Financing Evolves


Economic reports about the shakiness of the economy don't always tell the whole story. While sales may look slow for the foreseeable future, there is a bright spot: Credit is abundant. And whether you're looking for a new factoring deal or investment capital, institutions are ready to compete for your business. But their risk tolerance remains dampened, and you still need to present a solid business model.

"Supply exceeds demand" in apparel financing, says Nick Susnjar, vice president of business development at Summit Financial. "If a company is well capitalized and has a lot of things going for it, money is not an object. You're going to have different factors and accounts-receivable lenders competing against each other and you'll get price compression as a result.

"It'll end up being a win situation for the potential borrower," he says.

Borrowers today are savvy and well informed, says Susnjar. "We're looking at more sophisticated and educated borrowers that have been around, and they're always trying to get the best possible deal." Fee rates are always a top concern, but Susnjar lets slip this caveat: "A good salesperson will try to divert attention [from the rates] and show [the borrower] what they're getting for the money."

Founded in 1987 and headquartered in Salt Lake City, UT, Summit Financial does the bulk of its business in the Southern California market. Susnjar calls the company more of a "deal shop than a traditional factoring house," and says it is constantly adapting to the demands of today's client. "You've got to be able to reinvent yourself on almost every transaction." That includes finding a client's "hot button" and focusing on that. "Doing this for so long, you kind of pick up on things from the start ... and try to divert attention right away and see that, while I'm sure there's going to be a price issue here, I notice the hot button is really this." Some borrowers are more concerned with credit protection; others are in need of working capital.

Whether the economy is strong or weak, a new startup with little capital will always face a challenge (See Rough Riding, p. 26). In borderline situations, Susnjar says, integrity makes it or breaks it. Solid personal credit can influence a decision. Or, in the case of someone's going out on his or her own, a good track record with another company can swing a vote. During the decision-making process, credit reporting agencies are accessed, and banks and vendors are typically contacted.

Bottom line: Is this a good time to start a business? Yes, he says, if you have some capital to get it going.

Bon Appetit

What really determines the state of the market for financing is not the availability of funds, asserts John Daly, president of CIT Commercial Services. It is the risk appetite of lenders. "It's how willing companies are to lend money into growth or turnaround situations," he says. "And I'd say there's a modest improvement in the willingness to lend this year over last year."

Last year hit banks with a large number of write-offs, and this year they are down, Daly says. "As your charge-off rates come down, you have the ability to lend a little more money."

Since the start of the fourth quarter last year, Daly has seen an increase in companies' desire for the credit protection that comes with most factoring deals, and reports signing a "tremendous amount" of new volume. The reason factoring is looking more appealing than other forms of financing is that credit losses have been particularly high during the recession of the past few years. "Companies invest a great deal of money in marketing, production and sales strategies and don't want to assume credit risk on top of all the other risks of running a business," he says. "So we've seen a noticeable uptick in the request for factoring."

But it's not just the shaky economy. Suppliers have become increasingly aware of the dangers of having too many eggs in one basket. As an example, Daly cites K-mart's bankruptcy filing and how it all but destroyed food supplier Fleming in the process.

With the dollar weakened against the euro and yen, Daly is also seeing a greater demand for export financing among textile manufacturers, especially into the Caribbean Basin. "People are looking for credit protection on those shipments because they don't have a long history with these [Caribbean] companies."

He is also seeing a fair amount of "transition financing" for companies seeking to transform from a manufacturer to an importer, and restructuring, debtor-in-possession (DIP) or exit financing for companies just filing or exiting from Chapter 11 bankruptcy. Finally, he's seeing a slight increase in prospective borrowers that used to have investment-grade credit ratings but now need an asset-based lending company.

Despite this activity, CIT must actively seek out deals. The institution focuses on direct selling, particularly cold calling. "We are aggressively representing our own interests in the marketplace," says Daly.

The Age of Information

As retailers struggle with negative comp-store sales, they face greater scrutiny by lenders, particularly regarding the flow of information, and how capable retailers are of obtaining it quickly and reliably.

