How Invoice Factoring Is Helping Small CPG Businesses Succeed
November 30, 2018
There’s never been a better time for entrepreneurs to enter the CPG (Consumer Packaged Goods) market. Startups and small businesses are finding that disruptive technologies, e-commerce, and myriad routes to market are levelling a playing field once dramatically in favor of large brands.
Yet, even while small businesses are finding it easier to break into the CPG market, cash flow issues persist. CPG companies carry, on average, 60% of the cost of logistics and hold about 50% of inventory (Boston Consulting Group). Larger businesses typically achieve better working capital than their smaller counterparts (PWC), often by squeezing their smaller suppliers for better payment terms. Unfortunately, this simply shifts the cash flow issues onto the smaller business.
Another method of improving CPG cash flow that is gaining popularity among large brands, according to PWC, is reducing their investments. However, reducing investments hinders a company’s ability to grow and isn’t a preferred method of improving cash flow, either.
Smart brands are improving cash flow by optimizing their receivables and inventory, instead. More companies are turning to alternative finance channels and creative solutions like invoice factoring to speed up their receivables cycle without harming important supplier relationships.
It’s a strategy that works for small businesses, as well. In this post, we’ll have a look at invoice factoring as a solution for small CPG company cash flow woes, including a real-world example of invoice factoring in action.
What is invoice factoring?
Invoice factoring, or invoice funding, is an innovative business financing solution most commonly known for bridging gaps in cash flow. Invoice factor FundThrough, for example, advances the full value of your invoice (up to your available funding limit) to your bank account within one business day of your request to fund. You pay back the advance over the course of 12 weeks, with the option to repay early, making the funding fee as low as 0.5%.
You can learn more about invoice funding and how it works in The Ultimate Invoice Factoring Guide, here. Now, let’s carry on and see what this alternative financing method can do for CPG companies.
Invoice factoring helps CPG companies better manage trade spend.
New vendors, in particular, are pressed to get their product on shelves and typically have to accept whatever terms retailers offer. There may not be much (if any) wiggle room around slotting fees, promotions to end-consumers, logistics fees, or the like.
However, small CPG manufacturers may be able to negotiate lower annual fees, new store fees, or volume pricing by offering their retailers more favorable payment terms. Invoice factoring allows the manufacturer to continue offering retailers 30-45 day payment terms, without the interruption in cash flow. This can give you an important bargaining chip in your negotiations with retailers.
You may be able to reduce operating expenses by qualifying for cash discounts from suppliers.
The flip side of this coin is at the beginning of your manufacturing cycle. Every type of company is vulnerable to cash flow issues, and your suppliers are not immune.
Offering an early payment or COD discount improves a supplier’s cash flow and reduces their risk of non-payment. A supplier might offer a 0.7% discount on invoices paid within 5 business days, for example. Paying a $10,000 invoice to your supplier immediately would result in a $70 savings. Speeding up your own receivables cycle with invoice factoring can give you the free cash flow to take advantage of these cash discounts. (Check out more tips for improving your cash flow here.)
Free CPG cash flow can facilitate increased production uptime.
If you’re caught in a cycle of scrambling to fulfill a large order and waiting on payment before you can move onto the next, cash flow is hampering your ability to grow.
Invoice factoring advances the funds you’ve already earned with a funding fee as low as 0.5%, enabling you to continue production and invoice your next order that much faster. There’s no interest, hidden fees, or other charges. You can see the cost of funding here and compare it to the cost of other financing methods.
Invoice factoring can open the door to R&D and new products launching faster.
Canadian entrepreneur Justyna Kozlowska, the founder of NAGI, produces her organic snack bars to order. By 2015, she was searching for a workable solution to her company’s ongoing cash flow crunch.
“In terms of the cash flow, it’s hard,” she says. “You have an order coming in, but you still have to pay up front for labels, ingredients and things like that.”
Avoiding the creation of new debt was a priority, so business loans, a line of credit, and credit cards were all out of the question for solving her gaps in cash flow. With a constant flow of supplies and ingredients required to fulfill orders, but retailers taking up to 40 days to pay their invoices, Justyna decided to give invoice funding with FundThrough a try. With the click of a button, she now had access to invoiced funds within 24 hours.
Invoice funding empowered NAGI to:
- Reduce payment wait time by 40 days
- Launch 7 new products
- Sell product to 60 new stores
Today, you’ll find NAGI in two provinces and online on Amazon, Costco, Well.ca and more.
Improve your CPG company’s cash flow in just a few minutes.
Payment terms are getting longer; in 2017, the 1,000 largest public companies in the U.S. took an average of 56.7 days to pay their bills. But you don’t have to let these slow payments slow your company’s progress.
No-obligation signup with FundThrough takes just 2 minutes, and you’ll have your initial funding limit in just one business day.
Want to learn more? Dig into The Ultimate Invoice Factoring Guide to learn more about the financing options available to help you start, maintain and grow your business.
Finance your business, today.