As fashion suppliers’ and retailers’ cash flow tightens courtesy of COVID-19, some financing methods are seeing an uptick in interest.
In a typical payment timeframe, factories get paid a month or more after goods have been shipped. But with transportation delays, order cancellations and delayed payment terms, this process has been disrupted.
“There’s so much uncertainty as far as timing, and with the lack of activity for so many months, cash flow is the most important issue that [companies] have to deal with,” said Carol Lapidus, partner and consumer products leader at auditing and consulting firm RSM U.S. “And they’re looking at various options, which they might have looked at before, and they might not have looked at in the past, to try to face it head on.”
All parties in the supply chain are trying to stay afloat. But some may have more bargaining power than others. Factories typically need to be more flexible on payment terms to maintain business rather than losing a retailer to a competitor.
For factories that do seek to be paid earlier, it may not be financially feasible for their buyers to front them payments ahead of shipments, such as at the point of order or production. Lapidus noted that a U.S. brand buying from an overseas factory could wait months before they see the retail revenues from a purchase order.
Early payments can also come with risks, since companies will have little recourse in the case of production issues. “Cash in advance deposits are usually not a good option,” said Paul Schuldiner, executive vice president and division manager for Rosenthal Trade Capital at Rosenthal & Rosenthal. “It’s a good option for the supplier overseas, not a great option for the U.S. importer or distributor.”
Even if buyers are not able to support factories by moving up direct payments, there are still numerous options for suppliers to get the funds they need.
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Asset-based lending
One financing mechanism that has seen a surge of interest due to the coronavirus pandemic is factoring. In this agreement, a factor essentially purchases the invoice from a supplier, and then the buyer pays the factor. This gives the supplier money immediately rather than waiting for the buyer to approve their payment.
While factoring comes into play at the time of invoice, suppliers are also increasingly leveraging purchase order financing, which allows them to receive payment up front from a lender for a confirmed order.
Another option that Schuldiner has seen leveraged more as a result of COVID is a letter of credit. These documents offer a guarantee from a bank or financial institution that goods will be paid for by the buyer. Along with protecting the exporter, letters of credit also give the supplier the opportunity to potentially borrow against the assured payment.
Once the goods are en route from the exporter, there is also the possibility for them to do cash against documents financing. Schuldiner has also seen an uptick in requests for this type of financing, which enables suppliers to be paid while merchandise is in transit.
In some cases, to get factories funds faster, a buyer can leverage reverse factoring. In this model, a bank will pay an invoice to the supplier faster at a discounted rate. However, the availability of this option can depend on the strength of the factory.
Asset-based or alternative lending often ends up being more expensive than other financing methods. But that doesn’t mean that it should be discounted.
“It’s making sure you have adequate liquidity that drives sales and profits, albeit it might be at a higher finance cost, sometimes that’s not such a bad thing, as opposed to if you don’t have the liquidity and availability, you might have a borrowing rate that might be lower than alternative financing, but at the same time, you can’t grow and scale your business so you’re missing out on profit opportunities and growth opportunities,” said Schuldiner.
Gary Schneider, vice president of financial services for Infor Supply Chain, noted that factors also tend to be nimbler, and more open to working with smaller companies in different global markets.
The cost of factoring also needs to be weighed against peace of mind. “There is a premium to pay, but at least you have security that you will get paid by the factor [if] God forbid the company goes bankrupt,” said Joseph Ferrone, partner at Mazars USA.
As some brands seek to extend terms, bigger retailers may opt to do self-financing. Instead of a supplier using factoring to get their invoice paid sooner, a buyer may offer them the option to get paid faster at a discount. Conversely, if the supplier is willing to wait, they can get paid in full. Ferrone has also seen companies extend payment terms but offer a premium to their suppliers in exchange for the delay.
Schneider has witnessed some brands adding self-funded programs during COVID-19, while others have chosen to bring in a third party to conserve their own cash during this time.
For a supplier, picking between factoring and a retailer’s self-funding comes down to math, according to Lapidus, including whether the discount for speedier payment is small enough compared to a factor’s interest rates.
Financial strength
Due to COVID-19, there is a lot more scrutiny over companies’ financial health, including from their supply chain partners.
“Your relationship is as good as your financials are,” said Ferrone. “I think you’re still going to have to have a strong balance sheet, you’re still going to have to have a strong company for the factories to still rely on you.”
If a retailer is in an uncertain financial state, lenders might raise rates or even decline to take on the risk of working with their suppliers.
When factors and asset-based lenders wouldn’t finance against receivables from a retailer in bankruptcy, Lapidus advised supplier clients to seek money up front before shipping goods. “We have been talking to our clients about reaching out to these retailers that they’re selling to that have a lot of financial uncertainties, saying, ‘You need to get paid up front,’” she said. “Because it’s just too much of a risk, and right now there’s so much risk in the industry that you don’t need any more risk as far as having to worry that you’re not going to get paid from the retailer.”
Meanwhile, suppliers are keeping tabs on how retailers are doing. If a buyer is suddenly not honoring payment terms, it might be time to cut them off. “Once you see a little bit of a blip in what should be on a normal terms and payments, I think that’s the key to monitoring it and making sure you don’t get burnt down the road,” said Ferrone.
One thing that can help assuage concerns is history.
Infor uses analytics to track the time it takes from invoice creation to approval and payment. By sharing this with banks and lending institutions, this data gives added insight into the likelihood of payment or disruptions such as order cancellations.
The firm’s network also verifies purchase orders, giving suppliers extra credibility as they apply for asset-based lending. Retailers can also put their weight behind a supplier to help them receive financing. “As a major retailer or brand, my credit worthiness is going to be stronger than this smaller supplier,” said Bryan Nella, head of content and thought leadership for Infor’s supply chain financing team. “So being able to step in and ensure that that supplier can get access to capital based on my credit rating and getting it within days is essential.”
Mutually beneficial financing solutions are just another example of how buyers are rethinking their relationships with their suppliers. Amid extended payment terms, some companies are showing they value their partners by finding creative ways to support their factories.
“They know that their brand is only as strong as the quality of their goods, and the quality of their goods is only as strong as the quality of their suppliers,” said Schneider.