Consumer packaged goods (CPG) brands face a number of funding challenges when it comes to growth and scaling. One major issue is the inefficiency of working capital cycles—often, a brand must pay purchase orders for inventory two months before the inventory sells.
Due to the nature of the industry, it’s notoriously difficult for CPG companies to access traditional bank loans and lines of credit, which leaves them feeling there’s no choice but to raise excessively dilutive equity that reduces their shares in the company—but still holds them responsible for paying back 100 percent of the funding.
Given the variety of CPG funding options and the wide range of terms, it’s quite a task for brands to determine the right type of funding—and the right source for it.
The good news is that you have plenty of options, whether you’re a brand-new startup or an established brand looking to grow or scale your business. Here are 10 of the most commonly used funding sources for food and beverage brands, cosmetics companies, and other businesses in the consumer packaged goods industry.
CPG angel investors are typically wealthy individuals who invest relatively small amounts of money into newer companies that need startup cash. Angel investors will invest anywhere between $10,000 to $250,000 in a company and get equity in the company in return.
Running an angel round is less financially risky than taking on debt, but since you’re giving away part of your company to the investor, you want to do your due diligence. Look for a CPG angel investor with industry experience or influence who can provide support and expertise along with cash — and choose one whose ideas and vision align with yours.
Accounts receivable financing is a funding option for CPG companies that do a lot of wholesale orders. Instead of waiting 60 days for invoices to get paid, you can leverage them to get the cash you need now. In exchange for the cash, you commit the payment on outstanding invoices to the lender. This funding method comes with a hefty fee, so it may be best used as a last resort.
Banks have always been one of the first places established businesses go to get help with funding. Bank loans offer large loan amounts and low rates—an attractive prospect if you don’t want to spend a ton borrowing money.
But bank loans may not be in the cards for a new or small CPG brand, given the competitive and risky nature of the business. Banks want to minimize risk, so they look for established companies with a proven track record and excellent credit.
SBA loans are a promising CPG funding option for brands that want to try for a bank loan but don’t have a long history. Banks are more willing to lend to newcomers in this case, since the government promises to pay back a portion of the loan if the business fails.
If you’re a brand new or existing company trying to gauge interest in a new product and raise money at the same time, crowdfunding is an excellent fundraising option with benefits beyond cash.
If you go the consumer crowdfunding route, you can get cash through pre-orders before you’ve even created the product. Crowdfunding also serves as a marketing tool, allowing you to create excitement and build brand loyalty by offering additional perks.
The equity crowdfunding route works similarly, but it helps you find new angel CPG investors or venture funding without having to sacrifice cash flow for loan payments—but you’ll likely have to sacrifice a portion of your ownership in your business instead.
Many companies get stuck in an endless loop of putting all of their revenue into production, leaving little left over for growth. Inventory financing is perfect for established CPG brands that need inventory to keep growing.
Inventory financing for CPG brands is non-dilutive—you use your inventory as collateral to prove your ability to pay back the loan, and will get your money quickly.
A line of credit, like a credit card, is a revolving credit account. You borrow money based on your current needs and pay back your borrowed amount over time. A predetermined credit limit also caps the amount of money available to borrow.
The great thing about a line of credit is that you don’t need to draw the money as soon as you open an account. You have the money available whenever you need it, and you don’t need to worry about loan payments until you’re ready to use the funds.
If you don’t want to give away equity in your company or take on debt, revenue share financing can offer what you need. Lenders will look at your revenue and offer a loan if they believe you have enough sales to keep monthly payments coming in.
Since lenders base your repayment amounts on your company's revenue, this type of funding puts less strain on your cash flow. Some lenders also have no fixed end date for the loan, which means you don’t need to stress about paying it off within a specified period of time—or suffering penalties if you don’t.
Seed capital is a type of financing for brand-new startups. It comes from private CPG investors, often in exchange for a stake in your company or a share of the profit. In many cases, seed funding is provided by people close to the founder, like friends, family, and other familiars. It’s typically used to get an idea off the ground, and it usually covers just the most basic startup needs. Once you’ve successfully acquired seed capital, you can use it to help secure larger sums from a bank or venture capitalist.
Venture funding is for CPG companies that are ready for their second or third funding rounds. If you have a proven concept and some sales under your belt, venture capital companies are willing to hear your pitch and make a funding offer.
Venture capital comes at the cost of giving up some of your equity in the company in exchange for cash. But unlike most CPG angel investors, many venture firms have various teams available to help the companies they fund thrive. Venture capital may be a great choice for small CPG brands that will get enormous benefit from this type of expertise and advice.
You’ve secured funding and you’re ready to take your brand to the next level—congratulations! Since funding never seems to stretch as far as you hope it will, here are a few ways to get the most out of your funding.
Consumer brands must allocate trade spending if they want to grow, but considering trade spending is the second-largest cost for CGP brands—and it’s especially difficult to manage—you could be hemorrhaging dollars that you could otherwise invest in other areas of the business.
While many emerging and growing CPG brands use Excel to manage their trade promotions, it’s unsustainable once you reach a certain point. By tightening up your organizational processes and better managing your trade spend, you’ll have a clearer and more accurate picture of where your money goes so you can cut spending that doesn’t produce results.
You need all the cash you can get as a CPG brand, which makes planning and forecasting essential for keeping cash on hand and building a reserve. The most effective way to protect and build your cash reserve is to closely track and reconcile your spending. Managing deductions is one of the biggest pain points in this area for CPG brands of all sizes, which is why Vividly has created our Deduction Scanning Module to help you unlock and maximize your cash flow.
Without accurate forecasting, you’re essentially flying blind, operating on best guesses around how much product you need, your expected revenue, and various expenditures. Accurate forecasting requires reliable data, and if you’re mining data from multiple sources and trying to make sense of it manually, chances are, your data will put a wrench in the viability of your forecast. By automating your sales forecasting and trade planning, you help set yourself up for making better informed, data-driven decisions business-wide.
Vividly recently raised our own round of funding to develop and build new tools for our trade promotion management software and round out our TPM and TPO offerings to help CPG brands take control of their overall trade spend. These tools help businesses like yours gain visibility into trade promotions to save time and money. Reach out today to request a demo and see what Vividly can do to help minimize your trade spend — and maximize your CPG funding in 2023.
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