These Top Factoring Firms Are Helping Wholesalers and Retailers Offset Risk

Brands are continuing to diversify their shopping channels, creating more avenues of revenue. But this is also generating some uncertainty between wholesalers and retailers.

More and more, brands are investing heavily in e-commerce while moving product away from brick-and-mortar stores, tightening their distribution networks or partnering with specialty retail. Meanwhile, others are launching direct-to-consumer channels, bypassing the retailer completely.

As these new strategies are tested and implemented, third-party assurance on invoices can stabilize a wholesaler’s bottom line, while also helping retailers protect their cash flow and avoid prepaying for goods.

“Wholesalers want to get their money right away so they can pay their suppliers and contractors,” said Tim Moore, EVP and director of global business development at finance firm Hilldun Capital. “They want to have everybody prepay them on credit cards, to prepay them period. But that’s not good for any retailer’s business.”

Through a factoring service, the risk of payment by the retailer is assessed upfront and, if approved, assumed by the factor. The retailer then receives payment terms (commonly 30-60 days) from the wholesaler, who ships the product and is paid upfront through the factor, minus fees.

By incorporating such a service into their business, wholesale brands can also offload the entire back-office work associated with payments. Firms like Rosenthal & Rosenthal and Hilldun Capital oversee payment collection, credit protection and receivables management for the brands, with financial information available in real time.

A man filling out a formPersonal finance - 16 Jan 2012
Outsourcing to a factor can free up internal resources to be used on an additional salesperson or in product development.
CREDIT: Isopix/Shutterstock

“Factoring improves the wholesaler-retailer relationship by allowing the wholesaler to focus on selling to the retailer, without the burden of having to chase down payments from them,” said Cassie Rosenthal, SVP at financing firm Rosenthal & Rosenthal. “With so much to manage these days when running a footwear or accessories business, factoring allows business owners to focus on the things that matter most to them: sales, production and supply chain.”

This assurance is particularly valuable in the footwear industry, which Hilldun’s Moore describes as a market of extremes. The unpredictability increases the risk for wholesalers looking to partner with new retailers. However, it’s also more important than ever for brands to diversify their distribution networks, to keep up with shifting consumer behaviors.

“Footwear companies need to more effectively manage customer concentrations by diversifying their retailers as much as possible,” said Rosenthal. “They can’t put all their eggs in one basket because that basket may be strong today, but tomorrow that basket may be either not interested, or worse, nonexistent.”

A factor usually charges between 0.5% and 1.5% per invoice. That price guarantees that the factor will pay the wholesaler the full amount, even if the retailer defaults, effectively removing the financial risk of signing a new retail partner. Factors minimize the risk of defaulting through the assessments they conduct before approving any purchase orders; they only look at current financial performance and capacity to pay.

For retailers, the benefits of factoring are subtler. Due to the high risk associated, wholesalers will often require their retail partners to pay upfront for their own financial stability. This might lead to the retailer needing to forgo that brand product altogether, if their cash flow dictates it. However, with a factoring system in place, retailers can demonstrate their financial position and secure themselves preferred terms. And they are then rewarded with greater trust.

A factoring firm provides the bulk of the invoice’s value to the wholesaler upfront, freeing up cash flow.
CREDIT: John Powell/Shutterstock

But as Moore noted, working with a factoring company can’t resolve underlying management issues.

“If you’re on top of your inventory, if you don’t overbuy and you perform on a retail level, even at a small size, then you can show us or factors in general that you have the financial ability to be in business,” said Moore. “But if you’re constantly opening up new stores before you have the cash flow available, or you’re over buying, stuffed with merchandise and closing out every season, then it’s most likely that you’re not going to show a very good financial picture.”

For businesses looking to partner with a third party, experts recommend going with a company that understands the fashion industry’s seasonality. Because most brands do large transactions for the fall and spring collections, with smaller product drops in between, the accompanying finances are likely to fluctuate more than those in other markets. An experienced partner will build this into their assessments, providing both wholesalers and retailers with more accurate verdicts.

“[Rosenthal & Rosenthal] has been financing the footwear, apparel and accessories industries for decades,” said Rosenthal. “We have literally seen every imaginable financial cycle, crisis or event. To that end, we are a real trusted partner to all of our clients because we stick by them, even when things get bumpy, which they inevitably do.”

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