170. When to Access Working Capital for CPG Brands

When to Access Working Capital for CPG Brands

[00:00:00] 

Jordan Buckner: It's no secret that money is tight for CPG brands right now. The era of surplus investor funding is gone, at least for now, and businesses need to learn how to run leaner operations. That said, you still need cash to grow. So when and how and where can you get it? So to answer some of these questions, I've invited on Jim and Carly from AION to discuss when you should access working capital as a CPG brand, how to use it, and how to build that into your plan for your business.

Jim and Carly, welcome. 

Carly Spatt: Thank you. 

Jordan Buckner: Jim, so you talk with founders all the time. Give me a sense of what the financing landscape is looking like right now from all your conversations. 

James Shehigian: Well, I would, I would certainly agree with your characterization that traditional equity, private equity venture capital is definitely tighter than it was a year or two ago.

And, you know, anybody who reads the news knows that interest rates on credit and borrowing money have also gone up in the last year . But there are a lot of avenues for [00:01:00] brands to still fund the different phases of their growth and you know, it's really, I always talk about it as seasons, a business has seasons at different stages of growth, and there are different answers that make the most sense at each of those.

Jordan Buckner: I love that. So I know there's, you know, a lot of different equity paths for founders to get money. And similarly, there's a lot of different ways of getting debt. Carly, when you're kind of talking with founders around a loan or a line of credit for working capital, kind of what typically does that entail?

What can founders and companies use that for their businesses? 

Carly Spatt: Yeah. So working capital obviously has a lot of different uses as far as you can use it for payroll. A lot of our founders will use it for payroll purchasing, you know, supplies equipment you know, it's not just for, you know, invoices and things like that.

So they can use it for many different things that they need for their business, but they also can use it to, you know, pay off debts and things like that for their business. So there's lots of different uses that they can do with the working capital we offer them. 

Jordan Buckner: And then as [00:02:00] part of that, have you found any founders who are utilizing working capital like a really great system or process versus some founders who might kind of use it haphazardly?

Carly Spatt: Yeah, I mean, I think the founders that use it just, you know, for basic uses in their company. So, you know , they're paying off debts, they're using it for you know, supplies or materials that they need for their business. You know, those things that they really need to keep their business running properly I think is a big thing.

Obviously we like to help, you know, if they have any debts or little debts that have been stacked, things like that, to refinance and get them, you know, out of that debt stack and get them cleared up with that. So, I think a lot of them. You know, it's smart when they use it to pay off those debts as well and just to get, you know, so they're not stacking a whole bunch of little debts together.

Jordan Buckner: Yeah. I think that's it. Go ahead, Jim. 

James Shehigian: Sorry to interrupt, Jordan. It's an important point because you know, debt is a very broad topic and the way to use it successfully is think about it. Strategically, what we [00:03:00] see is, to answer your question, a poor way of using debt is we quite often will start working with companies when they've stacked up lots of little merchant cash advances or other people that are offering you know, part of the solution online.

And probably as you get in kind of a debt spiral and the interest on all of those adding together gets puts them underwater when they might otherwise be profitable. We were just talking to one this morning that way. And so when I say think of it strategically, it's, Look at the next year or two of , your business's trajectory and find lenders that understand that.

So you're not going out in three weeks and having to shop for a new one when you get that next big distributor order. , that's the difference between using it well and poorly. I think. 

Jordan Buckner: Yeah. I mean in thinking about the little further, right? Like most founders will use usually recommend they use the lowest or the funding with the debt with the lowest interest rates first.

And a lot of times people use credit cards because at least it gives them 30, sometimes 45 days afloat to be able to pay that off. But the interest rates can, can be pretty high if they're, if they don't. Where does kind of the [00:04:00] working capital line of credit land in terms of the expense from an interest rate?

James Shehigian: You touched on a really important point when you mentioned credit cards. Founders like the rest of us are generally taught that you don't want to just stack up debt on your credit card because buy a television or something it's not going to be worth more tomorrow than it was today. Credit for your business is very different.

If you use it properly, It multiplies your prosperity in the future because you're investing in a business that's growing your own business. You're also using it instead of raising equity too early, which means you are keeping more of your business as equity and your control in your eventual exit. Then if you start selling that right away , to fund things and in terms of interest rates other than things like merchant cash advances certainly the kind of credit we provide is cheaper than the typical, you know, what you might have on a personal credit card.

You know, interest rates go up and down. Sometimes it's a big difference. Sometimes a little one, but yeah, in general, if you find the right business lender, it's not going to cost you [00:05:00] what stacking up 15, 000 on your credit card would cost. 

Jordan Buckner: And I always want to say too, right? The reason this usually comes up for brands primarily is because when you're dealing with physical products and inventory, you often have to manufacture a product.

