So there you are. Sitting across the table from the grocery buyer from your friendly national grocery chain. They love the product, and they are impressed by your vision of how you will be getting your product into the kitchens of millions of consumers. OR. Starbucks just called and said, “Hey, we got your samples and we love them. When can you deliver 5,000 units?”. Sounds great, Right? But what happens next?!
If financing big purchase orders were our only concern in life, I’d say we are doing quite alright!
Now it’s time to think about how this all works. Do we have the inventory, the supply chain, and most importantly DO WE HAVE THE PROPER FUNDING IN PLACE for our food business? Yikes! So many questions come to mind as to how we deliver on this amazing and potentially once in a lifetime opportunity. Do your best not to screw it up. OK? No pressure.
Let’s talk about proper financing for your food business. The conversation could take all day, so for the purpose of this blog post we will hit the most important topics as far as funding your food business is concerned. We can dig in deeper into some different areas with another blog post. If you have any specific questions please don’t hesitate to reach out and we can answer the best we can.
PO Financing: Filling those freshly minted POs and where we turn first.
First step should be analyzing your current inventory, work in process, and raw materials to see if you have enough to pull the order off. If not, what does your current working capital situation look like? Consider putting together a quick financial model to see how you can handle the financing internally.
Are you a credit worthy entity?
You probably think so, and I am sure your mom would agree. But we are talking “credit” from a financial prospective. Are you able to get open terms from your vendors, or at least some of your vendors? Your current vendors should be your 2nd step to determining how to finance these great purchase orders you have just received.
At first request, they may deny you any additional credit terms. There are a few ways around their initial “NO”. You can offer a personal guarantee or perhaps some form of Vendor Payment Program that is offered from your current Factor (if you aren’t using one, now might be a good time to start. Email us to learn how a factor protects your company against Major Grocers).
No Supplier Credit Terms, What Next?
This is where food financing gets juicy(pun intended). After you have determined that you will need extra working capital to scale your business, the best solution could be turning to alternative lending. We have outlined a few of the more popular financing options that could help provide the additional production finance or working capital that you need. The four types of funding listed below are all about leverage. Speaking with a professional that understands the pros and cons of each type of funding is most likely your best bet.
MRKT keeps up to date on the most popular, easy to use, and cost effective financing products and helps structure lending programs that work for you. Key factors that come into play while exploring working capital solutions include price, capital availability, time to fund, and easy of use. We like to say that the cheapest solution usually isn’t the best, and the quickest funding option is probably the most expensive.
Asset Based Loans for Food Businesses
Often the most misunderstood type of financing, Asset Based Loans are great for a more established business. Also known as ABL, these facilities take into consideration a number of different assets from your balance sheet. Underwriters look at your Accounts Receivable, Inventory, Raw Materials, M&E(Machinery and Equipment), and sometimes Real Estate.
As a young business that is scaling quickly, this may not be the best type of funding for you. It’s not considered “opportunistic” and pays closer attention to your recent history and current balance sheet. Costs will be low, funding typically takes 2-4 weeks, and capital availability fluctuates depending on your balance sheet(learn more about Balance Sheets on Investopedia.
Term Loans For Food Businesses
What some may consider the holy grail of financing, Term Loans are a popular way to fund your business. Term loans are great because they provide optimal flexibility to do whatever you want with the money(for the most part). Term loan lenders take into consideration everything from recent cash flow, last two years tax returns, balance sheet, and what you want the money for. Term loan lenders may not be so quick to fund if you need the money to pay off old debt or past dues. Make sure you build a solid business use case for the funds you are requesting.
are typically relatively inexpensive, fund in 1-3 weeks, and allow you to pay it back over time. Keep in mind a standard term loan does not operate like a line of credit that you draw down on as needed. You get one lump sum and you pay it back over a set period of time. The key to growing a business successfully with term loans is taking into consideration pricing, term, and size of loan. Too expensive, too long of a term, or to much money can have a major negative effect on your cash flow.
Accounts Receivable Factoring for Food Businesses
Factoring is a topic we talk about quite a bit. Specializing in manufacturing and product companies, we find ourselves suggesting factoring to our clients over 75% of the time as the solution to their cash flow needs. Accounts Receivable factoring is a great way to help manage your cash flow as you continue to grow.
How does Accounts Receivable Factoring work? After delivery of your goods, your factor will purchase your invoices and advance you up to 95% of the cash in advance of your customer paying. Your customer then pays the invoice amount directly t your factor and leftover cash(the reserve) is dispersed back to you accordingly.
Factors can sometimes play more than just a singular role in supporting your supply chain. Here is a PRO TIP: Often times your suppliers will accept some form of payment assurance agreement or letter of direction from your factor. This means that your factor will pay your supplier directly once goods are delivered prior to you receiving any funds.
Factoring is a great working capital tool for a business that is growing quickly. The best accounts receivable factors will not put a credit limit on your account. This is because they are funding based off of the credit of your customers. The more you invoice, the more they will fund you. Just make sure you are working with a Non-Recourse Factor so you are receiving the credit protection against your customers. If the factor is asking you to pay more for credit insurance, find someone new as it’s typically included.
Purchase Order Financing for Food Businesses
Purchase Order Financing may be the most widely misunderstood of all of the financing structures for your food business. PO Funding is a great tool because it only really takes into consideration the credit worthiness of your buyer and your ability to execute on the PO from an operational prospective. A good PO Funding partner will handle both Work In Process and Finished Goods.
The definition of PO Funding Is:
PO Funding is when a lender or finance company helps you purchase or acquire goods pre-sold goods for resale to credit worthy end customers. The two main types of PO Funding include Finished Goods and Work In Process.
Here is a great FAQ on Purchase Order Financing by Star Funding, Inc.
In Conclusion
The good and grocery business can be a rewarding one. There are a number of things to consider when selling to the majors and it’s important to be working with a financing partner that understands how they operate. Proper financing for your food business is only one piece of the puzzle, but it’s an important one. The complexities of the industry from manufacturing through distribution require a meticulous operator that knows the ins and outs.
Stay tuned for more great information on financing your brand. If there are any topics you would like us to write about please don’t hesitate to send us an email at info@mrktcapital.com.
See you on the shelves,
Your MRKT Capital Team
