3. How Do You Finance Your Fashion Business? | #BoFEducation

[Music] so part three of the business of fashion basics is how do i finance my fashion business financing a business in fashion is a really really critical piece of the puzzle to understand as i said in part one you know you need capital to make these things work the question is where do i get that capital from and why is it so important to running a business in order to to kind of put things into perspective what i'd like you to do is just think about a theoretical season say and this is really based around the first season for a br for a new fashion business that's just starting out as we know fashion typically happens on a six-month cycle between when a collection is developed and when it actually hits the shop floor so the question is what are all the things that need to happen between the design of the collection and delivering the collection in order to finance it and the truth is in a fashion business you will incur many many many costs before you see any revenue and this is probably the biggest challenge of working in the fashion business in the first season you might be thinking about design or researching some fabrics and that doesn't necessarily cost you that much it's mostly your time and you know researching fabrics is also not really a costly thing to do but very soon as you've decided on what your fabrics are and you start developing samples you'll start incurring costs then you need to somehow sell the collection right you need to get away find a way to get that collection in front of people's eyes and build awareness about that collection so you might do a show or a presentation or you know hire a showroom or be part of a showroom and you have to pay some fees and again you're going to incur costs and at this point you still haven't earned any revenue in that sales process you will hopefully find some buyers and those buyers if they have confidence in you and they like what you have to offer they might place an order but you're still not getting any money because then you need to take that order and you need to go finance the materials to go deliver that order so you'll have to you know develop your production plan source more fabrics secure a factory to make everything for you and by the end of the three months after you started your design process you still haven't earned any money all you've done is spend money and then finally when you deliver your collection a few months later if you're lucky the retailer will pay you on time and you'll finally earn some money to put into the bank and what you'll see is throughout that process you will be spending money the whole time and even at the end of it you still are negative you still have less money in the bank than you started with and that's just the first six months i think of cash flow as kind of like a bathtub why is managing cash flow so important in a fashion business think of cash flow in a fashion business as being like water in a bathtub cash flows out a lot more quickly than it comes in imagine that the water in the tub is the investment or loans you have raised to start the business the drain is where your costs go out of the business and the faucet is where the water or revenue comes in as soon as you start operating your business the drain opens and cash begins to flow out you need to order fabric to make your samples you need to find a way to present and sell your collection you need to manufacture the orders that come in and you will need to pay your team and because your collections will only arrive in stores six months later you will have to pay for all of this in advance before the stores pay you each season as your business grows you will need more and more cash or working capital to keep your business growing because as your sales increase your upfront costs will continue to grow as well and the money you earned from previous collections will not be enough to finance your growth this is why managing cash flow is so important in a fashion business so what are the kinds of things you can do to slow the drain and increase the faucet sometimes you can get fabric sponsored people might donate fabrics to you or you might develop a relationship with a textile mill or something and they really believe and are excited about what you're doing so they might give you some fabrics to work with on your samples when you do your show or presentation you might be able to get an award you might be able to get some kind of income or sponsor to help finance your show a presentation that's already turning on the faucet because someone's going to give you a space or give you some money to help put on your show when you sell your collection you can also ask for a deposit a lot of designers are really scared to ask for deposits because they're like you know the retailers they don't offer it to you they don't say hey you know peter i'd love to i'd love to give you some some money up front but if your collection is in demand and if you're dealing with a reputable retailer and if they really believe in what you're doing then i believe that they should pay you a deposit and i've seen some really really talented designers bootstrap and finance their businesses because they were really smart about asking for deposits up front what is the right deposit 30 percent maybe up to 50 percent if you're really really lucky and really forceful and you're dealing with a retailer who's really believing in you but the more money you can get up front the less likelihood your bathtub is going to run out of water and then it's also thinking about payment terms so the other thing to negotiate with suppliers is how quickly they pay you some designers are so bold as to ask for cash on delivery which means as soon as the product is delivered to this the store you know they are paid i've seen many designers over many many years who are not paid by their suppliers for 60 90 180 days and it really throws the business off kilter so you need to be really clear with your retail partners your wholesale partners about your payment terms but even if you do all of that you know the bathtub still needs to be