Over the past year, we’ve learned that many young companies are financing their inventory completely the wrong way. What’s the wrong way to finance inventory? With venture capital funding.
Why you don’t need VC funding for your brand
First and foremost, unless you have a completely new business model (like Dollar Shave Club or Birchbox when they were first starting out) or something else that’s extremely innovative about the brand you’re building, venture capital funding is probably not right for you. If you do take VC funding, it should be used exclusively to drive your business’ hiring and marketing needs. These are important investments in growth and worth selling a piece of your company for. But, given that there are many other ways to finance your inventory, selling a big chunk of your company to do so doesn’t make any sense.
At this point, you might be asking yourself, well if I can’t use venture funding, what should I do? Here are three options:
(1) Your Suppliers and Manufacturers
Our advisor, Lisa Hom, who’s starting a new brand called Kaleido Concepts and has been an executive at multiple $100 mm+ brands, plans to finance her inventory by, “...getting creative when working with manufactures and suppliers. It all comes down to cash flow. The strategy should be to pay your manufacturers for the goods after you sell them. I asked a manufacturer for terms of net 120 days, meaning that I didn't have to pay him for the goods until 120 days after he shipped the product. So it gave me 90 days to sell it and not have to pay for the goods out of my cash.”
While it may take a bit of leverage to get that type of accommodation from a supplier, most founders don’t even know that they can ask. Many manufacturers feel that they are falling behind and are eager to partner with founders who can educate them on the world of e-commerce. When starting a new brand, you need to talk to suppliers from a place of strength, so getting creative about what your strengths are is super valuable. Moreover, we’ve seen several start-ups partner with their supplier by letting them take an equity stake in the company. Not only does it give you capital, but it also completely aligns your incentives.
(2) A Letter of Credit
Now that you’re in business and actually have sales, you can go get a letter of credit from a bank. The letter of credit will demonstrate to your suppliers that you will be able to pay them. This letter of credit not only allows you to purchase more inventory than you otherwise could, but it also allows you to negotiate better payment terms with your suppliers. Now that you have more inventory, you can drive higher sales, increase the amount guaranteed by the bank, buy even more inventory and do it all over again. So long as the inventory is selling, you’ll continue to be able to use this approach to finance your business.
(3) Inventory Factoring
Finally, although inventory factoring sometimes gets a bad name, there are great companies like Dwight Funding, who are revolutionizing the world of inventory factoring and taking a modern approach to working with young companies. Inventory factoring is when a company takes on debt to finance inventory against its future sales or accounts receivable. This can be especially effective when you work with large retailers like Sephora, Nordstrom and others that commit to purchasing large amounts of product for the upcoming season well in advance. These receivables can be leveraged to get a loan in order to be able to buy the inventory that will support these large contracts.
What do you need to be successful?
If you pursue these strategies, you need to maintain trust with the third parties you work with by forecasting your demand and inventory needs accurately. If you’re unable to pay your supplier because you’ve vastly overestimated the sellthru rate of your inventory or your factoring partner can’t get a straight answer on what you expect this year, these partnerships won’t be successful. That’s where a tool like Fuse comes in to help you forecast demand and inventory more accurately. Planning inventory and getting it right is our bread and butter. As a scrappy start-up, our tool can help you gain leverage and continue to forecast easily and accurately as you grow your SKU count and monthly order volume without throwing more bodies at the problem. No matter how you choose to finance your inventory, Fuse is here to help you focus on your business, not your inventory.