The fourth article in our BoF Basics series for emerging designers has been a long time coming. We have been receiving emails every other day asking when the next article would be published. So, here it is, and  thank you for your patience.

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So you’ve done it. You’ve cobbled together some financing from family and friends or squeezed a loan out of your bank manager. If you’re a little farther along, perhaps you have managed to raise an injection of capital that will help take your business to the next level. The question is, now what to do with your funding? And, how do you make it last?

It’s likely that you will have had to agree fund allocation to some extent with your investors prior to securing the funds, but it will be important to re-visit and re-confirm this now that you are past the negotiation stage. In reality, you will make spending decisions every single day, how ever small. The fourth part of the BoF Basics discusses the allocation of your capital, or more simply, how and where to spend your money.

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Taking on financing is one of the most important decisions an emerging fashion company will make.  This step is absolutely essential because the early stages of growth often requires significant amounts of working capital that cannot be generated by the business alone.  So, unless you are independently wealthy and sitting on a pile of cash, financing decisions will be part of your critical path, early on.

What is the difference between equity and debt?
Financing can come in many forms, but it basically comes down to equity versus debt.

Equity investors (in this case, venture capitalists or angels) provide cash to invest in your company and  therefore end up sharing ownership of the company with you. They invest in the hopes that your business will grow and that they will have some positive return through shared profits and upside.  They may offer you resources and expertise to help drive the business further. In fact, this is much preferred to someone just giving you cash and leaving you to fend for yourself.  If, however, you disagree fundamentally with your investor on where you want to take the company and how you will do it, then you may find their “help” a nuisance. Thus, when evaluating equity investors, choose someone who is aligned with your strategy and who has the industry and/or functional experience that your business needs to grow.

Debt financing, on the other hand, usually comes in the form of loans, where you are required to pay back  the money you have borrowed, plus interest, using a fixed schedule of payments that can be spread out over many years. While debt providers won’t be actively involved in your day to day business, taking on debt will mean you will have an additional cash outflow that your business will have to be able to support each month to stay on good terms with your bank. If payments aren’t made regularly, you may quickly find yourself dealing with irate calls from your bank manager. In the worst case, taking on too much debt  could drive your business into bankruptcy. Debtors are always paid back before profits are shared amonst the shareholders of your company.

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It seems the Business of Fashion for emerging designers is a relevant topic around the world. Recently, fashion bloggers in Germany and Brazil have been commenting on The Business of Fashion Basics series in German and Portuguese. Leo Moura, who is based in Brazil, is even translating the entire articles into Portuguese.

Thanks very much to Leo and Modabot for getting the word out. Stay tuned for article three on finding the right investors and partners.

The term “business plan” is casually bandied about like a hot potato in the studios of emerging fashion designers. Everyone knows you need one, but still, so few emerging design businesses take the time upfront to properly plan for their success. I use these words intentionally. Success is very rarely accidental. Sure, we all benefit from some good luck from time to time, but real success can only come through hard work and good planning. For this, a business plan is critical.

So, what is a business plan for? Many people think that the primary purpose is to secure funding – i.e. loans from banks or cash from investors. And while this is certainly one important objective, it is not the most important one.

The truth is, the business plan is, above all else, for you: the person or people who will drive the business forward. It is the document that lays out your vision and objectives. It is your roadmap for how you think it should evolve and grow to achieve this vision. It contains the budget and projections for how your business will manage is finances and fund growth. It is the document that helps you decide what to do, and just as importantly, what not to do. It is a living, breathing document that you should use to measure your progress, while still being willing to adapt it to reflect new insights, unexpected competitive threats, and changes in your business environment. In short it is like your company bible – except that this is a bible you can adapt as you go along.

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The Business of Fashion is getting a lot of play of late. At the recent CFDA/Fashion Fund awards in November, Marc Jacobs spoke at length about the ups and downs (and downs) of starting a new fashion business. Many young designers rush into setting up a business, attracted by the perceived glamour and fun that is associated with the fashion industry. There are wonderful fairy tale stories of young talented designers graduating from St Martins or Parsons and then going off to achieve fame and fortune. The stories we hear less of are those that describe all of the failed companies and dashed hopes that are the cruel reality of this industry. I am glad that Marc shared his stories with some of the upcoming stars of American fashion who were in the audience, including Doo.Ri Chung, Proenza Schouler and Peter Som.

One of the most common questions I am asked by designers who have just come out of fashion school (at both the bachelor’s and master’s level) is: “Should I start my own business or should I go work for a big fashion house?”. The truth is, the right answer depends on you and your aims. In our first article on the Business of Fashion Basics, we will pose the questions that you need to ask yourself – so you can make the right decision.

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Over the coming months, in addition to our regular musings on the Business of Fashion (as well as a few creative diversions  and digressions on new collections, hot fashion news, and industry analysis), The Business of Fashion will introduce a regular series of articles on setting up a new fashion business, and what it takes to be successful both creatively and financially in this competitive space.  We’ll call it “The Business of Fashion: Basics”

It is true that there is an increased market demand for collections from emerging designers largely due to the consumer’s ever-developing need for individuality and uniqueness in this world of mega luxury brands. It is also true that starting up a fashion business is tougher than ever, and more than 95% of start-up fashion businesses fail, and not just because the designer didn’t hit the right creative notes. More often than not, it is the lack of proper planning, funding and infrastructure that lets even the most creatively gifted designers down.

Stories about about the financial challenges that plagued some of the industry’s best known names early in their careers — John Galliano, Marc Jacobs, and Isaac Mizrahi, just to name a few. This series of posts will try to uncover the secrets to success and provide a logical reading path for readers who are thinking about their own fashion businesses and how to take them forward:

• How do I go about writing a business plan?
• What is better for me, equity or debt financing?
• Where do I allocate my limited resources, to a production manager or sales manager?
• How do I go about creating the necessary PR support for my business?
• etc.

We hope to touch on these and many other topics in the months to come and look forward to receiving your feedback. In the meantime, this is the proposed set of articles that you can expect to see here soon:

• Basics 1 – Setting up your own fashion business – what do I need to know first?
• Basics 2 – What is a business plan for and how do I go about writing it?
• Basics 3 – How do I find the right investors and partners?
• Basics 4 – How do I decide where to allocate my capital?
• Basics 5 – Value Chain – Design and Development
• Basics 6 – Value Chain – Marketing and Sales
• Basics 7 – Value Chain – Production and Supply Chain
• Basics 8 – Value Chain – Retail