filled at the beginning even if you've done all those really smart things to finance your business and you slow the cash drain and increase the faucet you still need money to finance your business and that's why you need to think about raising financing where can i get financing from what are the sources of income available to a designer as they're thinking about getting financing and what are the different types of financing available it roughly falls into three buckets the first bucket is income which is money you earn for doing things the second bucket is equity which is basically selling shares in your business to other parties and the third bucket is debt which is basically a loan or a line of credit where you have to you get money in from someone and you have to pay them back and all three different sources of financing come with different pros and cons let's talk about income first income can come from a variety of sources but primarily it might come from awards and competitions so things like the lvmh prize or the andam prize or the vogue fashion fund you know there's one in the uk there's one in the u.s there's one in india these kinds of awards exist all over the world and basically you're getting money into your business because of the potential that you have and because of the vision that you're able to sell to the people making the decisions about who gets the prize so again your business plan can come in very handy because when someone comes up to you and says what are you trying to do what's tell me about what you're doing or tell me about your collection you can really help to paint a picture of what makes that collection unique the pros of this is that you don't have to pay it back once you get award money it goes straight into your bank and you don't have to return it to anyone you're not giving away any equity in your business winning these awards can help build your profile and can give you credibility in the market the cons with awards is there's no guarantee you're going to win an award they're very very competitive and there's a limited pool of money available and the competition also may require you to give some of your time so when you win one of these prizes the organizations even just applying for these prizes can be time consuming and once you've won the prize you have to continue to give your time and every time you spend doing an interview or going to a dinner or meeting with someone who's affiliated with the organization giving the prize can be a drain on your time and it's less time that you can spend on your business but all in all i'd say awards are a great way if you can win an award and if you have enough talent and potential to win awards you should definitely do it you just can't you can't depend on the fact that it's gonna happen you have to treat it more like a windfall so winning awards or competitions is not a really stable or guaranteed way of financing a business if you can win an award then fantastic but you can't rely on it the second way you can earn income is through consulting or providing advice or services to other organizations in exchange for a fee many many young designers are often approached by large companies or organizations who want a little bit of cool factor who want something that they can't do internally in their organization you'll see other designers who are consulting without using their name and they're doing it kind of behind the scenes there's lots of ways that these can be structured the pros is that this can give you regular income and in many cases by working with some of these organizations you can learn you build experience and you really start to see how a real fashion business works it can build your reputation and give you credibility in the market however the more time you spend on other people's businesses and on consulting the less time you're going to spend on your own business and i can't emphasize enough how much work it is to build a fashion business so i have seen certain situations where designers over extend themselves with the objective of financing their business they end up spending so much time on other businesses that their business is the one that suffers and if you're doing consulting in the first place to finance your business then don't forget that that's your priority so these things need to be structured very very carefully and you need to make sure that you're being really clear about what the time commitment is how they're going to use your name if at all and what your remuneration is going to be there was one designer i knew who did a series of dresses from a major major international high street retailer and i think they must have produced 40 or 50 000 of these dresses and he got paid less than 10 000 pounds and there's nothing that makes me more sad because i think if you get the right advice and you get the right direction when you're going into some of these arrangements you must ensure you're getting paid fairly for the time that you put in otherwise it's not worth it then you have the two other types of financing available equity and debt and we should spend a little bit of time talking about the difference between equity and debt because you'll hear these words thrown around a lot but oftentimes it's not clear what they mean equity investors provide cash to invest in your business and when you take on an investment from an equity investor they are basically becoming part owners of your business if before the investment you owned 100 of your business after the investment you will own less than 100 of your business and that means inevitably that you'll have to share some decision making with that investor equity investors invest in your business with the hope that your business will grow and that they'll have a positive return on their investment based on this growth and shared profits and upside the best equity investors will be the ones who can offer you more than money they can offer you what some people call smart money which is money that comes with expertise contacts and other types of advice that can help you build your business debt on the other hand is a loan you're required to pay