Working Capital for Production: What Are Your Options?
Securing sufficient working capital facilitates innovation, sustains growth, supports resilience against unexpected challenges, and prepares you for a bountiful harvest. Without adequate working capital, even the most promising wineries can wither before reaching their full potential.
Let's unwrap the financing options available to support your production needs and help you choose the best fit for your business.
What Is Working Capital for Production?
Working capital refers to the funds required to manage the day-to-day operations of your business. It's the difference between your current assets (cash, inventory, and accounts receivable) and your current liabilities (accounts payable and short-term debts). In the context of production, working capital finances the purchase of raw materials and covers labor costs to keep the production line moving smoothly.
Having adequate working capital keeps your operations running seamlessly, much like a well-tended vineyard thrives under careful management. It bridges the gap between paying suppliers and receiving payment from customers, keeping your cash flow steady. What’s more, it empowers you to scale production to meet increasing demand or explore new markets — just as a vine extends its reach when nurtured properly.
Common Options for Securing Working Capital Loans
Finding the right financing solution for wineries or CPG brands can be challenging, especially with so many options available. The best choice depends on your business size, financial health, and specific needs. Let's delve into financing options tailored for smaller brands without asset-backed lines of credit and larger brands seeking substantial funding.
Financing Options for Smaller Brands Without Asset-Backed Lines of Credit
Emerging brands often face hurdles in securing traditional bank loans due to a lack of substantial assets or credit history. However, several alternative financing options cater specifically to businesses in the growth phase.
Wayflyer
Wayflyer is ideal for small, emerging brands experiencing rapid growth but operating with tight cash flows. It provides revenue-based financing by advancing funds based on your sales performance and marketing spend, with repayments made as a percentage of your future revenue.
Repayment terms are flexible, aligning with your revenue streams to ease cash flow pressures. Additionally, it doesn't require collateral or an extensive credit history, making it accessible to businesses still establishing their financial footing.
Settle
Settle works best for brands needing to purchase large quantities of raw materials and manage high levels of accounts payable. Use it to extend payment terms with suppliers, effectively providing working capital by paying your suppliers upfront and giving you up to 120 days to repay.
With Settle, you can align supplier payments with your revenue cycles, improving cash flow without straining your finances. By paying suppliers upfront on your behalf, it fosters stronger relationships with them.
Parker
Parker suits businesses seeking extended credit lines tailored to inventory and production needs, without being tied to traditional credit card points systems. It provides a corporate credit card with higher limits and longer payment terms based on your inventory levels and sales performance.
Financing Options for Larger Brands With Asset-Backed Lines of Credit ($1M+)
Established brands with significant assets and financial history can access more substantial financing options. These typically require collateral, such as inventory or accounts receivable, and involve more rigorous qualification criteria.
Aion Capital
Aion Capital’s customized financing solutions are based on your brand’s specific needs, offering competitive interest rates due to collateral backing and access to significant capital for substantial growth initiatives. For wineries ready to expand their vineyards without overextending finances, Aion Capital can help cultivate your growth.
Dwight Funding
Dwight Funding provides flexible credit facilities secured against accounts receivable and inventory. It supports businesses with seasonal fluctuations or extended sales cycles, providing working capital solutions that scale with your company's growth. With experience in consumer brands, the team understands industry challenges and can tailor financing to your needs.
Assembled Brands
Assembled Brands bring deep industry expertise in sectors like fashion, beauty, wellness, and food and beverage. Its collaborative approach includes additional support in operations and strategy, with flexible terms designed to match your business cycles.
JPalmer Collective
JPalmer Collective combines financing with industry insights and mentorship, focusing on building long-term partnerships. Its tailored solutions aim to align with your brand's vision and goals, helping you ferment success on your own terms.
Financing for Sustainable and Regenerative Agriculture
If your winery or CPG brand incorporates sustainable or regenerative agriculture practices, specialized financing options can support your mission.
Walden Mutual
Walden Mutual offers loans and lines of credit to food and agriculture businesses that prioritize environmental stewardship. It may offer more flexible terms, recognizing the unique challenges of sustainable agriculture.
Steward Financial
Steward Financial is a community lending platform to bring together regenerative agriculture entrepreneurs and mission-driven lenders together to rebuild our food system.
What It Takes to Support a $1M Line of Credit
Securing a $1 million line of credit involves meeting specific financial and operational criteria. Lenders providing asset-backed lines of credit require assurance that your business can repay the borrowed funds.
