Coronavirus could spell doom for fashion brands as demand and money dry up

• Fashion brands rely on sales in department stores to pay their bills. Demand for new product has disappeared, as major retail chains shuttered their stores amid the coronavirus pandemic.
• Unlike other small businesses, many of these brands are limited in their ability to tap the $350 billion small business loan program established under the $2 trillion relief bill President Trump signed late last month.
• Fashion brands often depend on a financing method called factoring, by which they can use their outstanding payments owed as collateral for cash.

A sitting area typically filled with people is virtually empty as a man walks through Herald Square with a protective mask on March 12, 2020 in New York City.

Gary Hershorn | Getty Images

Without quick government aid, the people whose work propels the fashion industry – designers,  suppliers and other laborers – are facing financial ruin, American brands are warning.

Fashion brands rely on sales in department stores to pay their bills. Demand for new product has disappeared over the past month, as major American retail chains, including Macy's, Neiman Marcus and Nordstrom, have shuttered their stores amid the coronavirus pandemic. Many are not paying for shipments of products already in their stores

"Everything that already shipped, they're saying, 'We're not paying you because our stores are closed. We need 90 extra days,'" said Gary Wassner, CEO of Hilldun, a firm that helps finance fashion brands. 

That means brands need cash now: to pay their seamstresses, to pay for material, to buy garment bags, to prepare for the crucial holiday season.

Unlike other small businesses, many of these brands are limited in their ability to tap the $350 billion small business loan program established as part of the $2 trillion stimulus and relief bill signed by President Donald Trump late last month. Fashion brands often depend on a financing method called factoring, by which they can use their outstanding payments owed as collateral for cash. Other businesses typically rely on bank loans for financing.

Factoring is necessary for brands because while cash flow in the fashion industry is irregular and seasonal, bills are not.

Factoring organizations are not directly supported by the CARES Act. While fashion brands could go to banks for financing, many have little or no relationship with the banks that are working with the government on loans. For speed and efficiency, some banks have prioritized giving loans to businesses with which they already have relationships.  

"We already know there's not going to be enough money [for the small business loan program]," said Wassner of Hilldun. "You're asking an industry that relies on factoring to now go to now establish an account at a bank they have no relationship with. By the time they've gotten to the end of the queue, they're out of money."

Treasury Secretary Steven Mnuchin said Tuesday that he is seeking an additional $250 billion for the small business loan program. Democratic lawmakers, meantime, are urging that a portion of the small business lending program be reserved for companies without relationships to banks

Designer Jason Wu said in an interview with CNBC that while his self-titled premium sportswear brand may be able to weather the storm, he worries that many of the smaller designers may not. His brand's parent company, JWU, was acquired by Chinese private equity firm Green Harbor Investment last year. Hilldun is a minority investor in the company. 

Without relief, Wu said, the pain could ripple throughout independent brands in the U.S., and down the supply chain. 

"It's also going to kill off a legacy of American fashion, the know-how of the seamstresses the, amazing pattern makers, who make flowers – it's basically the whole of Seventh Avenue," Wu said. 

The legacy of 'Fashion Avenue'

New York's Seventh Avenue, also known as "Fashion Avenue," is iconic for its role in the garment and fashion industries. In the early 20th century, it was the hub of professional activity for many Jewish immigrants. Wu is a Taiwanese-born designer who has dressed former first lady Michelle Obama.

But Seventh Avenue has already changed from what it once was, as today's shoppers have focused on mass-produced fashion and retailers themselves have fallen under pressure. The street is now home to hotels, restaurants and theater, as well as its Fashion Walk of Fame, 

Wu said he worried that Seventh Avenue as it once was known may be entirely swept away. 

"We're looking at the end of Seventh Avenue," Wu emphasized.

Looking for relief, retail and manufacturing executives at companies including Under Armour and Levi's last week wrote to the White House requesting a 90- to 180-day stay on duties. "Big brands that need a stimulus package, Wu said. "We need to preserve the unique nature of these small businesses – that very much fuel the productivity of the industry."