Apparel lines are usually asset-based and seasonal. A wholesale brand borrows against receivables from retailers, less the chargebacks and allowances those retailers deduct, and against finished goods valued at liquidation value, which falls fast once a season passes. A retailer borrows mostly against store inventory and card settlements. Many brands start with a factor, which buys the receivables and takes the retailer's credit risk, and move to an asset-based line as they grow. Lenders watch sell-through, dilution, aged stock and concentration in a few large retail accounts more closely than earnings.
- Usual structure
- Asset-based revolver, often with a letter-of-credit sublimit, or a factoring agreement
- Receivables advance
- Asset-based lenders typically advance 80% to 90% of eligible receivables
- Inventory advance
- Typically up to 85% of net orderly liquidation value, or roughly half of cost
- What shrinks the base
- Chargebacks and allowances, prior-season stock, goods still at the factory
- Concentration cap
- Commonly 20% to 25% of eligible receivables for any one customer
Two businesses with the same product
Lenders sort apparel borrowers first by how they sell. A wholesale brand designs a line, has it made by contract factories, and ships it to department stores, specialty chains and boutiques on payment terms. Its collateral is receivables and warehouse inventory. A retailer buys finished goods, from its own label or others, and sells them in stores and online for cash and card. Its collateral is almost all inventory. Most growing labels are now both: a wholesale book, a direct-to-consumer site and a few stores.
The mix matters because each channel produces different collateral. Wholesale produces receivables that a lender can count, but they arrive with deductions. Direct-to-consumer produces cash within days but no receivables to borrow against, only the inventory behind it. A brand shifting from wholesale to its own site often finds its borrowing base shrinking just as its inventory needs grow.
The season, in cash
Apparel runs on seasons, usually two main ones with deliveries in between. The cash cycle for one season of a wholesale brand looks like this:
| Stage | What happens | Cash position |
|---|---|---|
| Design and samples | Line built, samples made, market week and showroom costs | Money out; nothing booked |
| Orders taken | Retailers place orders, subject to cancellation if delivery is late | Order book grows; no cash |
| Production | Factory deposit or letter of credit opened; fabric and trim bought | Largest single outflow, months before sale |
| In transit | Goods on the water, then through customs; duty and freight paid | More money out; goods not yet in the warehouse |
| Delivery | Shipped to retailers against orders; invoices issued on terms | Receivables build; line at its peak |
| Collection | Retailers pay, less chargebacks, markdown allowances and returns | Line pays down; dilution shows up |
| End of season | Unsold goods marked down or sold to off-price buyers | Inventory converts to cash at a loss, or ages |
The peak borrowing need comes when goods are landing and shipping, and it repeats every season. That is why apparel lines are usually built as seasonal lines or asset-based revolvers whose availability rises and falls with the collateral, and why lenders sometimes grant a planned over-advance for the weeks between paying the factory and shipping to stores.
Paying the factory: letters of credit and sublimits
Contract factories, especially overseas, want to be paid before goods leave or on proof of shipment. Brands pay with a deposit and balance by wire, or with a documentary letter of credit that pays the factory when it presents shipping documents. A revolver can issue those letters of credit, and each one reduces availability from the day it is opened, not the day it is paid. How that works is on letters of credit under a revolver.
Lenders usually cap letters of credit with a sublimit and treat goods covered by one differently at each stage. Goods at the factory are not collateral at all. Goods on the water may count as in-transit inventory if the lender controls the bill of lading, the goods are insured, and the customs broker has agreed to act on the lender's instructions; many lenders count them only at a reduced rate or within a small sublimit. Once landed and in a warehouse the lender can reach, they become ordinary inventory.
A brand without room on its line for a large order may use purchase order financing, in which a financier pays the factory against a confirmed retailer order. It is expensive and suits single large orders; the trade-offs are on purchase order financing versus a line of credit.
Receivables: the deductions come off first
Wholesale apparel receivables look clean on the aging and collect less than they show. Large retailers deduct for markdown allowances, co-op advertising, late or early shipment, labeling and routing errors, and returns. Lenders measure this as dilution: the share of invoiced sales that never arrives as cash. Apparel dilution is typically higher than in most industries, and a lender sets its advance rate or adds a reserve to cover it.
The other cuts are familiar. Invoices more than 90 days past invoice date are typically ineligible. Borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables, and many apparel brands sell much of their wholesale volume to a handful of chains, so the cap can remove a large slice. Open credits and unresolved deductions are netted out as contras. Sales to overseas stores raise the questions on foreign receivables.
An order book is not collateral. Retailers can cancel for late delivery, so lenders count the invoice, less expected deductions, and nothing before it.
