Last Updated October 6, 2022
In the apparel and clothing industry, it can be tough to juggle back office operations, like invoice management and payroll, alongside your creative workflows. With thin margins and seasonal changes, the textiles industry can feel overwhelming, and it doesn’t help that you sometimes need to wait for weeks or even months for customers to pay, creating a frustrating cycle of negative cash flow and mounting debt.
To keep growing your company and stay competitive in an ever-changing market, you need cash to consistently make payments, create new garments, and pay your staff – this is where apparel factoring comes in. In this article, we discuss how invoice factoring for apparel and textile companies works, its benefits, and how it compares to other financing alternatives.
Keep reading to learn how altLINE can increase your cash flow and support business growth through apparel factoring!
What Is Apparel And Clothing Factoring?
Apparel and clothing factoring is when your business sells invoices to a third-party company such as altLINE in exchange for a cash advance. Because apparel companies often sell on credit, there is frequently a delay in receiving payment, which can result in negative cash flow and hurt your business. Fashion factoring is often used to access working capital when it’s needed, rather than relying on customer payment timelines.
Benefits Of Invoice Factoring For Apparel Companies
Apparel and textile factoring is a great way to unlock funds when your customers are slow to pay or during seasonal surges in the fashion industry. Check out how invoice factoring can help you access cash when you need it:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best apparel factoring companies fund your invoices within 1 or 2 days. This means you can receive up to 80-90% of your hard-earned money within 1 or 2 days instead of 30, 60, or even 90 days.
Access Capital To Grow Your Business While Maintaining Equity
Business owners must often sacrifice equity to fuel growth, but invoice factoring can set them up for long-term success. Factoring your apparel invoices provides quick cash to pursue business growth, pay debts, and meet payroll without sacrificing equity.
Get Cash When You Need It Most
Overdue invoices and late-paying customers can create extra stress during seasonal changes in the fashion industry. Invoice factoring offsets late payments and increases cash flow during peak seasons to ensure your business stays financially healthy all year round.
How Does Apparel And Clothing Factoring Work?
Factoring apparel and clothing invoices through altLINE works by turning unpaid invoices into cash for operating expenses and business growth. Instead of waiting on customers to pay their invoices, you can use invoice factoring services to get cash whenever you need it. By submitting apparel invoices to factoring companies like altLINE, you also soften the financial blow of late customer payments and seasonal cash flow changes.
Here is a simple guide to funding your company with altLINE’s clothing factoring services:
Submit Your Unpaid Invoices
altLINE accepts all types of unpaid invoices, though we generally favor invoices from creditworthy customers and large or medium-sized companies. Additionally, we do not factor invoices for customers who consistently make late payments.
If your invoice turnover time is between 30 and 90 days, your receivables are well-positioned for factoring.
altLINE Advances Up To 80-90% Of The Invoice Face Value
You can generally expect a factoring advance rate of 80-90% of your invoice’s face value and receive the cash advance between 24 and 48 hours after submission to altLINE. The exact timing of your cash advance deposit usually depends on your customer’s receipt and acknowledgment of goods.
altLINE Helps Collect Payment For Your Outstanding Invoices
altLINE assists in monitoring and collecting customer payments. We provide a lockbox under your business’s name and report all payments through our customer portal. If issues arise, we communicate with customers to resolve disputes professionally, so you can maintain good business relationships.
altLINE Pays Out The Remaining Unpaid Invoice
After we collect a factored invoice, we deduct our factoring fee (typically 1-5% of your invoice) and transfer the remaining invoice value to your bank account.
Uses For Your Factoring Cash Advance
Receiving cash advances from textiles and apparel invoice factoring means you do not have to wait on customer payments to fund your business. Instead, you can avoid long payment cycles and unlock growth capital sooner to accelerate business development and maintain operations. Here are some ways you can use invoice factoring:
Make Payroll
Paying employees on time is essential to running a good apparel business. Unfortunately, late customer payments damage your cash flow and jeopardize your payroll obligations. Getting a cash advance from invoice factoring providers prevents payroll issues, even when customers take a long time to pay.
Take On New Orders
You should not be forced to wait for customer payments to clear to take new orders and grow your business. Invoice factoring for apparel companies gives you greater flexibility to fill large orders and take on new customers without the delay.
Pay Operating Expenses
Paying for factory maintenance, transportation, and other expenses with negative cash flow is tough, no matter your business size or bottom line. Fortunately, getting extra funds from factoring helps you pay those expenses without taking incremental debt or selling business equity.
