How to Manage Costs When Producing Inventory with Increasing Demand

Having worked last few years as the CEO of a company that helps businesses secure funding, I’ve learned that almost every company hits a snag in their growth at a certain point. The story normally goes something like this: they have an issue with the way a product works, and thinks they can build a better one. They pitch this idea to a few people and it starts taking off; maybe they launched a crowdfunding campaign for the initial production run. Their product starts gaining interest and sales skyrocket.

But then production orders become increasingly larger and more costly. The high demand is amazing news, but how do you manage the high cost of production when the sales revenues to cover it may take many months to materialize? If you can find a way through this cash flow gap, the growth opportunities are immense. If you can’t, it can kill your business.

Fortunately, this is a well known problem and there are plenty of people who can help you through this exciting period! Let’s review five options that work pretty well for a lot of businesses.

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.

  • 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 providers, 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; if your business fails so does their investment, so 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 a one-time financing, and you will need to sell a piece of your company every time you use this method. It's normal for it to take 90 days or more to put a deal together.

    • Providers: CircleUp (crowdfunding), 500 Startups (accelerator) and many others

  • WIP Finance: This is a financier that will take a risker position to fund the production of inventory. This is very similar to AR factoring (see below), and often requires the same guarantees.

    • Pros: This can be a fast way of funding; 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: These are typically expensive, as they are assuming more risk than many of the options here. They require pretty strict warrants from the business owner, like personal guarantees or liens against all other business assets. 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, others

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.

  • AR Factoring: An 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. They will then collect from the PO issuer when the payment term has elapsed.

    • Pros: This is based on the credit of the PO issuer, as the inventory has already been delivered. AR factoring firms are typically a bit cheaper than WIP Financing because some of the risk has been removed. They're also generally pretty fast once they have verified the details of the financing deal.
    • Cons: You have to qualify every new PO issuer you work with, and you can change rates or refuse to serve certain PO issuers. They generally require 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: See a detailed list here.
  • Merchant Cash Advance: This is not a loan, but actually a purchase of your future revenue at a discount. It's 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: It's very fast, and many providers promise funds within 48 hours. It's also 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: It's very expensive. They can’t structure these as loans because they would be liable for usury at the rates they charge. Businesses report paying over 100% APR for MCA loans, and they 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.

As you continue to build a relationship with the community you expect to see your costs come down.

  • 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: These are reputation-based, so as you continue to build a relationship with the community you expect to see your costs come 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. You can also scale alongside your business needs, which is a flexible solution.
    • Cons: It 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 also required to complete one consignment before you can run multiple concurrent consignments.
    • Provider: Kickfurther; create an account here to see how they can help you grow.

Have any questions about funding your business? Leave us a comment!