Financing your sustainable fashion business
Financing your business can be tricky. In fact, it may be one of most difficult tasks you face in growing. Most fashion businesses start out on a shoestring budget. Don’t be put off by not having loads of money but do be realistic that you are going to need to invest in your business if you want to succeed.
Sustainability is also about being financially stable. Your inspiring social and environmental goals will not go far if you are not seeing any commercial success. Many now-successful fashion brands have reported not making any profit for the first three to five years of trading. It is hard, so the sooner you think about investing in what you do - the better.
There are many different options and models for raising capital, whether you are just starting out or you are looking to grow. Below we highlight a few options you might want to consider exploring.
Crowdfunding involves a number of people each contributing financially to your business or idea (via a loan, equity investment or donation), until you reach your funding target. As crowdfunding is an online process, the large pool of investors is often geographically disparate and each investor will tend to contribute a relatively small amount of money.
- Flexible alternative to conventional bank loans;
- Timing (you can raise finance relatively quickly);
- Profile building/customer engagement (can raise awareness of your business and create loyalty among this potential customer base – so investors can be both future customers and brand ambassadors);
- Market research opportunity/proof of concept (test the market, get feedback and understand how to best position your business);
- Pre-selling (you know how much to produce and it’s pre-funded, so cash-flow issues linked to upfront costs are minimised).
- Legal protection (your idea could be copied if you don’t have the right legal protection in place);
- All or nothing (typically, if you don’t reach your funding target, any money raised is returned to investors);
- Time consuming (considerable time spent on raising awareness and demonstrating your company’s potential).
Find a mentor before building your crowdfunding campaign to help you understand how to best market your business prelaunch. Set a realistic target, otherwise you risk receiving none of the money (and investors will get their money back). Be creative with your rewards – monetise what you already have to offer. Try to have a pre-existing base of followers on social media. This will give momentum to your fundraising efforts once the campaign kicks off.
Crowdfunding can be a particularly effective option for fashion companies with a social or environmental mission because you have a bigger inspiring story to tell and this can help to attract financial contributions.
You borrow money, which may be secured against assets. You’ll have to repay that amount, plus interest, according to a legally binding repayment schedule outlining the timing and amount of repayments. The lender’s concern is to get their money back; your concern should be on making timely repayments so that the loan isn’t compromised.
- Certainty (the money is repaid based on an agreed repayment schedule - ie unless you default, the loan is not “on demand”, so you have the money for the whole term);
- Control (no equity is given away – the lender has no control over your business).
- Security (if you default on the loan, the lender could have recourse to your company or even personal assets);
- Little flexibility (you need to be in a position to make the agreed repayments on time).
Shop around and negotiate with your preferred bank/lender. A bank will try to get as much security as possible for its loan – as a borrower, you should negotiate hard. Also, look around for innovative alternative lending schemes in your local area. There may be schemes that specifically support businesses with a social or environmental mission.
You may also borrow money from friends or family that want to help you out - a private loan. Be clear on what the money is for, how it will be used and when you intend to repay it and how, any interest, etc. Better yet, make a written agreement to avoid any future misunderstandings.
A grant is an amount of money given to your business or project. You will not need to repay it but you may have to use it for a specific purpose.
- Fewer strings attached (no equity given away - you retain full control of your business);
- Not as much financial burden (money is non-repayable, and there are no fees/interest on it).
- Time consuming (finding a grant that suits your business circumstances and needs, and the application process can be lengthy);
- Uncertain outcome (competition is high, so you will invest energy and time without any assurance that you will obtain the grant);
- Part-funding (you may have to match or top up the grant funds for your specific project);
- Limited availability.
Make sure you are familiar with the criteria attached to the grant and can make a compelling a case about how the grant would positively impact your project. Take a look at what grant schemes are available in your local area; you might look for institutions that support your demographic, fashion or social impact/environmental sustainability projects.
Equity finance involves you selling part of your business, in the form of shares to investors who, in so doing, become part owners. The sale of shares will attract a cash injection into your company.
- Expertise (investors can bring knowledge, advice and contacts to the business);
- Risk-sharing (business risks are shared with the investors);
- Financial management (no need to factor in loan repayments into company’s finances).
- Expensive and time consuming process (finding the right investor and negotiations);
- Loss of control (need to consult with investor before making certain decisions);
- Limited access (only limited companies can sell their shares, so not an option if you’re a sole trader or partnership);
- Ownership (you’ll own a smaller share of your business, though that share may increase in value post-investment);
- Impact on company strategy (you would need to ensure your investors share your same values and mission).
Speak with a lawyer if you are contemplating raising any kind of money through these or other routes.
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