Brought to you by Dwight Funding; Written by Jessica Bates, Director at Dwight Funding
As a follow up to my recent blog titled Raising Capital and Pursuing M&A in Uncertain Times, published by Cosmoprof in May, I’d like to explore fundraising options for the growing beauty brand that extends beyond equity.
Let’s pick up where we left off…
You are the founder of an authentic, fast-growing beauty or personal care brand that is poised for a great year in 2020. It’s going to be the year that you get an investment from one of the top growth equity groups and excel… you may even explore an exit.
Then COVID19 Hits…
It has affected your retail distribution and sales, equity groups have become more discerning and a raise or M&A now will likely result in a lower valuation than anticipated… But you need cash – are there other fundraising solutions?
I’m here to bring good news – there are several fundraising solutions beyond equity.
In the following article, I’m going to discuss four cash crunch scenarios that are common to growing beauty brands, and the related debt product that can help solve that particular funding need.
Funding Payroll
What’s the scenario?
You have a young Company that needs cash fast to make payroll or fund essential operational expenses, and the business doesn’t qualify for other forms of debt.
Debt Solution: Revenue Based Funding or Merchant Cash Advance (MCA)
Revenue based financing is a product in which qualification and the amount of funding is determined by the Company’s trailing revenue numbers. The number of months used to determine the amount of funding varies based on the lender (usually 3-4 month trailing revenue average) and payback is collected by debiting the Company’s bank account on a daily or weekly basis (most often, daily).
This kind of debt can usually be funded very quickly, even as quickly as days after approval.
Sounds great, what’s the catch?
Revenue based financing is often a very expensive source of capital. Payback can be very high, sometimes as high as 20-50% of the amount borrowed.
Funding a Purchase Order
What’s the scenario?
You have just received a large new order from Sephora or Ulta but the Company’s bank balance and inventory levels are low… How do you purchase the inventory needed to fulfil the order?
Debt Solution: Production or Purchase Order Financing
Purchase order financing helps businesses fund the production costs for new orders. For example, say Sephora has issued your business a large new Purchase Order but the Company is low on cash and needs to pay its supplier in advance for purchase or production. Purchase order finance companies are a great solution to help through this cash crunch.
The lender will pay the supplier directly for the product needed to fulfil Sephora’s order. When the order is shipped to Sephora, the lender will receive payment directly from Sephora. The lender will use the funds from Sephora to pay down the borrowed balance, plus any fees. Any leftover balance will be paid to your business.
Sounds great, what’s the catch?
This can also be an expensive form of funding, as the lender in this scenario is not only taking on payback risk but also production risk. Further, it can be a bit fragmented and cumbersome, as each PO must be approved on a case by case basis before receiving funding.
Funding Operations After a Large Inventory Purchase
What’s the scenario?
You just purchased 3 months’ worth of inventory that is sitting on a shelf at your 3PL, waiting to be sold. Once this product is sold, it will take 30-90 days to receive payment from the customer. You are prepared to fulfil expected orders in the coming months, but now cash is too low to fund day-to-day operations.
Debt Solution: Asset Based Lending (ABL)
Asset Based Lending (ABL) is a form of working capital funding. An ABL provider will lend a percentage of what the Company has in Accounts Receivable (AR) and/or Inventory. Therefore, operational spending needs are supplemented while waiting for inventory to be sold or while waiting for retailers to pay after purchasing inventory.
AR and Inventory levels are updated with your lender periodically, usually weekly or monthly. Therefore, as your Company grows, and AR and Inventory levels increase, your borrowing capacity will increase as well.
Sounds great, what’s the catch?
ABL lenders tend to work with slightly more mature businesses then a Revenue Based or Purchase Order Lender will. A Company generally needs to be doing at least $1mm+ in annual sales before getting approved for this kind of funding. Further, an ABL lender will need updated reporting for business on a monthly or weekly basis. Therefore, companies will need to have their bookkeeping and finances in order before pursuing ABL funding.
You Need Growth Capital but Don’t Want a Low Valuation as a Result of the Current Market
What’s the scenario?
You need additional growth capital but if you raise in today’s market, it may result in a lower than desired valuation. Or you need additional growth capital but prolonging a raise 6-12 months will allow the business to hit some additional milestones that will result in an increased valuation.
Debt Solution: Venture Debt
Venture Debt is a form of equity runway extension. It is structured as a term loan; meaning the Company will get one lump sum and will pay that lump sum back over a period (usually 2 – 3 years) plus interest.
Sounds great, what’s the catch?
This is a form of debt I like to call “quasi-equity”. Qualification of this type of funding is determined by whether the Company has raised equity before and who the Company raised equity from. If the Company does qualify, this can become the most expensive form of capital mentioned in this article, as Venture Debt providers not only collect interest, but they also take warrants in the business.
The Takeaway
If you are the founder of a growing beauty or personal care business and can’t raise equity in this market, don’t fret! There are plenty of funding solutions out there. Pinpoint your cash needs, do your research and pursue the debt solution that best cater to your needs.
ABOUT JESSICA BATES
Jessica Bates is Director of Business Development at Dwight Funding. At Dwight, Jessica spearheads the funding efforts for early stage, growth stage and lower middle market companies in the beauty growth and overall consumer goods growth spaces. Jessica and team partner with entrepreneurs to provide funding solutions designed specifically for the unique needs of growing consumer brands.
Prior to Dwight Funding, Jessica worked in the Investment Banking Division of Barclays Capital. At Barclays, she helped raise private debt and equity capital for both private and public companies globally.
About Dwight Funding
Dwight Funding is a leader in providing working capital solutions and lines of credit to early and growth-stage businesses. Dwight partners with entrepreneurs to provide funding solutions designed specifically for the unique needs of growing consumer brands. The products are structured to work alongside seed or private equity funding by covering all working capital needs of Beauty & Personal Care, E-commerce, Food and Beverage, and general consumer product companies.
Categorized in: Trends/Insights