The moment has finally arrived. You’ve connected with a retail buyer on RangeMe or at an ECRM Session, and after subsequent follow up meetings you’ve landed a large purchase order. All of the hard work – the numerous phone calls, emails, sending product samples out to various members of the retail organization – has finally paid off. Then reality sets in, and you ask yourself:
“How am I going to fulfill this order?”
With CPG brands under immense pressure, cash flow is continuing to be a major blocker for scaling revenue growth, and sometimes it’s difficult to find how to fulfill these orders. Having to cash flow a production run for up to 60-90 days, then waiting another 60-90 days to be paid by a retailer is grueling, and most growing brands don’t have a plan in place to manage this situation. Even established brands like Dean Foods filed for bankruptcy in 2019 with a large amount of accounts receivable outstanding, which if paid could have helped avoid this situation.
Up until recently, options were limited, either by receiving a personal guaranteed back loan, or giving up equity just to operate with day to day pressures of working with larger retailers who at many times, have net 60 day payment terms, and even more often are still late on payments.
So what are your options? Following are a few you can choose from along with underwriting considerations you might want to consider.
Personal Guarantee Loans
Personal guarantee loans from banks or financial institutions are a great way to solve the short and long term cash flow constraints, but with these, the founders are typically held liable for non-payment or late payment. This means that, if your company shuts down, you could still be on the hook personally. However, the benefit is that, typically, these options are flexible on what you can spend the money on, providing much needed liquidity.
Underwriting Considerations: Because there is a personal guarantee, the underwriting process looks at both the business as well as your personal financial information. Expect to provide your SSN and other personal information.
Factoring
Factoring is a dirty word in the world of business, typically associated with high fees, repayment risk tied to the CPG company, and the dreaded “advance rate” where your money is paid to you for a portion of the total order amount, typically around 75% of the total order. Factoring has been around for a long time and still plays a vital role in business, but due to a few bad actors, the option is typically seen as a last resort for many.
Underwriting Considerations: Factoring primarily looks at the buyer of the invoice, but the liability of repayment comes onto the business, sometimes with a personal guarantee. One of the downsides of factoring is that it’s an extremely manual process; try to get ahead of this and establish a relationship before you need it.
No risk deferred payment terms
Companies like Harvv have entered the CPG space, providing Affirm- or Klarna-style solutions for businesses, where they will be listed as a payment option on your invoices, allowing retailers to pay in net 30, 60, or 90 day terms, but the CPG company is paid up front with no risk. The best part is that the buyer on the other side does not have to provide a personal guarantee. If you do offer a payment option like Harvv, the data shows you will also see increased contract values and customer retention, all with less operational overhead.
Underwriting Considerations: There are several options in the market, but something most of these have in common is that there is no personal guarantee, and with digital first models the underwriting is usually instant or within 1-2 business days. Make sure that your accounting and books are up to date for the fastest approvals.
Dilutive capital
Being an emerging brand, chances are that you’ve raised capital, or have considered raising capital, and if you have a $5M valuation and raise just $1M, that would be 20% of your company, ruining the prospect of a lofty exit for yourself after pouring blood, sweat and tears over your brand. This may sometimes be required, but with the current VC market, there is less and less money being pumped into the CPG space, making this option a less likely opportunity to scale with larger POs. Some CPG focused investors include Access Capital, ZX Ventures (Anheuser-Busch), and Inventages (Nestle).
Underwriting Considerations: Although dilutive capital doesn’t typically have a “underwriting process,” VCs and investors will look at more than just financials which can take from one to six months of due diligence. Ideally, this is not being handled at the time of receiving a PO, but rather months in advance, with data to prove your business model.
What’s next?
Getting a head start on signing up for financing before you need it and making sure that your books are up to date is the best approach to take. You might need capital at the moment, but if you are not prepared you might find yourself in a world of stress and frantic actions if you suddenly do. Instead, find a way to establish a “capacity to borrow” to make sure you are ready for that large PO when it does come.
As the market continues to contract, funding options aren’t as readily available as they were a few years ago. But as a brand who has made it this far, it’s important to realize that it won’t be a matter of if you will need a capital expansion plan, but when! Invoices are being paid later and later by buyers both small and large, and that, stacked on top of long payment terms to begin with, is creating a downward pressure that can be avoided by planning ahead.