First, sometimes 60, 90 days before you can even sell it sometimes longer. And so that inventory sitting there without being paid for, then once you sell it to a distributor or a retailer, sometimes they won't pay for a 30, 60, 90 days as well. And so you can have. You know, anywhere from a show where there's 15 or 30 days where you need the cash to cover it and as high as six months to sometimes a year, if someone's really slow.

And so I think that creates this really big cashflow gap, especially as you have to pre buy inventory for. future orders And then that has a big burden on, cash , for your business as well. 

James Shehigian: What you just said , is precisely, I think what's important in what Carly said around finding lenders that understand the food and beverage and [00:06:00] CPG space.

Because it's not like a lot of other industries, particularly the terms with distributors and the various kinds of dilution and perishability , on inventory, all those things that all of us in that space know a lot of traditional lenders don't. And so you go to them and say, well, I'm not going to get paid for 90 days, or I typically plan on 5 percent spoilage and shrinkage or dilution.

A lot of lenders just. We'll stop you right there. And so, you know, whether it's us or somebody else, you want to find people who've been in this space for a decade or more because we don't get freaked out about that. We actually create a lending products that work that way. And if you're finding those, those lenders that do that then it can work really well when you start scaling when you describe.

Jordan Buckner: Carly, I'm kind of curious , when you and Jim talk about knowing the CPG industry, how does that show up in terms of the actual application process and or the loan itself? Is it just like, you're more likely to understand those and build those into, you know, the The approval [00:07:00] process or there are other kind of more tangible things that it comes with as well.

Carly Spatt: Yeah. I mean, I think there's a lot of different aspects that help with the process, but I think we understand you know, how a lot of these small CPG companies are, as far as they're, you know, one or two founders that are running the whole operation they are not always, you know, finance people per se that's not their area of expertise, but also their.

You know, short staffed. I mean, it's just them running the whole show, so they're tight on time and we want to make sure that we really, like, explain everything to them clearly, which is something we've been talking about with our team lately, you know, just making sure that they understand the terminology or they understand what we're asking them for.

Because not all of them are finance people, like I said, so that aspect of it you know, really making sure that we try to get it accomplished in a quick time frame and try to get it, make it a smoother process for them because they don't have that much time. They're really, you know, leveraged on time, but also we understand the space like we kind of talked about.

We understand [00:08:00] how , these retailers pay UNFI, KeHe, you know, Whole Foods, Sprouts. Costco, a lot of them that they work with and so we understand how they pay. We understand kind of the cash, the process of that and the dilution rates, things like that. Where a lot of these lenders have no clue about that.

So it'll freak them out basically, you know, and they, and they'll turn away from it. So we understand that space. We also I, I follow them. I know kind of what they're doing, where they're at in their business. What they're looking for. And you know, so we kind of try to do that. We also, like I said, we don't turn away a lot of the founders that other lenders may do, you know, may turn away because we we take chances on them.

You know, we look at businesses that others won't look at. We look at other aspects of, you know, Kind of what their growth trajectory is, is kind of where we look, whereas other lenders may just look at, you know, do you have, are you profitable? How long have you been in business? You know, do you have a lot of debt?

We will kind of work with companies that have debt. So we, we're a lot more [00:09:00] flexible with what we'll work with and we like to look at a company as a whole and see like what their growth kind of projection is going to be. And if we feel that they have that, then we, you know, we'll take a chance on a lot of these smaller businesses.

James Shehigian: I think there's the one thing I was going to add, Jordan, is that the idea that, you know, founders aren't necessarily, this might be their first company. So, they haven't sold a KE five times before. Because we've worked with so many that do, or, you know, find a lender that knows this stuff, you can quite often end up being helpful beyond just the money that you give them.

And so I'd say, I don't know what you think, Carly. I think the majority of our customers, we do some level of, you know, basic guidance strategically about, you know, they say, well, I know T's told me they're going to order this next week. And, and we say, well, that'd be wonderful. What happens? We've seen a pattern where it.

Maybe take longer, less, whatever, and can give them that objective viewpoint. And it helps them then make their own decision about when to borrow and what the right size of credit line and how they use it. So it's more than just the [00:10:00] money. If you, you need, whether it's us or anybody, you need somebody who understands the space well enough to add value beyond money.

People talk about shopping for a venture capital firm, you know, you, all the money is green. You want somebody who has smart money and we think of credit the same way. 

Carly Spatt: Yeah, and we do try to help them. We care about them. It's not, we will give them advice, even if it's not necessarily beneficial to us.

James Shehigian: We just want to help these brands. 

Jordan Buckner: I love that. So as we think about brands on their journey Jim kind of curious, like when in the company's life cycle should they start thinking about bringing on the working capital. And when's too early , and when's kind of , the right time. I know it definitely varies, but when have you seen kind of be ideal?

