Everything You Need to Know about Alternative Financing Options
Things were abuzz at Surf Expo in January, with core industry accounts and retailers bringing great energy to this year’s show. And it wasn’t just the big players who were making news and fostering new connections with retailers. Accessories, hardgoods, footwear and brands across other categories were more active and visible than ever this year.
During the holidays, major retailers experienced declining brick-and-mortar and e-commerce sales, with some even taking on double-digit losses. All indications are that the challenging environment we are in now – with looming inflation concerns, supply chain slowdowns, labor shortages and deep discounts from retailers — will continue well into the coming year. So it’s no surprise that brands are starting to take a closer look at their cash flow and funding sources to make sure they are well positioned to ride out this difficult period.
For many consumer brands in the surf, snow, skate and activewear space, debt can sometimes seem like a dirty word. But the popular alternative—raising equity—isn’t always as glamorous as it seems, especially when it involves chasing limited VC dollars, diluting ownership in your company, and operating at a loss. Founders and business owners shouldn’t feel pigeonholed into pursuing VC funding, friends and family investments, or angel investors, at least without first understanding various debt options that might prove to be a better fit for your financing needs. In this environment, you may also find that institutional banks are less supportive than usual, even frowning upon or penalizing clients for losses. When times get challenging, it’s often worth exploring what alternative lenders can offer, as they tend to look beyond the balance sheet to help business stay on track (or get back on track).
Read on to learn more about what various debt financing solutions can do for your business and how leveraging these options just might make all the difference.
Asset-based lending is the most traditional type of financing, as well as the most cost-effective. Borrowing against your balance sheet, the lender provides funding based on inventory cost value, typically between 50-60%. If the business has a wholesale channel, receivables can also be leveraged for cash flow, typically up to 85%. By leveraging debt now, brands get an extra boost to accelerate growth without giving up equity or diluting ownership in the business.
A form of secured lending, factoring is a great tool for wholesale companies selling into retail stores to get early access to your money for products and services you’ve already delivered, allowing you to control your cash flow and keep your business moving forward.
A factor lends up to 85% against your receivable for cash flow and will assume the credit risk. So, if your customer files for bankruptcy while you have outstanding receivables, the factor will pay you the full amount of the invoice. Factors also handle all aspects of managing the receivable (i.e., ledgering, reporting and following up with customers on your behalf when payment is due) and essentially become an outsourced receivable department. While slightly more expensive than asset based lending, the added services and benefits beyond increasing cash flow make it worth it for many businesses.
Purchase Order Financing
When companies receive a large purchase order from a retailer, but they lack the capital or supplier terms to produce the order, a purchase order (PO) financing firm will often step in to help. PO financing solutions range from a letter of credit, if suppliers require cash in advance to produce goods, or a wire transfer to the supplier for final payment when the goods are ready to be put onto a vessel and shipped. Typically, if margins are on the order are 25% or greater, a PO financing firm can provide 100% of the cost of the goods to produce the order, including freight and duty payments. When product is received in the company’s warehouse and invoiced out to customers, the PO financing firm is paid by the company’s receivable lender (often a factor or asset based lender).
A borrowing option based off your company’s historic sales, a revenue-based financing approach looks back at one to three months’ worth of sales to determine a credit line to draw against. Borrowing rates are dependent on the prior period’s sales average and can be a more expensive debt option compared to asset-based lending. Typically, the company pays back the lender daily, paying around 10-20% of credit card receipts from website sales.
Accounts Payable Financing
Accounts payable financing is a great option for companies that receive extended payment terms on inventory purchases from a lender rather than the supplier directly. The lender will typically extend payment terms on purchases to their borrower in 30-day increments — up to as much as 120 days — with payback auto-debited from the borrower’s operating account.
If debt isn’t the route for your business, there is always the option of pursuing equity investments. Brands typically look to equity investments to fund non-working capital needs — to cover marketing and advertising, human talent, or research and development budgets.
While equity investments can come in many forms including private equity, venture capital, family office, friends and family or other individuals, they always involve trading a percentage of the business ownership in exchange for receiving capital in the form of cash.
Alternative Lending Resources:
Asset-based Lending: Alternative lenders specializing in high-growth DTC and e-commerce businesses, like Rosenthal’s Pipeline, focus on leveraging inventory and sales data by SKU to extend advance rates against inventory even further for direct-to-consumer sales.
Revenue-based Financing: E-commerce funders like Wayflyer and Ampla cater to omni-channel brands with high margins. Seasonal brands that need to bring in inventory with minimal sales to leverage should be wary of this option. While often a pricier solution, revenue-based financing typically provides more liquidity than other debt options.
Factoring: Factoring solutions through companies like Rosenthal can benefit any company that sells products on terms, across a wide range of industries.
Accounts Payable Financing: Through platforms like Settle, companies can pay suppliers immediately without having to use their own working capital. Think of accounts payable financing as PO financing for direct-to-consumer brands that lack capital or supplier terms, but know they can sell through items quickly and efficiently with a high enough margin to cover the cost of this type of capital.
Purchase Order Financing: PO financing with Rosenthal offers companies a short-term alternative inventory financing option that provides incremental working capital to cash-constrained businesses. It’s a non-dilutive way to provide capital to produce orders received from retailers on time, without raising equity.
Maria Contino is the Western Region Sales Manager at Rosenthal & Rosenthal, the leading factoring, asset-based lending, PO financing, d2c and e-commerce inventory financing firm in the United States.