Cash with questions: how brands can secure new credit lines

From fledging start-ups to established brands, fashion businesses often require external investment to expand their physical footprint or launch into new markets.

In October, Footasylum secured a £35m revolving credit facility from HSBC UK to accelerate its growth plans. The funding will be used to roll out a store expansion programme, grow its own labels, including Monterrain and Zavetti Canada, and bolster its digital offering.

In July, Tala unveiled a £5m investment led by Me & Em backer Pembroke VCT, alongside Venrex and Active Partners. The activewear brand will use the capital injection to drive its international expansion, with a primary focus on the US market.

Hurr, Cult Mia and Castore were among other young fashion businesses that have completed fundraising rounds over the past year while The Very Group, Ann Summers and New Look have secured new funding packages to boost their working capital.

Lenders and investors are constantly updating their funding criteria as the retail industry and investment landscape continue to evolve. Retailers must prepare for an increased focus on ESG (environmental, social and governance) efforts, a more stringent due diligence process and growing scrutiny over profitability when approaching financing discussions.

Under Footaylum’s funding arrangement, the package includes a sustainability improvement loan, launched by HSBC this year. The retailer’s sustainability performance will be monitored by EcoVadis, an independent assessor for corporate ESG standards. If the company improves its sustainability rating in line with pre-agreed targets, it could benefit from reduced interest rates on the loan.

It comes as retailers are now expected to “have a plan to transition to a more sustainable way of sourcing, manufacturing and selling their products", said James Sawley, head of retail and leisure at HSBC UK.

“The key point however is transitioning [and] accepting there will be challenges along the way but understanding a retailer’s intentions are genuine.”

Explore lenders who are well capitalised and have a strong appetite for supporting brands in their growth ambitions.

Nick Scott, CFO of Footasylum

From banks to credit funds

Over the past decade, high street banks have been reducing their exposure to the retail sector, making it increasingly difficult for fashion businesses to access finance.

Banks are also using a stricter set of criteria to ensure the select retailers they lend to are resilient, said Joe Wood, partner of debt advisory firm Cadence: “To work out how much confidence it has in a business, a bank would look at whether a business has established [itself] online as well as on the high street, whether it is international, if it has its own labels with retention of title and so on.

“Banks don’t just look at how much they can get out of this if it goes wrong – it’s also reputation risks as lots of retailers are household names.”

Nick Scott, CFO of Footasylum, said only “businesses with a resilient consumer base and a robust business model” can give banks the confidence to continue investing in their growth.

With a lack of available funding from high street banks, retailers have turned to alternative lenders to support their working capital and growth plans.

The Very Group unveiled a £125m funding package in February led by credit fund Carlyle Global Credit. Ann Summers announced a £8m facility in January from asset-based lender Secure Trust Bank Commercial Finance to boost its online and in-store offering.

Last year, New Look and Kurt Geiger secured £100m and £150m respectively through US bank Wells Fargo and UK-based credit fund Blazehill.

Tom Weedall, managing director of Blazehill, explained that in the current environment, high street banks “would only get retailers so far in terms of liquidity” but alternative lenders can “take a more hybrid approach than traditional banks and unlock further liquidity for retail borrowers to continue their growth journey”. One example of this hybrid approach is taking into account the brand value, as well as assets on the balance sheet.

“As long as retail businesses are coming to the market with a coherent story and a robust financial model, there will be appetite from lenders to provide additional liquidity. It’s no longer a case of if the banks won’t support, then there are no alternative options,” Weedall added.

Path to profitability

For brands seeing early-stage investment, a clear strategy to profitability should be the top priority.

Tom March, founder of Redrice Ventures, which has invested in Castore, By Rotation and Hylo, named three key focuses for investors: “First is path to profitability. Second is quality of customer acquisition, we want to see a more diversified set of marketing channels. Also investors are often asking more about internationalisation of a brand.”

Referring to AllBirds and Rent the Runway, he added: “There are consumer product brands that raised a lot of money, were listed but haven’t proved their economics and profitability.

“What investors and brands have learned is that from the beginning, businesses need to focus on being profitable sustainable companies.”

The days of driving revenue at any costs are gone. Founders need to have a business model that genuinely works.

Andrew Wolfson, founder and CEO pf Pembroke

Founded in 2015, US trainer label AllBirds's shares have plummeted 98% since it went public in 2021. In the latest quarter to 30 June, the company posted a net loss of $19.1m (£14.6m) as it continued to tackle declining revenues.

Shares of online rental platform Rent the Runway have plunged 97% from its listing in 2021 after a series of store closures and job cuts. Last month, the business said it expected to be “free cashflow break-even” by the end of the year, as part of its progress on profitability. profitability”.

Other fashion companies that did not pay off for investors in recent years include include luxury reseller Cudoni, childrenswear resale site Dotte, fashion marketplace Atterley and personal styling site Threads.

“The days of driving revenue at any costs are gone,” echoed Andrew Wolfson, founder and CEO of Pembroke, the backer of Me & Em, Tala, Ro & Zo. “A lot of people think putting money in a business should be like turning on a light switch and suddenly revenue is coming in.

“The only way revenue will kick in straight away is if you start throwing money at digital advertising spend and we would always be really nervous about that.”

Keep your options open

The market remains volatile for the fashion retail sector and businesses will continue to face challenges securing funding. However, retailers and investors believe those with robust business models will be able to access the financing it needs to grow through various ways in the market including banks, alternative lenders or equity financing.

Pembroke's Wolfson believes there is growth capital available for the right businesses: “Founders need to have a business model that genuinely works. But we are bullish. We value the consumer sector and there are still really good brands out there.” The venture capital trust announced on 21 October a £2.5m investment in British women's shirt brand With Nothing Underneath for its first funding round, alongside JamJar Investments.

Footasylum’s Scott said it is important to “keep your options open”: “If you experience difficulties engaging with your current bankers, consider reaching out to the market to explore lenders who are well-capitalised and have a strong appetite for supporting retailers and brands in their growth ambitions.”

HSBC’s Sawley concurred: “Those that remain on the high street and online have earned the right to exist, which makes them fundable, whether through private equity, bank finance or the public markets.”