Fashion Businesses We Fund And Finance
altLINE’s factoring services help all kinds of businesses related to the fashion industry. Here are some businesses that can benefit from our clothing merchandise financing services:
- Textile manufacturers
- Wholesale and distribution companies
- Fashion houses
- Fashion merchandisers
Factoring For Apparel Companies vs Other Funding Options
In addition to invoice factoring, clothing stores and manufacturers have a few other options to improve your business cash flow. In this section, we compare these alternative financing methods against apparel invoice factoring:
Apparel Factoring vs Bank Line Of Credit
A bank line of credit is usually the first financing solution a business considers. While many apparel and clothing companies can qualify for a line of credit, the funds may not be enough to grow their businesses.
Banks typically look to fixed assets when reviewing a line of credit application. As an apparel manufacturer, you likely have a lot of fixed assets like sewing and cutting machines, making approval easier. However, if you are a new company, you may not have much credit or enough assets built up, making a line of credit qualification harder.
Textile manufacturer factoring is the better option if you are a new or growing company because factoring companies look to your customers instead of your assets to provide cash advances. If you work with an established customer base, factoring companies will give you enough working capital when other financing options fall short.
Apparel Factoring vs ACH/MCA Loans
ACH (automated clearing house) loans or MCA (merchant cash advance) loans offer online applications and approval processes based on bank statements. These loans are usually easy to qualify for but offer high interest rates that can even reach up to 60% of the loanable amount.
While you can get ACH or MCA loans easily, the high lender fees and interest can put you in a debt spiral that is difficult, and sometimes impossible, to get out of.
Fashion factoring is typically safer for your finances because your customers will eventually pay their invoices, thus paying off your cash advance. Because repayment is almost guaranteed, you can focus more on growing your business and creating new clothing lines rather than scrambling to repay debts.
Apparel Factoring vs Early Payment Discounts
Offering customers discounts for early payments can accelerate cash flow when needed. However, there is a crucial limitation to quick pay discounts: sometimes customers do not want to pay early.
Some customers will prioritize their own cash flow over the discount you offer, so they may not take your early pay discount and decide to make payments later, leaving you low on cash and unable to grow your business or maintain operations. Factoring in the clothing industry is more reliable because as long as your invoices are approved, you will typically receive a cash advance within 48 hours.
Typical Apparel Factoring Rates And Fees
Invoice factoring fees depend on how much you plan to factor and how long customers take to pay. Factoring more amounts and getting customer payments faster generally result in lower factoring rates. Factoring companies may also consider other criteria like how long you have been in business, customer base diversity, and overall customer credit quality.
When factoring an invoice, we charge two types of fees:
- Initial fee: This fee covers the factoring company’s invoice processing expenses for the first 30 days. Your initial fee usually ranges between 0.90% and 3.50% of the invoice’s face value.
- Incremental fees: These fees kick in after the initial fee period is up and compensate the factoring company for its time. Incremental fees typically range between 0.25% and 1.50% of the invoice’s face value.
Requirements To Apply For Apparel Factoring
Before getting a cash advance from invoice factoring, you must provide some information to qualify. Here are the documents you need:
List Of Existing And Potential Customers
To qualify for invoice factoring, you need a list of existing and potential customers. Factoring companies need this list to review the credit quality of your customer base and decide your eligibility for invoice factoring.
Financing Application
altLINE requires you to complete a form as part of the apparel financing application process. You will need to enclose the following documents alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Relevant corporate paperwork
Accounts Receivable Aging Report
An accounts receivable aging report lists all your invoices based on their due dates. We need this report to research your customers’ payment behaviors to determine their factoring eligibility. We will consider invoices 60 to 90 days outstanding, but invoices where customers say they cannot pay may be ineligible for factoring.
Frequently Asked Questions About Apparel Factoring Companies
Here are some typical questions about factoring for fashion companies answered:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all apparel company owners that apply for factoring. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to identify an apparel factor that is willing to help.
Do you require UCC filings when factoring apparel and clothing invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is apparel factoring a debt or loan?
Apparel factoring is neither a debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers. However, altLINE is a recourse factor, so you may need to pay the cash advance back if your customer fails to pay their invoice.
Do you offer non-recourse apparel factoring?
altLINE only offers recourse factoring for apparel companies. While you must repay the cash advance if your customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger cash advances.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.
