In the glossy world of fashion—where aesthetics and storytelling reign—the industry's financial underpinnings are quietly coming undone. The global fashion sector is facing an intensifying liquidity crisis, threatening to unravel the very fabric of how clothes are made and sold. At the heart of this crisis lies a historically transactional, power-imbalanced business model—one that is proving alarmingly ill-equipped to withstand the shocks of a changing global economy.

The crisis isn’t new, but its severity has escalated over the years. Extended payment cycles, soaring operational costs, tariff upheavals, and global supply chain disruptions have exposed the vulnerabilities of fashion’s legacy structures. Yet, while the threats are real and rising, a growing coalition of voices within the industry is calling for an overdue shift—from brittle transactionalism to a model built on collaboration, shared responsibility, and transparency.

Legacy models on life support

Fashion's business relationships have long been adversarial. Retailers and brands, traditionally the powerbrokers, often dictate unfavourable terms to suppliers—lengthy payment cycles, unilateral cancellations, and razor-thin margins. For manufacturers, this means fronting the cost of raw materials and labour, only to be paid months later. Azfar Hasan, CEO of Matrix Sourcing, doesn’t mince words, “Factories are filing claims for financing every other day, and banks are pulling out of this sector because it’s considered high risk.” This structural dysfunction, once papered over by steady demand and cheap capital, is now untenable.

Five forces squeezing fashion’s cash flow

A perfect storm is brewing, driven by a confluence of pressures that are crushing the financial flexibility of fashion players across the value chain:

1. Working capital paralysis: Retailers are struggling just as much. A Hackett Group survey revealed negative working capital metrics in the sector for the first time in a decade. With stagnant revenues and rising receivables, many retailers simply cannot pay suppliers on time. As Brad Ballentine of MAS Acme notes, “Inefficient use of working capital comes from buyers and suppliers not sitting down and talking about how to make the business better.”

2. Disrupted global transit: Geopolitical conflicts and logistical blockages—particularly in the Red Sea, Suez, and Panama Canals—have lengthened delivery timelines and tied up capital in transit. According to Drewry’s World Container Index, freight rates have jumped 173 per cent since November 2023. These shipping delays translate into higher costs and longer working capital cycles for all parties.

3. Tariff shockwaves: Tariffs are rapidly reshaping sourcing strategies. The US reimposed steep tariffs on Chinese apparel, pushing average duties to a record 69.1 per cent in May 2025. As a result, US apparel imports from China fell to $556 million—their lowest monthly level in 22 years.

Table: US apparel imports from China ($ mn)

Source: USITC, May 2025

4. Rising input costs: Manufacturers are hit by volatile and rising costs of labour, energy, and raw materials. Cotton, for instance, stood at $0.92 per pound in early 2024, up sharply from a pre-2021 average of $0.65. These costs often can’t be passed down the chain, squeezing margins.

5. Inventory overhang: Retailers are also weighed down by bloated inventories. In February, H&M reported an 11 per cent YoY rise in inventory levels, driven in part by Red Sea shipping delays. Excess stock means capital is frozen, warehousing costs spike, and markdowns proliferate—hurting profitability.

A culture resistant to change

Despite the clear distress signals, the industry remains slow to adopt new operating models. Decades of mistrust, power asymmetry, and risk aversion hinder progress. Buyers are reluctant to absorb the upfront costs of new approaches, even if they promise long-term gains. Moreover, the deep transparency required for true collaboration—such as sharing point-of-sale data or factory financials—remains a cultural taboo.

Collaboration and flexibility is the way forward

A growing number of industry leaders advocate for a paradigm shift towards collaboration, flexibility, and transparency. This new approach promises enhanced efficiency, reduced working capital, and improved profits for all stakeholders.

Optimized working capital: Strategies like postponement of raw materials and joint business planning can significantly reduce capital tied up in the supply chain. Ballentine highlights cases where a "2 per cent increase in direct cost, channeling supply flexibility," led to "as much as a 10 per cent increase in gross margin."

Shared risk and rewards: Moving beyond a ‘nobody takes responsibility’ culture, collaborative models foster shared ownership and distributed risks, as outlined in reports like ‘Under the Banyan Tree’.

Transparency as a driver: True transparency, where factories share balance sheets and retailers provide point-of-sale (POS) data, is crucial. This allows both parties to understand mutual financial realities and identify opportunities for shared gains, as seen with companies like Gym Shark and New Balance.

Sustainability & innovation: A more stable and collaborative supply chain inherently reduces waste from overproduction and cancellations, aligning with growing consumer demand for sustainable and high-quality products. Agile models, exemplified by fast fashion players like Zara, demonstrate how quick response times and reduced inventory can lead to success.

Table: Benefits of supply chain collaboration

The stakes couldn’t be higher

The fashion industry has reached an inflection point. The existing model—built on squeezing suppliers and prioritizing short-term gains—is collapsing under its own weight. The alternative is clear: reimagine the supply chain as a partnership, not a battlefield.

This transformation won’t be easy. It requires unlearning decades of ingrained behaviours and building new capabilities in forecasting, financing, and transparency. But if the industry hopes to survive—and thrive—in a volatile world, the path forward must be stitched together with trust, shared vision, and mutual accountability. As Hasan puts it, “There’s no choice left. Either we build this together, or we lose it all—alone.”