NEW YORK, United States — Even in the best of times, it's tough for fashion start-ups to access the capital they need to sustain their growth and expansion. But today, it's downright brutal.

The usual private investment sources like angel investors and early-stage venture capital, which were limited to begin with, have dried up. What's more, fashion boutiques can be notoriously slow at paying their invoices and sometimes, they don't pay at all, making cash flow management tricky and unpredictable.

In a sinking economy, this kind of behaviour will only get worse, as fashion boutiques hoard cash and in some cases, go out of business. So while we have seen independent fashion businesses flourish in recent years, today they have an even higher risk of failure due to their small scale and limited access to capital.

This is where factoring companies like Hilldun Corporation can help. I caught up with CEO Jeffrey Kapelman to get his take on the economy and what independent designers can do to survive the downturn.

BoF: First things first. What exactly is factoring and why might emerging designers be in need of such services?

Factoring is actually one of my least favourite words, because it lacks a definition.

Boiled down to its essence, though, factoring  (i) is the approval (and guarantee) by the factor of the credit of a designer's customer (typically a store) and (ii) may include an advance by the factor against the future payment of the invoice by the store. Factors act as a designer’s collection department, as well as helping their cash flow by loaning funds, where appropriate.

This can be of enormous help to emerging (and established) designers because the factor typically has the knowledge of the creditworthiness of stores and the strength to collect on behalf of the designer.

In addition, factors also act a source of financing. For appropriate clients, Hilldun can advance against invoices after (and in some cases, before) shipment, thereby saving the designer from having to wait for payment before having the funds to produce subsequent orders.

BoF: So, how do you decide which brands and designers to work with? I can't imagine that every brand is right for Hilldun or that Hilldun is right for every brand.

We evaluate our prospective clients by quality of product and production, experience, quality of customer-base and size of business.  Since the charges for factoring are relatively small, we seek clients with the capacity to get and produce orders and the potential to grow.  We pride ourselves on spending the time to give our clients the benefit of our experience.

Also very important to the fit between a factor and a designer is the area of the market that each specialises in.  For example, though we are active in all areas of the market, Hilldun typically works with high-end designers.  As a result, we work with many designers who are selling to the same store base.  Having the top designers who are sought after by these stores is important to us (and our clients) because this gives us enormous strength in collecting from these stores.

A store can live without any one designer, but in Hilldun's case, representing  30 or 40 designers selling to the same stores means that these stores cannot afford to jeopardise their source of product, and have to pay Hilldun on time, or else risk losing their supply from all Hilldun clients.

Simply said, in a world of sometimes limited resources, Hilldun gets paid first.

BoF: Even if a brand does not avail itself of factoring services, what should one do to evaluate the credit worthiness of a shop, boutique or department store?

Evaluating the credit of a store without the benefit of a factor can be difficult.  Designers can certainly ask the store for references from other designers, as well as trade and bank references and financial statements.
But, the difficult part is that financial statements are frequently dated, references are those chosen by the store and, in fact, credit is a moving (and sometimes a very fast moving) target.  Having a factor in your area of the market is really the best way to know what's doing from a credit perspective.

BoF: How is Hilldun as a business responding to the economic crisis?

Today's environment makes evaluating credit even more difficult, and stores are susceptible to sudden and significant changes in credit which really should be monitored almost daily.

Hilldun's concerns in this environment are, of course, the credit quality of a designer's customers and  the ability of the designer to get and produce sufficient orders to sustain its business, as well as its access to sufficient capital to produce its orders.

BoF: Finally, as the economic environment continues to deteriorate, what other advice would you offer to emerging fashion businesses in order to survive and thrive in the downturn?

The best advice that we can give to designers is to keep your overhead low, stay flexible, scale your overhead promptly to changes in your business including volume, only produce to order (don't speculate on orders - its great to tell a customer you're sold out!), and don't sell on consignment or special arrangements (mark-downs, guaranteed profits, etc.). Your job is make a great product and ship it on time, the stores' job is to sell it.

We are all in a difficult environment now, but as I often remind our clients, consumers can't live without clothing forever. Demand is being built even as we struggle and change will come again in the future. Your job is to get there.

CEO Talk is BoF’s forum for in-depth discussions with the fashion industry’s global decision makers, conducted by founder and editor-in-chief Imran Amed.

This interview has been edited and condensed.