James Shehigian: Well, you know, that comment about seasons, that's really one of those seasons is when you need working capital credit. So most often, no two businesses are the same, but most of the time, what we see is a founder will create a product. Usually Brial at some way, either a small online forum or with the [00:11:00] local natural and CP organic grocers, independence, things like that.

They start to get some proof of product market fit and they can often approach friends and family. You do small convertible notes and things like that, which is a hybrid of debt and equity. They can approach local angel investing groups, which are groups of wealthy investors that care about this space.

Challenge there though is all of those top out at a, at a level probably below what you're going to need when you do start getting interest from larger retail chains and the big distributors and food service companies and things like that. So you need to plan for success just like you plan for downsides in your business.

And if you project out that within the next year, you want to be there. 500 doors all around the country and these chains and you're getting POs and you're getting interest. That's the time to start shopping for credit. One of the challenges we have with companies that come to us is they don't think [00:12:00] about that early.

And so they've already got the, or they've got 30 days to fill a 2 million order with Whole Foods. , and then they are scrambling. And when you do that it's tough to make the best decision. You've got to shop for a lender. So you want to think about it before that stage typically. And then second, you want to find a lender that can scale with where you think you're going to go.

A lot of them will top out at 250, 000. That's typical. We, and a couple of others will go from 20, 000 up to 5 or 6 million if you're going Business goes that way because that point about not having a lot of time is true. You don't want to go shop for a lender every three weeks. So when you reach the stage of needing credit financing and working capital, make sure it scales with you.

And eventually you'll outgrow that. You will succeed. You're in a thousand stores. You've got competing term sheets from equity investors. You can then dial back the credit at that point. So that's kind of what the life cycle of it typically is. 

Jordan Buckner: Do you need to be profitable to access this type of 

James Shehigian: It depends on the lender.

If the lender does not [00:13:00] understand the space well and thinks more like a traditional bank does. Yes. For firms like us, no, we, this, this business of knowing the space. One of the ways we use it in our credit decisions is people will give us projections of where they think they're going to go. We have experience to judge what we think of that projection.

So no, you don't have to be profitable. You, we want to see it growing. We want to understand where you think your next big Avenue is going to be. But if those make sense to us, we can make credit lines on that basis. 

Jordan Buckner: I'm always curious as well. If you, and then you say you advise a lot of companies, those who.

Are using your working capital products. Are you helping advise them on how to best kind of pay that back? Right. Like they're thinking about taking out a loan for an order that's coming up. Are you helping to think through like, okay, what's your margin? How much should you be allocating so that you're paying back the loan?

Once you get the payment from. You know, from a distributor or something like from the order expecting that there's going to be some deductions, it really helped [00:14:00] them figure out like where the money's going to come , to pay you back. 

James Shehigian: Yeah, so , there's two pieces to that. , we at the end of the day started as a financial technology platform.

So for us, the pay down things are automatically administered through the system. The client sees that and controls it. So there's a lot of, you know, well, what do I pay tomorrow questions that are automatic. But this applies, frankly, not just in food and beverage, any business. It's an irresponsible lender that, that lends you money on terms you can't easily repay.

And we do see this all the time. When I was talking about stacking up lots of little debt, quite often, like the one we talked to this morning, the the interest payments will start to erode the margins, sometimes be the difference between profit and no profit. So we are scrupulous about not doing that.

And there are, and many good lenders are that same way, but , that's a main thing to look for. If you're not comfortable, With what they're saying, you can pay back, listen to your inner voice. You should be aligned with a lender on that. 

Jordan Buckner: That makes sense. Carly, I know you have talked and have a lot of companies that [00:15:00] the team has worked with on these solutions.

Can you share some examples of other CPG companies who have used products like this and what that experience was like? 

Carly Spatt: Yeah. Yeah. So one that everyone would know in the space is purely Elizabeth. We can talk about her cause she likes us to share. So she was here post or pre me, but I do know a lot about kind of how it works as we talk about it all the time.

She was someone that started out in Jim's neighborhood in Boulder, which is a big organic you know, food and beverage space where a lot of the bigger organic brands start. And she started and, you know, just out of her kitchen small business didn't have a lot of sales and whole foods, you know, came to her and said that, you know, she needed to get a half a million dollar order going in a short period of time.

And she was smart because she didn't go and give up equity in her business to get capital. So she worked with us. And she was able to fill that order and grow and, you know, obviously she outgrew us and she didn't [00:16:00] need us anymore, but she grew, you know, was with us for about the first four or five years of her business and she still owns a hundred percent or almost a hundred percent of her business.

So she was very smart. You know, not everyone does that. Some of the brands will, you know give up equity early on in their business. But the, it's, you know, the smarter option, obviously, if you can, is to try to keep as much equity in your business as you can. Another one that we've worked with that's a, a bigger one was No Cow Bars, which same thing.

