Fast moving consumer goods (FMCG) are products sold at speed and at relatively low prices. They can include foods, beverages, toiletries, cosmetics, over-the-counter drugs and other consumables – often things that each of us eat, drink and use every day. Businesses operating in the FMCG industry face a number of financial challenges as they grow, enduring long payment terms, high production costs and much more. But the current economic climate is putting even more pressure on these firms, squeezing their cash flow and impacting growth.
We take a look at some of the key challenges plaguing the industry and share expert advice on how these issues may be overcome.
1. Long industry payment terms
Despite the FMCG industry’s speedy persona, it suffers from long payment terms of up to 90 days from retailers and wholesalers, which means businesses can be owed up to 20% of their annual turnover at any one point.
This is particularly problematic for small, but growing companies that are still trying to establish good relationships throughout their supply chain, while also managing early payment demands from certain suppliers.
2. High production costs
Production costs in this sector have always been high, but following a significant rise in inflation, businesses will likely be feeling the squeeze more than ever.
If your company does not have suitable cash reserves in place, it might be struggling to handle the extra costs.
3. Fierce competition
Competition within FMCG categories is stronger than ever, with huge numbers of emerging brands competing with market leaders for shelf space in supermarkets and to win consumer spending.
Whether your business is new to the market or a more established player, constant innovation is necessary to ensure your business keeps up with competitors, but this can be costly. Expansion into new markets, research and development and product diversification requires capital, which might not be readily available.
4. Storing Inventory
FMCG brands must keep a significant value of inventory in their warehouses to ensure they are able to meet D2C demand and last minute orders. This has been further exacerbated by firms trying to cope with recent global supply disruptions caused by Covid-19, the Suez Canal blockage and ongoing conflict in Ukraine.
Planning for contingencies by storing inventory is a great way to meet demand, but it sits on your balance sheet and hampers working capital, creating issues elsewhere.
5. Barriers to funding
Many of these challenges can be supported by funding, yet for many FMCG businesses, (especially those at an early stage) accessing funding can be difficult. This is because they fail to meet the eligibility requirements from traditional lenders, as many are loss-making in their early years and have a high concentration of debtors.
Long payment terms, seasonal fluctuations and other contractual challenges can also mean non-specialist lenders are not equipped to support them in the right ways.
Navigating the challenges: why funding is so important
Many of the challenges above hamper FMCG firms’ success because they squeeze cash flow and limit opportunities to re-invest in growth.
From capital tied up in invoices to profit tied up in inventory, without cash to invest in product development, marketing spend or expanded teams and premises, FMCG firms can fail to make the leap from start-up to established business.
Getting the right funding in place can be a game-changer, but also presents its own challenges, with access to investment being a separate issue.
Could alternative lenders be the answer?
Alternative lenders approach funding differently to traditional banks, making them a great fit for organisations with more unique requirements.
Many will invest in pre-profit businesses, as long as they can demonstrate a realistic route to profitability and will forgo concentration limits, so that successful FMCG firms are not hampered by their large client contracts.
Finding a funding partner that can offer flexibility is also key, as it means any investment will be tailored to the individual requirements of your business and can evolve as the business grows.
What about invoice finance?
Some business leaders still hold the belief that invoice finance should be used as a last resort, yet working capital funding has the specific benefit of strengthening cash flow, enabling FMCG businesses to thrive, rather than just survive. If used proactively, invoice finance enables firms to unlock capital tied up invoices, inventory and elsewhere, freeing up cash to spend on strategies that promote growth.
Alternative lenders such as Growth Lending offer invoice finance facilities with additional benefits; we can leverage against aged receivables, inventory, commercial property and plant and machinery to facilitate a higher lending quantum than traditional lenders.
This extra cash can help manage high up-front production costs, support day-to-day operational needs, remove the strain on your balance sheet of storing inventory, or fund growth activities.
Whether your FMCG business is experiencing one, or a number of these challenges, our expert team can help. Get in touch via our website, email or LinkedIn to discover how we could support the next steps of your growth journey.