LONDON, United Kingdom — In Part Three of Fashion Business Basics, Imran Amed explains the different options available to emerging designers to finance their businesses.
KEY LEARNINGS: Each season as your sales increase and your business grows, your upfront costs will increase and the money you earned from previous sales will not be sufficient to finance the growth. You will need some kind of financing to bridge the gap. There are generally three different sources of available financing for a fashion start-up.
Equity: Equity investors provide cash to invest in your business. When you take on an investment from an equity investor, they become part owners of your business, which inevitably means that you will have to share some decision-making with that investor. The best equity investors can offer you smart money, which is money that comes with expertise; contacts and other types of advice that can help you build your business. You will have to report to a board for key decisions and regularly report on how your business is progressing.
Debt: Debt financing usually comes in the form of a loan. You are required to pay back the money you have borrowed plus interest in a defined schedule of payments. Taking on debt will mean that you will have additional cash outflow that your business will have to support each month and that can be an additional burden for a business to bear in the early stages. The big advantage with a loan is that you are not giving away any equity of your business and you maintain full control. Debt providers will not actively get involved in your business; they are mostly concerned with getting back the money they have lent you with interest.
Other Income: This can come from a variety of sources, including awards and competitions and providing advice or services to other companies. The benefit is that the this kind of funding is non-interest bearing and you are not giving away any equity in your business. However, these other commitments can be a distraction from your core business, as they require your time and energy.