Negative comp-store sales strike a blow to morale in the collateral-based realm of retail financing. "It gets [retailers] a little nervous because . [their] goods aren't selling as quickly as they did last year, so [they're] a little bit more at risk," says Jim Hogan, senior vice president of retail finance at GE Corporate Financial Services.

That doesn't necessarily mean that retailers are having their credit reeled in. What it does mean is that they face tighter monitoring and longer discussions with their lenders about waivers and overadvances. "It's a little tougher for people to get flexibility right now from their lenders," says Hogan.

As GE is primarily an asset-based lender, its "focus is on the collateral, and everything builds from that." But running a close second to collateral is a retailer's information system and its ability "to pull out very current information on the performance of its goods."

The ability of a retailer to immediately contact vendors to make adjustments in purchasing and pricing is something a financial institution wants to see. "Historically, the struggling retailer struggles because it can't work with that information quickly enough, and so it ends up with a lot of goods that are in the stores and not selling through. They haven't been nimble enough to go back to their suppliers and say, 'We need to do something before I have to take a big markdown.'"

When looking at a potential borrower, Hogan examines the retailer's information technology from a POS, ordering, distribution and sourcing standpoint. He's looking for reliability and efficiency. "There's a perception that the asset-based approach to retailing is a clamping down or heavily monitored situation," he says, "but the better the information systems, the less so. The better we feel about their systems and what information they're using to make their decisions, the more flexible we can be with an overadvance or a waiver or whatever they need."

Good systems lead to financing, and financing to good systems. Retailers are constantly upgrading their information systems, because ultimately information technology can withstand the turnover of even the best management.

"We have no problem with people buying goods," Hogan says. "Where we start to look closer is when they say: 'I need twice as much for capital expenditures as I needed last year.'"

In the current market, higher-end apparel retailers are faring better. Those targeting a mainstream customer are sticking to staples. Hogan is seeing little fashion risk today, and more focus on putting new twists on old staples, such as stain-resistant khaki.

Though he admits the retail industry is historically afflicted by chronic gloom, Hogan says no one is expecting a rosy comeback for 2003. "They are hunkering down," he says of retailers. "We don't see big plans for new store openings; we see consistent scrutiny on the existing stores."

Bottom line: Don't expect a big fall order.

Deal of the Century

David Enzer thinks the direction of financing - and the apparel industry as a whole - is headed into licensing. And he's just fine with that, because these are deals he's eager to pursue. Enzer is managing director at Century Capital, a strategic advisory firm founded by investment bankers with apparel industry backgrounds. The firm is three years old and headquartered in Los Angeles.

"There's been a flurry of M&A and licensing and development deals over the last year," says Enzer. "I'm surprised to see this kind of growth." He cites mega-discounter Target's deals with Cherokee and Mossimo, as well as swimwear company Manhattan Beachwear, which has taken on licenses for Hobie Surfside and Ocean Avenue.

"Retailers are realizing that they can source, manage and market brands in their own shops very well."

As a result, Enzer is seeing a trend in companies' raising capital in order to acquire licenses. "I think that's been a successful strategy. The reason money is flowing back into apparel is that a lot of these license deals have made it a lot easier for smaller companies to get distribution and to partner up with bigger guys."

With alliances and licenses in place, "it's a lot easier to secure financing" because of the resale value of the brands, says Enzer. He cites as an example of this type of activity Liz Claiborne, which recently bought Lucky Jeans and Juicy Couture. "A lot of people looking to put money into [apparel] companies see that there's a potential buyout or exit opportunity, just one more way to realize on their investment." This is especially the case in the junior contemporary space, which Enzer says is on fire.

Currently, Century Capital is approaching popular name brands in junior and contemporary activewear. Footwear is a particularly hot area. "I look at a lot of activewear sport lines, whether its Hurley or Smith's Sunglasses, and it wouldn't surprise me if a bigger sports name like a Nike came in and bought them or licensed them for shoes." These big players typically fail when they try to do it themselves. "They need the cool factor," he concludes.

CHRISTIAN CHENSVOLD is a Los Angeles-based freelance writer specializing in business, fashion and the luxury lifestyle. 

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