back the loan just like you would on a mortgage there will be a defined interest rate and a defined schedule for returning that capital that you borrowed to the person who or company that gave you the loan people who give you a loan won't tend to get actively involved in your business they're mostly concerned with getting paid back the money that they've loaned to you with interest they're doing it as a part of a way of earning a return on the capital that they have taking on debt and this is really important means that you'll be taking on additional cash outflow on your business so in addition to all of those other expenses that we just discussed in the bathtub you'll get a bunch of money in the in the bathtub from the investor but every month part of that money will have to go out to pay back the loan it tends to be quite hard for a startup business to get a loan because what they'll be looking for is a business that has a good credit rating and has a predictable cash flow but some young designers are able to get loans on the basis of a good relationship with a bank manager or their parents good relationship with a bank manager you just have to know that taking on a loan means paying it back and that's an additional burden for the business to bear in the early stages so where might you get equity investment from one of the most easy paths for some people is to get investment from friends or family the pros of this is of course if there's people who are going to believe in you in the world it might be the people who know you the best it might be the people who've seen you toil and struggle away in fashion school and have this like passion and commitment to what you're doing for a very long time and they tend to be quite lenient as investors they're not looking for a return on their investment immediately they might have a much longer time horizon the cons with this of course taking money from family is that the pool of money available is usually limited and it runs out fast and taking on money from friends and family can come with other kinds of pressure so it might be that they loan you the money but when people you know and love invest in your business it's a different kind of expectation if you lose the money there's also relationships at stake so if you're going to take money from people you know understand that that basically means you're going into business with them and your personal and professional relationships will become intertwined and that can be very challenging to manage the other places you can look is more professional investors and sometimes these are called angel investors these are people who have um often you know wealthy people who have built and amassed a fortune and who are interested in investing in fashion industry or fashion startups these tend to be very well funded backers they can give you credibility you know someone with a very good reputation invest in your business that can add a halo to your business if andrew rosen invests in proenza schooler then that means he sees potential and pro and schooler because he's a great investor and he's got a good track record and as i said some of these investors can come with expertise you may also have heard that some of the big luxury groups like caring and lvmh have been investing in young fashion businesses those kinds of investors obviously have great expertise to offer and those are what you might call a strategic investor or an institutional investor so all of these kinds of external financers or investors can come with some significant advantages to your business however when you're d when you're dealing with more professional investors this also comes with other requirements you're selling a percentage of your business in exchange for cash and you will often have a board of directors or at least some form of accountability to the investors that you are partnering with they'll want to have regular reports and information on how your business is progressing they'll want to measure your success against the business plan that you've shared with them and they'll generally want to be part of the decision-making process as you navigate your way to building the business so i can't emphasize enough that if you're going to take on this kind of professional investment an angel investor or an institutional investor that you must ensure that there's a good fit you must feel comfortable on a personal level because these investors will be your partners in the business until such a point that they sell their shares and finally there's debt and debt typically comes from banks or other kind of financial institutions the way to do this is to really develop a relationship with a financial institution who might have a family relationship through someone in your family or because they've known you since you were young there's a whole bunch of different ways this happens if you take loans in your business one of the big advantages is that you maintain control of your business you're not giving away shares in your business and it's generally a more straightforward process if you are able to find an interested financer than say raising equity so you maintain control of your business the cons are of course loans come with interest so you have to pay interest banks are not forgiving they will hold you to account so if you miss a few payments it can become a big problem and your business can be sent into administration so you must meet a regular payment schedule so those are basically the three different types of financing sources for a business you can have income from consulting work or from awards and presentations you can have equity investment from angel investors or family investors or professional investors and you can have loans with debt that come from financial institutions you

Channel: The Business of Fashion

Views: 63,698

Rating: 4.930253 out of 5

Keywords: business, The Business of Fashion, Imran Amed, Fashion Education, fashion, Fashion Luxury, Business, Education, insider, Business Education, Fashion, Emerging Designer, Luxury Fashion, Finance

Id: _81zbeZV7WQ

Length: 20min 40sec (1240 seconds)

Published: Wed Sep 09 2015