Financing in the Age of Electronic Commerce
By Martin Efron Executive Vice President, General Manager Origination, New York, Mike Earnhart Senior Vice President, General Manager Origination, Los Angeles, White Oak Commercial Finance | Wednesday, October 6, 2021
The clothing industry was one of the early adopters of e-commerce. Even before COVID-19 hit, online retail accounted for 27% of clothing sales in the United States in 2018 and 30% in 2019. By 2020, that number has risen to 46%, with consumers largely avoiding stores for health and safety reasons, research shows. Digital Commerce 360 ââcompany. It is no exaggeration to say that e-commerce has kept the fashion industry afloat last year and this year. But e-commerce is a very different business model than brick and mortar. Instead of selling to big retailers like Walmart or Macy’s, many clothing companies sell either through platforms like Amazon and Shopify, or directly to the public through their own websites. The direct approach is attractive because it eliminates the middleman and offers the promise of greater margins. However, it also requires significant commitment and involves increased risk for apparel companies, who may think of it as operating without a net. Apparel manufacturers who once received orders, and with them a measurable degree of certainty from retailers, must now assess and make their own real-time decisions about demand. Are they going to make enough of the product? Will they end up with unsold inventory? The risks and rewards are higher.
The same is true on the financial side. Because there are no receivables, lenders like White Oak have had to switch to a model where they provide more asset-based loans against inventory and other forms of collateral. It requires a thorough understanding of a client’s business and leadership team and feeling comfortable with the risks that are being taken on. White Oak is also able to provide advice on digital transformation drawing on its know-how and commitment in this area.
Additionally, White Oak has had to be creative about the types of collateral it assesses when making lending decisions. Successful websites can have collateral value, as well as brand names, even brand names of companies that have gone bankrupt. You can’t manage these assets like you would a sweater; they fall under the realm of intellectual property, but in the digital age, intellectual property is a critical part of the value equation. Lending against so-called intangible assets is a relatively recent phenomenon, but as these assets become a larger part of a company’s valuations, this type of financing may become more important. In all cases, and with all types of guarantees, White Oak’s goal is the same: to optimize the amount of available working capital that clients can use to manage their operations.
Another big impact online retailing has made is that it has made everything faster. Gone are the days when the fashion world had predictable seasons. Today, if a pop star or Instagram influencer is pictured wearing a signature fashion item, it can become an overnight sensation, forcing the clothing maker to ramp up production. Likewise, new fashion trends from working from home to fit the distant but professional crowd required quick pivots. The shorter the fashion cycle, the greater the risk that a clothing manufacturer will get stuck with unsold inventory. The bottom line: Manufacturers and their lenders need to be very flexible.
It should be emphasized that while e-commerce grows, traditional in-store retailing remains a huge business. In August, clothing sales were up 43% from a year ago, driven by strong increases in online and in-store sales, according to Retail Dive. For in-store sales, factoring remains a common form of financing for the same reasons it has historically benefited the clothing industry: it provides a quick source of money, it can be easily adapted to businesses of all kinds. sizes, it helps businesses cope with the swings, and it outsources credit checking and debt collection tasks to those with the expertise to handle it. Our customers continue to ship products to stores, and we still do significant factoring to fund these transactions. Factoring and receivables financing remains a reliable form of working capital that can help businesses in many distribution models, and it continues to keep pace with a rapidly changing market.