Does Made in the U.S.A. Spell R.I.P?
By Rob Reuteman
Published July 12, 2010 | FOXBusiness
They want to bring their designer knitwear business home from China, establishing a factory in Manhattan that would employ 80.
They have the experience: 50 years in the garment industry between them.
They have commitments from established customers eager to move back from overseas production and jump on a made-in-the-USA bandwagon.
They have real estate commitments, either in the Garment District itself, or in East Harlem.
They have the the equipment lined up, 35 computerized knitting machines and laundry facilities.
They have a business plan with financial assumptions and five-year projections that have been vetted by professional financial advisers.
But after more than 10 months of meetings with banks, potential investors and sympathetic economic development officials, they still don’t have financing they need to pull it off.
”We know with absolute certainty that this is precisely the right time to do this and that, specifically, we are the right people to do it,” Vianin said. “But it’s the worst time to get financing. There is no money.”
Most lenders these days require that entrepreneurs invest 20% of their own money in startups. For a $2.5 million loan, that translates to $500,000. The Elanis partners don’t have it yet, in cash or collateral.
“Any lender is interested in how much you have put into the business, or are willing to put ion,” Kearns said. “To date, we have invested over $125,000. At this point we don’t have assets and our cash flow is just building to a point of interest to the banking community.”
These days, lenders are looking for a personal commitment from business owners.
“It’s a proven fact that when you have no skin of your own in the game, you are much more likely to walk away from a business idea gone badly, than when you have your own money at stake,” said Lakewood, N.J., business consultant Issamar Ginzberg.
At another point in time, bakers, venture capitalists, angel investors and others might be swayed by the plucky, feel-good sales pitch of a return to domestic manufacturing. But most financiers are still paying for the bad bets they made in the past five years, mostly in the housing industry; risk aversion remains the prevailing sentiment.
Kearns and Vianin are not exactly babes in the woods looking for handouts. Kearns has more than 30 years on the technical and production side of the fashion business, and Vianin more than 20 years on the merchandising and operations side.
In 2007, they established Elanis Inc., a wholesale women’s apparel business specializing in full-fashion, knit-to-shape sweaters. They operate out of Kearn’s Upper East Side apartment, getting local designers’ patterns manufactured in China – or New Jersey for small-lot production.
Last year, revenues approached $300,000.
Over the past couple years, Vianin and Kearns began hearing more and more dissatisfaction from the high-end designers they work with about the problems associated with overseas manufacturing.
“The desire to have greater control over their product was driving more people to test the domestic waters,” Vianin said. “But full fashion, knit-to-shape simply didn’t exist in Manhattan on any level.”
This led to their startup plan: seek $2.5 million to operate a 30,000-square foot factory locally, employing 80 people to manufacture designer knitwear. New York fashion houses like John Bartlett and Yoehlee Teng say they’ll use a factory run by Elanis.
Another advocate of U.S.-made clothing is Seth Lawrence, president of Bliss Manufacturing, which makes “indie couture” sportswear in New York City.
“Overseas lead times average around 120 to 160 days, door to door,” Lawrence said. “Domestic turn can be in as little as four to six weeks.”
“That’s a big difference when you are doing fashion pieces that are time-sensitive,” he added. “Stores find it difficult to make fashionable, trendy merchandise overseas because the trend can be over by the time it hits the selling floor. So there is some potential to make it in America.”
But any made-in-America plan has to make that sort of business sense.
“When it comes to patriotism versus pocketbook, patriotism loses,” said David Mahmoud, chairman of Dallas-based Allegiance Capital Corp. “Look at where America shops: Target (TGT), Walmart (WMT), Kohl’s (KHP)and JC Penney (JCP). It’s naïve to think any other way. U.S. industry outsources manufacturing on the altar of cheaper prices.”
The partners in Elanis may not be flush with money yet, but naivete is not an attribute easily hung on them.
“Neither one of us is a Pollyanna, nor are we glassy- eyed crusaders,” Vianin said. “We are pragmatic, experienced business people who have identified a market that has the potential for a rapid growth curve and profitability. The fact that it is taking longer than we anticipated to secure the equity funding we need is not daunting.”
Blame the battered economy, she said. “Everyone is pullng back. Their cash flow is limited. Everyone wants guarantees, but we don’t have guarantees for $2.5 million. Our cash flow is not where it should be for that.”
Vianin attributes Elanis’ current lack of cash flow on the amount of time she and Kearn spent in the past 10 months peddling their plans for a new factory to potential investors – time they didn’t spend on their existing business.
“We cut back to work on our business plan,” she said. “But we’ve scaled back on that, and this year we expect to show $1 million in revenue. We’re building equity with banks by building our business.”
“We’re in a difficult position, she added. “ We’re producing in China right now, but it’s temporary. We want to produce in America. We’ll keep networking and knocking on doors. Something will happen, it’s just a matter of time. We haven’t been placed in front of the right individuals.”
If Kearns and Vianin indeed haven’t been meeting with the right individuals, it’s not for lack of trying.
They’ve met with a dozen banks – ranging from local to multinational and eight potential equity investors and eight venture capital companies. They’ve met with government agencies and quasi-government agencies, economic development corporations, empowerment zones, the mayor’s office, small business agencies and politicians. They estimate that another dozen or so public and private financial firms have rejected their plans without a meeting.
“Each experience has given us an opportunity to further hone our business plan and projections,” Kearns said. “In each meeting, we’ve had the opportunity to question the reasons for a turndown which, has given us a firmer grip on our presentation.”
A low point, she said, was a meeting with a venture capital underwriting firm.
“They told us that what we were trying to do would never happen and that we were naïve to think it could,” Kearn said. “They were rife with negativity and did everything they could in the meeting to discourage us. It actually had the opposite effect. It forced us to relook at our plan and our numbers, tinker with and tailor them, bringing the plan to the next level.”
It’s probably no consolation, but Kearns and Vainin’s misery has company.
“We’ve had this same situation here in Los Angeles,’ said Arlene Battishill, president of ScooterGirls Inc., which makes high-style protective gear for female scooter and motorcycle riders. “We actually had $300,000 in the bank [and] were already manufacturing our clothing line. We didn’t need anyone’s money; we just wanted to have a credit line in place to support a large order if we got one. Money in the bank, three houses with equity totally more than a million dollars we were willing to put up as collateral and no one willing to provide financing.
“There is no help for small businesses, especially ones with just a business plan,” she added. “If we as an established business who didn’t need the money couldn’t get financing, who can?”
For now, the Elanis partners will seek a better balance in growing their existing business while peddling their plans for manufacturing fashion knitwear domestically.
“With each rejection we reevaluate to find other ways to peel the bureaucratic and financial onions,” Kearns said. “It pushes us to make connections and dig deeper.”
Added Vianin, “Our level of commitment is sustaining. It overrides the frustration that comes with having virtually every element in place but the gas to get the bus running. We are committed to our Made In America project and see no reason to be discouraged by our quest for that first level of equity investment.”