They worked with us until they kind of did their Series A and you know, didn't need us anymore. And obviously they're doing very well. But a lot of these bigger brands, you know, worked with us. They were smart about kind of. Not stacking too much debt, not giving up a lot of equity and they worked with us and were able to grow their businesses in a good way and still maintain control of their businesses.

We do work with a lot of other brands as well, you know, currently that are really starting to take off and just grow like a cheesecake company that we're working with that they are interestingly enough doing a lot of in hospitals, [00:17:00] they're doing some government products with the government and the Pentagon.

They're selling to a whole bunch of different outlets. And we're helping them grow and they're already, you know, increasing their sales rapidly. They're, you know, extending their line with us. They're needing more, more capital. So they're growing with us and we help a lot of these, like I said, these smaller brands that aren't small anymore.

A lot of them, like I said, purely Elizabeth, but they started somewhere. So we help them to grow. And you know, that's what we love to do. So we love to see these small businesses grow and in the right way, like I said, so that they're not. You know, , losing power over their company, losing control of their company.

Jordan Buckner: Yeah. I think one thing as well in this day and age, a lot of founders are looking for ways of retaining more of that ownership, but also struggle because. They're running into financial hardship of actually having the cash on hand to grow their business. I saw a post from a chocolate, the founder of a chocolate company on LinkedIn.

They were like, chocolate prices have gone up and I don't know if I can afford to pay for, for this route [00:18:00] because I don't have the cash up front to be able to, to buy that. And it's leading to these, you know, very crucial decision points for, for businesses. And so it's always nice to have options like this to be able to get through those tough seasons, as you mentioned, Jim.

James Shehigian: We have other customers that have chocolate in their recipes and they, they're running into the same thing. And that's why I was saying, you know, you don't want to necessarily go out and borrow 500, 000 well before you need it. But if you can find it on a revolving credit kind of basis, you do want to go out and get a limit like that, that you can draw on when you need it.

You're not paying interest on money until you use it. That's a key thing about credit working capital. But if you find a structure like that, then you've got that in your pocket. And if chocolate prices skyrocket, well, you do land this enormous order from Whole Foods, you're not standing scrambling for the money.

You already know how you're going to pay us that order. 

Jordan Buckner: Yeah. I think , that's so important. So, you know, one thing that I always recommend as well is like, have these conversations now before you need it as a founder, so you [00:19:00] know what options are available, get to know your options for it. So that when you're having those meetings, you can confidently say.

Yes. Knowing that you have an option to fulfill. Yeah. 

James Shehigian: You don't want to be saying, I'll get back to you when you get that big meeting you've been working on for six months. 

Carly Spatt: Planning ahead is a good thing. 

Jordan Buckner: Yes. So Jim and Carly, anything else that we haven't discussed around this topic that you think is important for our listeners to know?

James Shehigian: I would say that , you need to use your own judgment. There are a lot of people, especially when you start. Getting a business that gets some visibility in the marketplace that'll, that'll come at you with very different kinds of ways to fund your growth. Get many opinions, not just one. If, as I said, if it's, you're not comfortable with how the company operates and how much they're making you borrow at the beginning or not don't assume because you're not experienced in finance that you shouldn't listen to that in your voice.

If it doesn't make sense, don't do it until it does. You know, we've seen Any number of clients come to us and then say, gosh, I wish I'd found you a year ago, , but , do your homework, [00:20:00] do it now while you got a little time and then you'll be ready to grow. 

Carly Spatt: Yeah, I agree. Make sure you're comfortable with, you know, who you're working with and ask a lot of questions.

I think that's always smart. Don't, like, be afraid to ask questions if they're not going to answer them for you, then there's a problem. They should be able to answer the questions you have and listen to, like I said, like Jim said, you know, listen to kind of your instincts. 

Jordan Buckner: I know there's some companies who sometimes wish you don't pay them back because they make more money on the interest down the line.

There's other companies who want to see you succeed and loan you more money and succeed that way. 

James Shehigian: My own bias is if someone comes to you and tells you you're, before they even talk to you or they've even looked at your business, you're pre approved for 200, 000. Well, you want to look at that extra hard.

I would feel better if I were a business person borrowing that someone understood my situation and then said, here's what I think makes sense. , that's kind of the lens I'd use. 

Jordan Buckner: Excellent. Jim, Carly, thanks so much for being on today and sharing more about some of those ad products for working capital.

If anyone has questions or wants [00:21:00] to learn more from the AION Team, I know they are open to talking with you and seeing how they can help regardless if you end up working with them or not. They just want to make sure that you have the right information so that you can succeed. Thanks so much for being on.

James Shehigian: Thank you, Jordan. Appreciate it. 

Appreciate it.