Every company sets out with a grand vision. But the only way to achieve that vision is through growth. Sometimes that growth comes naturally, but there is almost always a period where every company hits a snag. The story normally goes something like this:
You have or see an issue with the way something works and you know you can build a better experience or product. You promote this idea to a few people and it starts taking off; maybe you launch a crowdfunding campaign for the initial production run. The product starts gaining interest and bigger buyers take notice. Maybe you get your product in front of those buyers through RangeMe. Then comes the event that can induce accomplishment and elation, often simultaneously — you get a big juicy purchase order from one of the buyers. Amazing!
But then: panic. This is more inventory than you’ve ever produced, the deposit to the factory is going to be massive, and the purchase order means you don’t get paid until after the product is delivered, which could be months. If you can find a way through this cash flow gap, the growth opportunities are immense. If you can’t, it can possibly kill your business.
Fortunately, this common problem has plenty of solutions to help you through this exciting period! Let’s review five options that seem to work pretty well for a lot of businesses.
1. Equity Finance
Simply put, you can sell a portion of your business for a cash infusion and that cash can be used to fund your ongoing operations and inventory production. There are many different investment firms and you can often find a likely investor by looking up who invested in companies similar to yours.
Pros: Investors can be strategic and add value to the business. The investor is along for the ride, so if your business fails their investment does too. Thus, they have an interest in helping you succeed.
Cons: Valuations are typically pretty low for consumer product good companies, so you may end up forking over a significant portion of your business to secure the funds you need. It’s one-time financing, and you sell a piece of your company every time you use this method. It is normal for it to take 90 days or more to put a deal together.
Providers: CircleUp (crowdfunding), 500Startups (accelerator), and many others
2. Work in Progress (WIP) Finance
This is a financier that will take a risker position to fund the production of inventory. This is very similar to Accounts Receivable (AR) factoring and often requires the same guarantees.
Pros: This can be a fast method for getting your company funds. WIP firms are familiar with the time constraints around a purchase order. Typically, once you establish a relationship you can continue to fund purchase orders through them. They use the credibility of the PO issuer, so you can get funding even if you are a young company.
Cons: Working with WIP firms are typically expensive as the firm is assuming more risk than many of the other options we list here. They require pretty strict warrants from the business owner like personal guarantees or liens against all other business assets. Additionally, they are not invested in the growth of your company so they don’t care if they have to sink you to get their money back.
Providers: Leland Capital Advisors, wip-funding.com, others
3. AR Factoring
An Accounts Receivable, or AR, factoring firm, will buy your receivable from you at a discount. That means once you have delivered the inventory, instead of waiting 60 days to get paid, you can get paid a portion of the PO from an AR factor immediately, and then the firm collects from the PO issuer when the payment term has elapsed.
Pros: This funding opportunity is based on the credit of the PO issuer as the inventory has already been delivered. It is typically a bit cheaper than WIP Financing because some of the risk has been removed. Once they have verified the details of the financing deal, the process moves fast.
Cons: The AR factoring firm has to qualify every new PO issuer you work with and they can change rates or refuse to serve certain PO issuers. It generally requires the same strict warrants that WIP financing requires. Similarly, they are not invested in the performance of your business and will come after you to make themselves whole. Finally, if your PO issuer does not end up paying them, many factoring agreements include a clause that would make your business liable if the PO issuer does not pay. Some agreements will include punitive clauses where you have to pay if the PO issuer pays late.
Providers: Check out this article for invoice factoring providers
4. Merchant Cash Advance
This is not a loan, but actually a purchase of your future revenue at a discount. Essentially a new take on AR factoring, this funding method will buy a portion of your future revenue, even if you do not have a receivable on hand. That means this can be used to fund production of inventory.
Pros: This process moves very fast and is quite easy to do. Many providers promise funds within 48 hours. This opportunity is based on your revenue track record and includes little other qualification so the process is much easier than most of these other options. It typically does not require a lien on your business.
Cons: This method is a very expensive option. The groups who give out merchant cash advances (MCAs) can’t structure their loans because they would be liable for usury at the rates they charge. Take note, some businesses can pay over 100% APR for MCA loans. These fund issuers will go after all of your assets to make themselves whole and most will require personal guarantees. These can impact your personal credit and make it difficult to qualify for other life purchases.
Providers: Kabbage, OnDeck, plenty of others.
5. Inventory Crowdfunding
The latest innovation in funding inventory is crowdfunding your inventory. Inventory crowdfunding companies allow anyone to pay for your inventory which is then put on a consignment agreement. As your inventory sells, you pay the people back.
Pros: This method is reputation-based so as you continue to build a relationship with the community you can expect to see your costs go down. Since there is an incentive to fund companies these consignments don’t require the amount of marketing and attention you expect with crowdfunding. You can make this opportunity available to your supporters and pay them instead of a monolithic financial institution. You can leverage existing financing costs to build brand affinity with your customers. It can scale alongside your business needs and is the most flexible solution.
Cons: Takes about a week to receive funds after a successful co-op. Depending on the business it can require strict warrants like a personal guarantee. You are required to complete one consignment before you can run multiple concurrent consignments.
There is no one-size-fits-all solution when raising cash for your growing business, but there are a lot of options to consider. If you need help raising cash for your next round of inventory but don’t want to deal with banks and other expensive partners, learn how inventory crowdfunding can work for you. Check out Kickfurther today.
About the Author
Kickfurther’s fundraising platform helps growing businesses grow faster by raising cash for inventory production. The unique crowd-financing experience supports businesses that are selling through any combination of direct-to-consumer, online, wholesale, or retail channels. Payment schedules and terms are customized for each client so that production, sales, and cash-flows coincide with their Kickfurther timeline.