With 2023 safely in the rear view mirror, now is the time for outdoor companies to take a hard look at what worked and what didn’t last year. While there are positive signs that inflation may be cooling and that interest rates might be starting to come down, the overall economic uncertainty and inflationary pressures that underscored 2023 are not expected to let up anytime soon. Given that, finding the most effective ways to manage growth in this challenging environment – including giving your financing and capitalization strategy a serious review – will make all the difference in the year ahead.
Andrew Barone, Senior Vice President at Rosenthal & Rosenthal
Throughout 2023, we saw major domestic banks, regional banks and other financial institutions pushing out clients, tightening credit parameters and making it more difficult to access capital. While this credit crunch is nothing new, the impacts are being felt across the retail sector. Add to that ongoing inflationary pressures and a possible recession and you can see why it still feels like we are on shaky ground.
Outdoor companies were largely over-inventoried, overly promotional and overly reliant on discounting in 2023. Many brands struggled with managing down excess inventory while also bringing in the right mix of new inventory, either through new product lines or expanding to more high-performing or high-demand inventory. As a result, companies got creative with their marketing efforts, selling their overstock through off-price channels or bundling hot-selling products with excess inventory. While that kind of quick thinking and creativity should certainly carry over to 2024, the hope is that we will see less reliance on discounting merchandise as a strategy to move inventory.
Forecasting will also become increasingly important this year. Many experienced brands believe that retailers do not do an adequate job of forecasting, given that they often rely on antiquated forecasting systems and methodologies. It’s important that brands take an active role in forecasting and don’t just look to retailers to do the heavy lifting. Poor forecasting can lead to an uptick in order pushbacks, cancellations or even running low on best-selling products, so the onus really falls on brands to be proactive with their customers. This becomes especially important for outdoor brands that are launching new product lines.
Whether a company is launching wholesale or direct-to-consumer for the first time, companies can no longer afford to rely solely on past performance. The market now demands that companies pivot quickly to meet shifting consumer demand and respond accordingly to retailers’ buying patterns as they change. In these cases, brands can lean on partnerships with factors that can lend against both accounts receivable and inventory. The right lender can help a company dig deep into the inventory mix and evaluate down to the SKU level to structure the most flexible inventory facility. Surely outdoor companies will not want to find themselves flat-footed with a one-size-fits-all approach.
Along with better inventory management and forecasting to support wholesale expansion, there is also a growing need for companies to focus on customer credit and accounts receivable management. Non-recourse factors can alleviate this burden by providing credit protection against receivables and extending guidelines on the credit profiles of existing and new customers so management can focus on selling to better customers.
Non-recourse factors can become an extension of a company’s operations team by managing, collecting and performing cash applications more efficiently. Because factors are so close to the collateral, companies can benefit from higher advance rates and availability on receivables than they could find with a bank. It’s a good reminder that remaining nimble even with financing offers a real competitive edge.
We’re seeing many brands moving away from stand-alone inventory financing facilities, instead opting for more traditional asset-based lending solutions that include borrowing against newly generated receivables. This is critical for businesses that are extending their cash conversion cycles with a wholesale model selling to retailers on 30-, 60- or 90-day terms.
In addition, purchase order financing has also become popular among brands taking on larger wholesale orders with retail partners that are running into supply chain challenges, especially younger brands that are accustomed to paying for goods in advance and lack open credit terms. They often struggle with financing large wholesale programs when new orders and retailer-specific SKUs can’t be fulfilled through stock inventory. Purchase order financing can provide funding to cover the cost of goods related to those orders until a company is able to negotiate credit terms with suppliers.
For emerging brands in particular, investors are now looking for businesses that can demonstrate sustainable growth while maintaining healthy margins and profitability. They also want to see a growth trajectory that’s tied to brand appeal and product quality more than hot trends or the latest Tik Tok craze. For these companies, the right debt financing facility can fund inventory purchases once a company lands its products on a retail shelf. And the right financing partner with deep industry experience and relationships can make all the difference to a company looking to scale and potentially even pursue an exit.
As businesses look to the year ahead, they should stay focused on remaining nimble, diversifying sales channels to secure more market share, being more strategic with forecasting and inventory management and finding the right financing solution – and financing partner – that can best position a brand for sustainable, scalable growth in a challenging consumer retail climate.
Editor’s Note: Andrew Barone is senior vice president at Rosenthal & Rosenthal, a factoring, asset-based lending, PO financing, DTC and e-commerce inventory financing firm in the United States.
