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Fashion Business Factoring – Explained

July 24, 2009

While we are spending a lot of time discussing and pulling together news on the CIT bankruptcy, we are noticing that nobody is taking the time to explain how CIT as funding works and where the industry will be if CIT disappears.

CIT was able to provide extensive funding to the fashion industry through a process called Factoring.  Factoring is a financial transaction whereby CIT purchases the receivables from a fashion company at a discount, in exchange for money upfront, whereby the receivables are used as collateral for CIT.  A receivable is created when a fashion company creates a sale to another entity on credit.  As an example, Antonio Valente may sell $20 million worth of black Sartorial seamless trousers to a retail store, with payment expected in 60 days.  This generates a $20 million 60-day receivable, which Antonio Valente expects to receive at a future date.  CIT will purchase this receivable for $15 million ($5 million discount) and Antonio Valente will receive the money upfront.  If Antonio Valente goes bankrupt (heaven forbid), the receivable is owned by CIT, which means that CIT has rights to any of the collections from this receivable.

CIT got comfortable with factoring, as it takes ownership receivables as collateral in exchange for money, similar to a home equity line of credit, whereby you take a loan and provide your home as collateral if you default on the loan.  Generally, the quality of a fashion company’s receivables is determined by the credit worthiness and the number of clients they have.  As an example, if Antonio Valente had all their receivables to a small retail shop, this would not be as appealing to CIT as if Antonio Valente had thousands of clients that were large companies.  The discount on the funding and CIT’s willingness to do the transaction would be determined by such factors.

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