Raising Finance in Fashion — The Fashion Law Edit

Assessing how much the fashion industry is worth is a difficult task because different studies either include high street retailers or not. The British Council in collaboration with Oxford Economics, estimated that the fashion industry makes up 1.7% of the UK’s GDP including retail distribution, and 0.5% excluding retail distribution. Including high street retail the global industry has been calculated as being worth US$ 1.2 trillion to US$ 3 trillion. The latter figures are astounding considering the UK’s GDP for 2015 was US$ 2.9 trillion.

So how can new fashion businesses raise money in order to break into this large market?

Private Equity Firms

Private equity is a loose term for capital that is not listed on a public stock exchange, and a private equity firm specialises in directly investing in private companies or buying out publically listed companies thereby taking them off the stock exchange. Private equity is a general term which includes private equity firms as well as venture capitalist firms discussed below and other institutional investors. Examples of designer brands that have been funded through private equity include Jimmy Choo, Kurt Geiger and Dr Martens.

In essence private equity firms value innovation and are always on the lookout for the next big idea. They like to invest in a company they think has potential. The end plan is to sell their stake when the company gets big, and typically look for a return of investment of 3 to 5 times the initial investment. This is a draw back because it tends towards short-term to medium-term thinking, and such investments are not necessarily seen as a 10-year position. Nevertheless private equity can be a very useful tool to sling-shot a company to a globally recognisable brand, as the above names prove.

Image: Courtesy of Phoenix Equity Partners

Given the target return on investment and exit strategy, the future performance of the company is the be all and end all for private equity when considering which fashion brands to invest in. They look for a solid management team ideally with experience, and like companies that offer something a bit different. The financial fundamentals are also important, as well as having the intellectual property already protected. Other aspects including the potential to export to other markets are key considerations. Therefore funding from a private equity firm is more suited for the fashion company which already has a number of years trading under its belt and has had some limited market success.

Venture capitalist firm

A venture capitalist firm is a class of private equity that specialises in investing in start-ups and younger companies. They do so using the general model of a private equity firm, i.e. looking for a large return of investment and taking a position of 3 to 5 years, although they tend to be a bit more flexible on their exit strategies. However given they invest in start-ups the risk to them is greater, therefore they tend to take greater control, including in operational decision-making, then a typical private equity firm would.

Commercial loans

When offering a business loan the key consideration for a bank is whether the loan plus interest can be repaid. As they are not looking for a return of investment of up to 500% a commercial loan is often more realistic, particularly for the young start-up. However this is not to say obtaining a business loan is easy, far from it. Although there is no shortage of retail banks and financial firms offering loans, the criteria are often the same. Lenders want to see a well thought out and costed business plan as well as being satisfied that the people running the business are reliable and trustworthy. Many require trading of at least 12 to 24 months, though this is not necessarily the case across the board.

A loan is not of course free cash, and a business should only take one out if it is confident in its plan to repay it and its general future. If it is confident and the extra capital is needed for expansion, a business loan is a time tested tool to leverage a company to the next level.

Crowdfunding

Crowdfunding first started hitting the public consciousness in 2012-2013, though it existed before, and it is an example of how the internet can break down commercial barriers. Crowdfunding was invented so that businesses that would normally struggle to obtain a loan could get the funding they need. The idea is a business registers on a crowdfunding platform and then members of the public can choose to invest in it or not. There are two main models, debt crowdfunding where investors receive their money back with interest, or equity crowdfunding where investors obtain shares in the company.

Crowdfunding is not a mature market and therefore there can be a lack of quality on both the supply and demand side. Nevertheless it has helped many good business ideas, and there are crowdfunding platforms which cater only to the fashion industry such as:

Factoring

Fashion is a cash intensive business. Factoring is different from the previous examples in that it is not an investment or a loan. Factoring is where a business sells its invoices (accounts receivable) to a third party, called a factor. For example a fashion business delivers a product and issues an invoice. The factor buys the right to collect on that invoice by agreeing to pay the fashion business the face value of the invoice minus a discount, usually around 5%. The factor then pays up to 80% of the face value immediately and pays the balance less the discount when the end customer pays. The fashion business does therefore take a haircut on the invoice, however in an industry with complicated supply-chains and where long receivables prevail, factoring is often necessary to release cash into the business and help finance the enterprise.

Many different avenues for finance exist for budding and established fashion businesses to break out into the next level. As with everything in business, which method is right depends on the business's particular needs and objectives.