Late Supplier Payments Bite American Apparel

Struggling U.S. fashion brand American Apparel has faced late supplier payment controversy in the past, but this week those hurdles compounded for the retailer. Reports published Monday (Sept. 7) said American Apparel has been hit with a lawsuit by one of its fabric suppliers, The Knit House Corp., for allegations of non-payment.

The New York Post reported that The Knit House has filed legal action against American Apparel to recover nearly $81,000 of an order worth more than $134,000. Reports said the lawsuit was “for a relatively small amount,” but that the timing of the lawsuit for the retailer “couldn’t have been worse,” considering the chain’s ongoing economic woes.

The Knit House reportedly claims that American Apparel has “refused” to pay the rest of the bill on its outstanding invoice just three months after the supplier entered into an agreement with the firm regarding invoice payments.

Neither company responded to requests for comment sent by PYMNTS. But reports in New York Post said that The Knit House’s lawsuit comes alongside suppliers’ fears that American Apparel will go bankrupt, leaving outstanding invoices never to be reconciled by a defunct business.

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The company warned investors in a filing last month with the Securities and Exchange Commission that it is losing confidence in the ability to raise much-needed cash to remain afloat. “The company’s existing and any new investors could suffer substantial or total losses of their investment in its common stock,” American Apparel stated in the filing. Analysts said the statement implies that the company could be headed towards bankruptcy, though it is in discussions with Capital One for a possible lending agreement.

An Ongoing Issue

Late last year, New York Post covered a similar story. Reports in December 2014 said that American Apparel was struggling to pay its suppliers on time, delaying invoice settlements by up to 60 days past-due.

At the time, the publication spoke to Reisman Peirez Reisman Capobianco Partner Jerome Reisman, who said that the late payments were putting suppliers on edge about American Apparel’s ongoing financial issues and that these anxieties spread to invoice financing firms, too.

“They keep reducing the amount of availability to manufacturers and vendors to American Apparel,” Reisman said of the lenders. “They don’t want to take the receivables because American Apparel’s not paying their bills [on time].”

Still, American Apparel assured reporters that it has made moves to improve its supplier payments operations. According to a spokesperson, the company “has had great feedback from its vendors over the past two months about the progress it has made improving the accounts payable function, and they expect continued improvements in the weeks and months to come.”

The recent lawsuit filing against American Apparel could suggest that the firm’s AP operations have failed to improve in the first half of 2015. 

Suppliers’ Dilemma

American Apparel’s legal troubles also highlight the struggle suppliers can face when doing business with a company headed for failure.

Earlier this year Target was hit with legal action by some of its suppliers following the retailer’s exit from Canada. Several suppliers have taken the corporation to court for claims that Target told suppliers to send invoices to Target Canada, rather than its U.S. base, just days before the company’s Canadian units filed for bankruptcy protection. The suppliers say that this practice has left them with outstanding bills that will not be paid by Target.

Late payments to suppliers has emerged at the forefront of supply chain news, with legislators in the U.K. vowing to combat the issue, while reports in The New York Times last April highlighted several major corporate buyers, including Mondelez, Kellogg and Mars, and their lengthening payment terms.

But, like the ongoing court battle with Target, American Apparel’s latest hurdle highlights the challenge suppliers can face when doing business with a financially struggling corporation, leaving manufacturers and vendors to pursue legal action or risk their invoices never getting paid should their corporate client go under.