when it comes to financial planning.