Embedding Trade Credit In The Hard-Hit Fashion Supply Chain

The fashion industry was hit particularly hard by supply chain disruptions and economic volatility, often culminating in excessively-long B2B payment terms for suppliers — or non-payment altogether.

Earlier this year, a group of garment suppliers across the Middle East and Asia banned together to demand more favorable B2B payment terms from their corporate buyers, seeking 90-day terms following reports that some of the world’s largest apparel retail brands, including Gap and Primark, had cancelled orders totaling an estimated $3.7 billion at the beginning of the pandemic.

In April 2020, reports like the one that Topshop parent company Arcadia introduced 30-day extensions to supplier payment terms, coupled with order cancellations, as well as news that H&M cancelled about $4 billion worth of orders from suppliers, were commonplace.

A global and highly-fragmented market made up of many small and medium-sized enterprises, the fashion industry can be notoriously challenging for vendors, particularly when payment terms become stretched. The ability to offer trade credit to corporate customers is essential to remaining in business and protecting cash flow, but Jesse Kim, COO of Flowfy, warns that it’s not an easy process — especially for SMBs.

Risky Business

Small businesses can face massive consequences when they are forced to bear the risk of underwriting their own customers, Kim recently told PYMNTS. But it’s not necessarily a new challenge for the sector.

“The issue of settlement between wholesalers and retailers has existed for a long time in the apparel market, and even in other industries,” he noted. “Even in the L.A. Fashion District, most buyers request a payment term, and suppliers are accepting the terms of 30 days and 60 days with great challenge in collecting and absorbing the risk.”

Flowfy has stepped in to become a third party that can absorb that risk, integrating a trade credit solution within the digital B2B marketplaces that the fashion supply chain is increasingly adopting.

Through a collaboration with TreviPay, the FinTech aims to reduce the risk of fraud or non-payment from a client for a fashion-industry seller. There are also pain points on the buy-side the FinTech is looking to tackle, with a focus on supporting the need for smaller buyers to have the opportunity to transact in a challenging market, too, with larger corporates often operating as the only businesses able to secure trade credit from their suppliers.

“It places more emphasis on how healthy the company is, rather than the business’s scale,” said Kim. “A large-scale business with a short-term operation could be rejected, whereas a small business with positive credit history would have a good chance of approval.”

Modernizing The Industry

Considering the fragmented nature of the industry, and the challenge that small businesses face across the globe of embracing digitization, offering trade credit to the market continues to be a challenge even with third-party intervention.

A lack of digital data from which to draw upon, and the continued lack of access to traditional banking services for many SMBs, continue to throw a wrench in an underwriting process that remains essential to getting suppliers paid.

Yet Kim acknowledged that change is afoot in the fashion arena.

“We live in an era that is rapidly changing due to computer automation and digitalization,” he said, encouraging the sector to prioritize convenience, reach a broader audience, and drive greater participation within production and the supply chain.

Much of the efforts in B2B payments and credit innovation are aimed at accelerating B2B payments, yet as with other industries, the fashion sector is unlikely to waver from its tendency to wield 60-day terms — longer than the previous 30-day standard.

“From our analysis, 30 days [was] deemed too short a time to create such a structure,” Kim said of Flowfy’s decision to allow buyers 60 days to repay, while providing suppliers payment within two days. Retail buyers have their of cash flow challenges, and 60 days allows a longer capital float to fuel other purchases, he added.

But it’s also important to help drive modernization, and that includes major paradigm shifts in the ways that buyer and sellers across the industry connect and transact. The rise of the digital B2B marketplace has helped propel the market into the modern age, enabling even the smallest of buyers and suppliers a way to operate on a digital platform without having to launch their own eCommerce operations.

It’s on these platforms that Flowfy finds its trade credit tool — coupled with a logistics offering — most impactful, rather than servicing buyers and suppliers one-by-one. This strategy is also a testament to the growing need for embedded financial services within these online B2B ecosystems.

“Of course, there is a way to target each supplier and create performance to become another marketplace,” said Kim, “but our company’s direction is different. Out goal is to grow together through partnership and coexistence, rather than competing with companies in each field.”