How to Fund Your Fashion Business: A Look at New and Traditional Models
Last month I spent three full days at the Texworld USA and Apparelsourcing USA tradeshows here in New York. One of the highlights of my time there was interviewing three very smart women about how to fund a fashion business.
If you missed the event or couldn’t be at the show this season, here are a few of the highlights from our talk about fashion funding:
Method #1: Crowdfunding
Shannon Lohr, the founder of Factory45, shared her expertise on crowdfunding your fashion brand. Here are the main nuggets of wisdom Shannon shared with us around crowdfunding:
- Crowdfunding is a way to pre-sell your collection. You use the money you raise to produce your line. This is not charity and the funds you raise are not donations- this is a common misconception.
- Crowdfunding offers a low barrier to entry. You can market your product early on.
- Popular platforms include Kickstarter, iFundWomen, and IndieGoGo.
- VETTA is a great example of a brand that went through the Factory45 program and learned how to launch a crowdfunding campaign. They raised $90K, triple their original goal.
- You can crowdfund as many times as you want, as long as you have an audience who is still engaged and is still interested in what you have to sell. Nisolo was an established footwear brand that used Kickstarter to launch a jewelry line.
- The#1 reason crowdfunding campaigns fail is that you don’t have an audience to launch to. You need to bring the audience to the platform to pre-order what you want to produce.
- Build your email list. This is where the support and money is.
- 500 dedicated email subscribers is better than 200 people who never open it. An email open rate of 20%-30% is strong.
- Social media is not a good backup for email. You own your email list. You pay to reach your audience on social media. A better approach is to use social media to drive people to your email list.
- A failed or struggling crowdfunding campaign can be very informative: maybe you have the right product but you’re targeting the wrong audience. Or maybe you have the right audience but they want something slightly different than what you created.
- You need to have a crowdfunding deadline. If you do the ongoing, trickling in orders (always pre-selling) you can place an order with your factory that meets their minimum.
- You must already have the materials, fabrics, and trims to create a sample before launching your campaign. You also need photography, a campaign video, an email list, a social media following, and a marketing plan (for before and during your campaign) before launching your campaign.
- You need a minimum of 6 months (and ideally 12 to 18 months) to build up your momentum and prepare your crowdfunding campaign.
Method #2: Savings, Cash Flow, and Collection Development
Syama Meagher, founder of Scaling Retail, shared her expertise on using cash flow and collection development to build a fashion business. Here are the nuggets of wisdom Syama shared with us around cash flow, budgets, and collection development:
- Long terms plans for fashion funding- how much money do you have to start and how do you build a business model that will enable you to be sustainable over time?
- You can’t just have money for that first collection- you also have to have money to invest in marketing.
- When it comes to preparing your business, don’t be short-sighted. Really take a long-term approach. Focus on assortment planning and ask yourself how much money is going into product development. Can you do that that sustainably over time? Meaning, should you focus on an item-driven brand to start, rather than a full collection? Which will give you more money to allocate to marketing?
- Item-driven collection: one core staple product with colors and variation.
- Details are important. Do your homework. You can’t just have a general idea of your marketing plan (i.e. “I plan to do influencer marketing”). Who are the influencers you plan to work with? How much will it cost you? What is your projected ROI? You need to project operating costs. You need to be clear upfront on how much money you will need. This way, you will have a clear grasp on whether your cash flow and savings and collection development decisions are going to work and be adequate to cover everything.
- You need to have a dollar amount in mind that you’re willing to risk. And then essentially ask yourself “How do I play Tetris with this money in order to achieve my goals?” You are imposing limitations on yourself and your business in order to make the best use of the money you have.
- 30% of your total budget should be allocated to marketing.
- Tools you need: budgets, revenue streams defined, marketing plan.
Method #3: Small Business Loans
Juliet Obodo, founder of FWRD Startup Solutions, shared her expertise on accessing capital via small business loans. Here are the nuggets of wisdom Juliet shared with us around small business loans:
- Small business loans are an option for fashion brands, but you should already have established your business in some way. This is different from being “established.” It means that you have a registered business, a website, a business plan, some sales. You have a business checking account with money flowing through it and you have a business savings accounts. You can’t have just an idea.
- You’re getting money to grow. You’re not borrowing money because you need it- you’re borrowing money to level up.
- You need to be to build some revenue and proof of concept before you go to borrow money in order to minimize risk.
- You need to be able to say where you’re going to allocated the borrowed funds in order to grow and then easily pay back the loan. i.e. You’re not borrowing just to borrow.
- Think like a house flipper: they give you the cash, you use it for something specific, flip the house, make money, and pay them back.
- Too often brands look for loans before they’ve incorporated or become an LLC, without a business plan, without a website, using a gmail address rather than an official business email address– these things all add up to making a difference as to whether a bank will lend to you.
- Turn the tables and put yourself in their position. If someone came to you looking to borrow money for their business but wanted you to write a check to “Jane Smith” instead of “Jane Smith Designs, LLC,” how does that look?
- Creating (or updating) a business plan helps you to figure out how you’re going to use the money you’re looking to borrow.
- Consider launching an eCommerce shop with other designers’ products to get the business rolling. Then launch your own line once you have some traction. (Shannon from Factory45 mentioned that a few of her designers did this successfully).
- Don’t take out a loan for less than $50K. That’s because $5K-$25K is something you can raise via other methods (i.e. crowdfunding).
- Try to work with vendors that will report to business credit bureaus to help build your business credit early on.
Looking for investors?
- You need a million in revenue or a million followers. – Shannon and Juliet agreed on this.
- Be careful who you get married to here. What are the expectations of the investor and terms of their investment?- Syama made this important point.
How long should a founder of a fashion brand be prepared to financially support themselves before seeing any real profit?
All three women said: 3 years!
In an upcoming post on the blog, I will be sharing more wisdom from Syama, specifically about how to create a direct-to-consumer strategy.