Securing working capital is essential for managing day-to-day operations, building inventory, or scaling production when demand spikes. When Matthew Featherstone, founder of Hiatus Cheesecake, expanded his business into hundreds of new stores, he faced the challenge of funding large orders and managing cash flow to meet rising demand. As Hiatus Cheesecake secured deals with major retailers like Kroger and expanded through partnerships with distributors, the need for working capital became urgent. Featherstone leveraged a line of credit from Aion to cover production costs, fulfill purchase orders, and scale operations smoothly.
Access to working capital can now be easier than ever, with the right guidance. This article will explore working with traditional banks as well as innovative solutions from online banks like Aion, offering CPG founders a clear path toward qualifying for lines of credit that align with their business needs.
Traditional Banks and Their Criteria
Traditional banks have long been the go-to source for business loans, including working capital loans. For many CPG founders, a bank line of credit can offer the flexibility to cover short-term cash flow gaps, fund inventory purchases, or meet other operational needs. However, the qualification process for these loans tends to be rigid, focusing on a few key financial metrics.
1. Revenue and Sales History
Traditional banks heavily emphasize a business’s revenue and sales history. They want to see a stable and predictable sales pattern, which can often be a challenge for smaller CPG brands that experience seasonal swings or sporadic growth based on retail partnerships. Banks prefer companies with several years of established revenue, offering evidence of long-term stability.
2. Profitability
Profitability is another critical criterion for traditional loans. Many small CPG businesses, especially in their growth phases, operate on thin margins or reinvest heavily in production and marketing, which can make it difficult to show profitability on paper. Unfortunately, without consistent profits, many founders find themselves denied access to working capital from these traditional sources.
3. Credit Score and Financial Health
Banks also place significant weight on the business’s credit score as well as the personal credit score of the founder. Founders with lower credit scores, even if their businesses are growing, can struggle to meet the bank’s lending criteria. Additionally, banks review financial statements, cash flow projections, and business plans in great detail to determine if the loan is a sound investment for them.
While traditional bank loans offer low-interest rates and potentially higher loan amounts, many small CPG businesses find it difficult to meet these strict requirements. This is where modern, more flexible lending options come into play.
Modern Solutions from Online Banks
While traditional banks rely on rigid metrics like revenue, profitability, and credit score, a new wave of online banks is offering more flexible options, which are especially beneficial for small CPG businesses. One such example is Aion, an online bank that uses your business data to qualify you for a line of credit.
1. Accounts Receivable as Collateral
Unlike traditional banks, Aion and other online lenders focus on accounts receivable to determine loan eligibility. For many small CPG founders, this is a game changer. Rather than requiring a lengthy history of profits or steady revenue, these lenders base their decisions on outstanding invoices from distributors and customers. This model is particularly advantageous for CPG businesses with strong retail or distribution partnerships but inconsistent cash flow.
By using your business’s accounts receivable as collateral, lenders can provide a dynamic line of credit that grows as your sales volume increases. For example, if you have outstanding payments due from a distributor like UNFI or KeHE, these online banks can quickly provide you with working capital based on those future payments. This flexibility allows you to cover your current operational needs without waiting for months to receive payment from retailers.
2. Faster Approvals and Easier Access
Time is often of the essence for small CPG businesses. Whether you need to ramp up production or capitalize on a large order, waiting weeks or months for loan approval from a traditional bank may not be feasible. Online banks like Aion often offer faster approval times, sometimes within days, by leveraging technology to evaluate your business’s financial health based on real-time data.
The application process for these loans is generally simpler, requiring fewer financial documents than traditional banks. Many of these lenders use algorithms to analyze your accounts receivable data, sales forecasts, and other relevant metrics in real time, enabling them to make faster and more accurate lending decisions.
3. Free Bank Accounts and Credit Access
Another compelling aspect of online lenders like Aion is their business model. Aion, for example, offers free business bank accounts to CPG founders. These accounts not only reduce the administrative burden on founders by simplifying their banking needs, but they also directly qualify businesses to access lines of credit. This model is particularly beneficial for startups and early-stage businesses that may not yet have significant profits but do have growing sales and outstanding receivables.
This new approach to working capital financing opens up doors for CPG businesses that might otherwise be shut out of traditional loan options. It allows founders to access credit dynamically, scaling with their business as they grow without the burdens of excessive paperwork or strict profitability requirements.
Deciding Between Options
Choosing the right working capital loan for your business can be a crucial decision. Both traditional banks and online lenders offer distinct advantages, but the right option depends on your company’s specific needs and financial situation.
1. When to Choose Traditional Banks
If your business has a well-established track record of profitability, stable revenue, and a strong credit score, a traditional bank loan or line of credit may be the best option. These loans often come with lower interest rates and larger loan amounts, making them ideal for businesses that need significant capital for expansion or large inventory purchases. Additionally, traditional bank loans can offer longer repayment terms, which can help with managing cash flow over an extended period.
However, the application process for traditional loans is more time-consuming, and the approval criteria are stricter. CPG businesses that are still in their growth phase or lack consistent profitability may find it difficult to qualify for these types of loans.
2. When to Choose Online Lenders
For small CPG businesses that are growing but face challenges with cash flow or don’t meet the strict requirements of traditional lenders, online banks like Aion offer an attractive alternative. The use of accounts receivable to qualify for credit lines is particularly beneficial for businesses with outstanding payments from retailers or distributors. These lenders provide faster access to working capital, allowing founders to seize opportunities without waiting weeks or months for approval.
Additionally, online banks tend to have more flexible lending terms. For example, Aion’s free bank accounts are an added benefit that can simplify your banking needs while providing access to dynamic lines of credit. This makes them ideal for businesses with fluctuating sales cycles or seasonal demand spikes, where access to flexible capital can be the key to sustaining growth.
3. Managing Your Line of Credit
Once you’ve secured a working capital loan, it’s important to manage it effectively. Many founders make the mistake of treating a line of credit like an unlimited resource, but it’s essential to use the funds strategically. Ensure that the loan is used for specific growth-related purposes, such as buying more inventory, launching a marketing campaign, or scaling production in response to a large order.
Regularly review your accounts receivable and cash flow to ensure you can meet the repayment terms. By managing your working capital wisely, you can maintain access to additional credit as your business grows, creating a sustainable financing strategy for the long term.
Ready to Explore Flexible Financing Options?
Access to the right line of credit can make all the difference for your CPG business. Whether you’re looking to manage cash flow, ramp up production, or seize new opportunities, Aion can provide a solution tailored to your needs.