Inventory: fashion ages quickly
Apparel inventory is valued on what a liquidator would realize, not on cost or retail price. Inventory typically advances at up to 85% of net orderly liquidation value, or roughly half of cost, and the appraisal behind that number is season-specific. Core basics and replenishment items such as denim, tees and uniforms hold value; fashion items lose it once the season turns.
| Inventory | Typical lender treatment |
|---|---|
| Current-season finished goods in the brand's warehouse or a 3PL with a bailee letter | Eligible at the appraised liquidation rate |
| Core and replenishment styles | Eligible, often at a better rate than fashion items |
| Prior-season or aged finished goods | Reduced rate or ineligible after a set age |
| Goods in transit under the lender's control | Sometimes eligible, within a sublimit |
| Raw fabric and trim | Usually low value or ineligible; hard to sell except to the maker |
| Goods at the factory, on consignment in stores, or at a warehouse without a bailee letter | Ineligible |
| Samples and showroom stock | Ineligible |
Retailers add a layer: inventory is spread across stores, and each leased store raises the landlord question, answered with a landlord waiver or a rent reserve. Card settlements in transit from store and online sales usually count as eligible because they settle in days. The general rules are on how lenders advance against inventory.
Factor first, then a line
Apparel is the industry where factoring grew up, and many brands still start there. A factor buys the receivables, advances against them and, on a non-recourse basis, takes the risk that the retailer does not pay for credit reasons. It also approves each retail customer's credit before shipment, which a young brand selling to large chains finds valuable in its own right. Of the lenders in Transparent's book, 116 write factoring.
| Factoring | Asset-based line | |
|---|---|---|
| What the brand gives up | Ownership of the receivables | A lien on receivables and inventory |
| Retailer credit risk | Carried by the factor on non-recourse terms | Carried by the brand |
| Inventory funding | Limited; some factors add an inventory loan | Built into the borrowing base |
| Reporting | Invoices assigned as shipped | Borrowing base certificate, agings, inventory reports, field exams |
| Usually fits | Early-stage or heavily wholesale brands selling to a few large chains | Established brands with steady sell-through and clean books |
The two can coexist: a lender can advance against the amount due from the factor alongside inventory. When a brand is ready to leave the factor, the steps are on moving from factoring to a line of credit, and the broader comparison is on factoring versus asset-based lending and recourse versus non-recourse factoring.
Covenants, reporting and what trips apparel borrowers up
Asset-based lenders to apparel companies usually rely on excess availability rather than earnings covenants: a minimum level of unused availability, with a fixed charge coverage test that springs only if availability falls below a threshold. Reporting is a monthly or, at the peak, weekly borrowing base certificate, receivables and payables agings, a deductions report, inventory by style and season, and periodic field exams and inventory appraisals.
- Overbuying the season. Inventory bought for orders that are then cut or canceled sits as aged stock, loses eligibility, and the line tightens when the next season's letters of credit are due.
- Deductions nobody fights. Unchallenged chargebacks raise dilution, and higher dilution lowers the advance on every receivable.
- One big account. A department store that slows payment or restructures can take out a large share of receivables at once; lenders think about this as customer concentration.
- Channel shift without a plan. Moving from wholesale to direct-to-consumer trades receivables for ad spend and inventory, and the borrowing base falls unless the lender has already sized for it.
- Cash advances against online sales. Advances repaid from daily card or platform payouts take the cash the line depends on; the way out is on refinancing cash advances for retailers.
Preparing an apparel file
Transparent's line-of-credit checklist starts with the AR aging by customer with days outstanding, the AP aging, the balance sheet, the P&L and a year-to-date P&L, a debt schedule showing existing liens, and an inventory report because inventory is part of the base. For an apparel company the file is read correctly only with three more things: a deductions history by customer, inventory aged by season and style with sell-through, and the calendar of open letters of credit and factory commitments. If a factor is in place, its statements and the notice-of-assignment terms matter too.
Of the 1,800+ lenders in Transparent's book, 235 write asset-based loans and lines. Some specialize in consumer products and understand seasonality; others will not take fashion inventory at all. Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day once the documents are in, with the seasonal availability curve modeled so lenders can see the peak before they are asked to fund it. The SBA's lending record for the sector is on SBA loans to clothing retailers and SBA loans to clothing wholesalers.
Common questions
- Can an apparel brand borrow against its purchase orders from retailers?
- Not on a borrowing base. Orders can be canceled, so lenders count only shipped, invoiced receivables. Purchase order financing is the product that funds production against a confirmed order, at a higher cost.
- Why does my lender count less than my receivables aging shows?
- Because large retailers deduct chargebacks, markdown allowances and returns before paying. The lender measures that dilution and reduces the advance rate or adds a reserve, and also removes aged invoices and any amount over the concentration cap.
- Does inventory at an overseas factory count toward my borrowing base?
- No. Goods at the factory are outside the lender's reach. Goods in transit may count, usually within a sublimit, when the lender controls the shipping documents and the goods are insured.
- Should a young apparel brand factor or get an asset-based line?
- A brand selling mostly to a few large chains often starts with non-recourse factoring for the credit protection. Once its books, sell-through history and customer spread are established, an asset-based line usually costs less and funds inventory too.
- How do letters of credit affect my availability?
- A letter of credit issued under your revolver reduces availability from the day it is opened, even though the factory is not paid until it presents documents. Plan the letter-of-credit calendar against the borrowing base for each season.