How to Finance a FMCG business

A few disclaimers to start with; First, I am not an accountant, second, every business is different… although the problems that most businesses, especially FMCG businesses face are pretty similar. What I am is an entrepreneur who set up and successfully exited a business with 95% equity (my mum had the other 5% for a £30k startup investment… which I appreciate is not available to everyone). I am also someone who loves to learn. I invested a lot in learning from mentors and on a variety of courses during my journey, plus I learned a lot from my mistakes… and I love sharing what I learned to help others not make the same mistakes.

The primary reason that FMCG companies need investment is due to cash flow, not profitability. I have written more on this at – which is probably worth reading before you read this, but here’s a quick summary; As FMCG companies we often deal with suppliers who are a lot bigger than us and customers who are even bigger than that. We do not have a lot of power. We normally need to pay suppliers for our stock far sooner than our customers pay us for it, and we need to hold an amount of stock to service our customers. This gives us 2 things that suck up cash; 1) “Stock holding” the value of the stock that we hold and 2) “Debtors” The amount that those lovely people at Tesco, Sainsburys, Amazon et al owe us.

For ease of maths let’s say you have a £1.2m turnover company (£100k pcm).

If you need to hold 6 weeks’ worth of stock, that stock value is about £70k (assuming a 50% GM).

If you are on 60-day payment terms your debtors will be about £200k. If you are working with Amazon it will be more!

Now let’s say that your business grows 50% per year to £1.8m. This means that your £70k stockholding is now £105k and your debtors are now £300k. That’s an additional £135k cash that is held in your business that you have to find from somewhere. That’s 7.5% of your turnover, and most £1.8m businesses don’t have 7.5% net profit, especially if they are growing at 50% per year.

At this point, most people think that they need to raise money from investment. There are many problems with this, primarily it’s not easy, and almost as importantly you can then get on other people’s timelines and end up facing a whole other set of pressures, especially in the future when you will undoubtedly need more cash, because you will grow turnover… which means the stock and debtors will grow.

So, instead of looking at the symptom – the lack of cash. Look at the causes of the problem, the debtors and the stock holding.

The best way to fix this is to get your payment terms extended by your suppliers, which is what we did. You could get very very lucky, like we did, and have a supplier who will give you this because of the strategic relevance of what you are doing (in our case the geography we were in).

If you aren’t that lucky there are other options. You could offer to pay more. This may sound counter-intuitive, but as I said at the start cashflow kills more companies than profitability. Even if you are less profitable the additional costs could easily be outweighed by either the cost to finance borrowed money or the long-term cost of giving away your equity (it’s your equity that gets you paid in the long-term, you need to guard it like a dragon guarding a hoard of gold).

The other option, which is my favourite option, is to offer your supplier 5% (less if you can get away with it) of your company for extended payment terms with an uncapped credit limit…. not very dragon hoarding gold, but to explain:

Let’s say you value your £1.2m turnover company at £2m (post-investment for ease of maths). That values 5% at £100k. You could go to an investor and get £100k in your bank for 5% equity. This is what most people do because they love to say that they have raised money and no one explains the alternative. This is only a sticking plaster, as you grow you need more and more money, which either costs you (interest) or dilutes you.

Instead of this, you give 5% to your manufacturer to get you from 30 days to 90 days payment terms.

Assuming that you are buying £50k of stock per month (£100k sales at 50% GM), then this additional 60 days is already worth £100k.

Now let’s say that you grow 50% per year; Next year your stock holding will be £75k and the 60 days will be worth £150k. Year 2 your stock holding would be £112.5k and the 60 days will be worth £225k. Year 3 your stock holding will be £168.75k and the 60 days will be worth £337.5k – “Entrepreneur maths” that’s a £6.75m valuation on the 5%.

The benefits of this are not just financial. It should be easier to sell to your manufacturer than an investor, the risk for them is very low (assuming you agree not to go crazy with your ordering). It grows with your business. Most importantly you go from being a customer to a partner. Win Win.

If you back this up with Invoice Financing on the debtors – where your bank pays you the value of your invoice on day 1, for a fee – and some DTC sales, where you don’t have debtors. Then you can turn your business from a cash drain to a cashflow monster…. and cash is what you need to fuel the growth, to hire great talent, to develop great products to do awesome (ROI proven!!) marketing.

ADDITIONAL NOTE: It’s worth remebering that an investor’s job is to provide as good a return as possible to their investors. A manufacturer’s job tends is to make and sell more stuff. Based on that a manufacturer’s goal may be more likely to allign with your goal than an investor’s.