Requirements might include:
Sufficient collateral: You need adequate accounts receivable and finished goods inventory to secure the credit line, reducing the lender's risk. Typically, these lenders will lend up to 70% or 80% of accounts receivable and/or 50% of finished goods inventory. Therefore, you need at least $1.4 million of AR and/or $2 million of finished goods inventory to support a line of credit of $1 million.
Solid financial history: Demonstrating consistent revenue growth, profitability, and sound financial management boosts lender confidence.
Cash runway: Having at least 12 months of cash runway indicates financial stability and the ability to withstand market fluctuations.
Institutional investors: Backing from institutional investors can enhance your credibility and signal that your business has been vetted by professionals.
Detailed financial statements: Providing comprehensive and accurate financial reports, including balance sheets, income statements, and cash flow statements, is essential.
A winery with a robust portfolio of accounts receivable from distributors and a substantial inventory of bottled wine ready for sale would be in a strong position to secure a $1 million line of credit.
Best Practices for Managing Working Capital
Securing working capital is only part of the equation. Managing it effectively helps your production stay on track and keeps your business financially healthy.
Monitor Financial Ratios
Keeping a close eye on financial ratios helps assess your working capital position and supports informed decision-making.
Current Ratio Example
The current ratio compares your current assets to current liabilities, indicating your ability to cover short-term obligations. A ratio above 1 suggests a healthy position.
Suppose your winery has current assets totaling $500,000, which include cash, accounts receivable, and inventory. Your current liabilities amount to $300,000, consisting of accounts payable and short-term debts.
Current Ratio = Current Assets ÷ Current Liabilities
Current Ratio = $500,000 ÷ $300,000 = 1.67
A current ratio of 1.67 means you have $1.67 in current assets for every $1 of current liabilities, reflecting a solid liquidity position.
Quick Ratio Example
The quick ratio provides a stricter measure of liquidity by excluding inventory from current assets.
Using the same example, if your inventory is valued at $200,000, your quick assets (current assets minus inventory) would be $300,000.
Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities
Quick Ratio = ($500,000 – $200,000) = $300,000 ÷ $300,000 = 1.0
A quick ratio of 1.0 indicates you can exactly cover your current liabilities with your most liquid assets, which is a healthy sign.
Inventory Turnover Ratio Example
Evaluating the inventory turnover ratio helps you understand how efficiently you manage stock levels.
Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory
Assuming your COGS for the year is $1,200,000 and your average inventory is $200,000:
Inventory Turnover Ratio = $1,200,000 ÷ $200,000 = 6
An inventory turnover ratio of 6 means you turn over your inventory six times a year or roughly every 2 months. A higher turnover ratio indicates efficient inventory management, reducing the risk of excess stock and associated holding costs.
Forecast Cash Flow
Accurate cash flow forecasting is vital for anticipating working capital needs and avoiding shortfalls. Here are some tips for robust forecasting:
Consider production schedules. Align your forecasts with production time lines, accounting for the time between purchasing raw materials and receiving payment from customers.
Account for payment terms. Factor in the payment terms you have with suppliers and customers. Longer terms may require more working capital to bridge gaps.
Adjust for seasonality. Recognize periods of higher or lower sales due to seasonal demand and plan accordingly.
Include contingencies. Build in buffers for unexpected expenses or delays to prevent cash crunches.
Optimize Inventory Management
Robust inventory management reduces the amount of cash tied up in unsold goods. Adopting just-in-time inventory practices aligns purchases closely with production schedules, minimizing excess stock.
Regularly reviewing inventory levels helps identify slow-moving items and adjust purchasing decisions accordingly. Managing inventory wisely stops capital from getting tied up unnecessarily, keeping your financial resources as nimble as a well-pruned vine.
Build Strong Financial Controls
Implementing robust financial controls safeguards your working capital and enhances overall financial health. Consistently reconciling bank statements, accounts receivable and payable maintains accurate records. Monitoring expenses diligently helps identify areas for cost savings, ensuring you allocate funds efficiently.
Secure the Right Working Capital for Your Success
Navigating myriad options for securing working capital can be complex, but finding the right solution can set your winery or CPG brand's success in stone.
At Balanced Business Group, we specialize in helping winery owners and CPG brand founders secure the working capital needed to fuel production and drive growth. Our finance and accounting services provide personalized support tailored to your needs.
Want to learn more about winery finance? Take a look at our articles on financial modeling and equity investment.
Contact Balanced Business Group today to explore the best financing options for your production needs and take your business to the next level.
