Loss Problem or Working Capital Problem?
Most CPG brands that feel “short on cash” jump to equity as the solution. But equity and working capital solve two fundamentally different problems. Before you start pitching investors or negotiating term sheets, answer one diagnostic question: Are you losing money on every unit sold, or are you just waiting for money that's already owed?
The answer determines everything about how you should fund your next phase of growth.
Loss Problem — Equity Is the Tool
Negative gross margin after landed cost. Unit economics don't work at any volume. Pricing is below COGS. You're spending more to make and deliver each unit than you collect. No amount of faster payment will fix this—you need capital to absorb losses while you fix the model.
Working Capital Problem — Debt Is the Tool
Positive gross margins. Growing revenue. Retailers are buying. But you're constantly cash-strapped because you pay suppliers 90–180 days before retailers pay you. The money is coming—it just hasn't arrived. You don't need permanent capital. You need a bridge across the timing gap.
The most expensive mistake in CPG finance is selling 10–20% of your company to solve a timing problem that a $300K credit line could handle. Equity is permanent dilution for a temporary gap.
The 90–180 Day Cash Conversion Cycle
If you're importing product and selling through retail, here is what your cash conversion cycle actually looks like. Every dollar of revenue ties up capital for 5–6 months before it returns to your bank account.
Day 0–15: Raw material deposits
Suppliers require 20–50% upfront before production begins. For a $100K production run, that's $20K–$50K out the door before a single unit is manufactured. This is non-negotiable for most overseas suppliers, especially for new vendor relationships.
Day 15–60: Production cycle
Raw materials become finished goods. Balance of payment typically due at shipment—another 50–80% of the production cost. You're now fully paid out on manufacturing with zero revenue collected.
Day 60–90: Ocean freight, customs, and drayage
Container ships don't move fast. Add customs clearance, port delays, and drayage to your 3PL or distribution center. Freight costs add another 5–15% to your landed cost, and the clock keeps running on your cash.
Day 90–105: 3PL receiving, QC, and putaway
Product arrives at your warehouse. It needs to be received, inspected, labeled if required, and put into inventory. Storage costs begin accruing immediately—typically 20–30% of inventory value annually in carrying cost.
Day 105–120: Retailer receives, scans, and shelves product
Your shipment arrives at the retailer's DC. They receive it on their timeline, scan it into their system, and distribute it to stores. The invoice clock doesn't start until they say it starts.
Day 120–180: Net-60 to Net-90 payment terms
Most major retailers pay on Net-60 to Net-90 terms—measured from their receipt date, not yours. Some stretch beyond 90 days. And when the check arrives, it's not the gross invoice amount. It's the gross minus every deduction the retailer decided to take.
The gap: You paid suppliers on Day 0. You get paid on Day 150–180. That's 5–6 months of cash tied up in every dollar of revenue. Grow faster, and the gap grows with you.
The Gross-to-Net Deduction Stack
Most founders quote gross revenue. The P&L feels net revenue—after trade spend, retailer deductions, and chargebacks strip 30–40% off the top before cash hits your bank account. Here is what actually comes out of a gross retail invoice.
Trade spend
Promotional allowances, off-invoice deductions, scan-backs, temporary price reductions. The cost of being on shelf and staying on shelf. Cadent Consulting Group's 2024 Marketing Spending Study pegs trade spend at 15–25% of gross for most CPG categories.
Retailer deductions
Slotting fees, market development funds (MDF), markdowns, end-cap placement fees, co-op advertising charges. These are negotiated (or dictated) at the category review and deducted automatically from your payments.
Chargebacks
Compliance penalties for shipping violations, ASN errors, pallet non-compliance, and routing guide failures. Chargebacks run 5–15% of gross for most CPG brands, with first-year brands typically skewing toward the higher end (Inmar Intelligence, 2024). See our retail chargebacks guide for the full breakdown.
Freight allowances and damages
Freight deductions the retailer passes back to you, plus damage claims for product that arrived compromised. Some retailers deduct these automatically; others invoice separately. Either way, it comes off your gross.
Net received as percentage of gross invoice
After the full deduction stack, most CPG brands collect 55–70 cents of every gross dollar invoiced to retailers. Your cash flow model must run on net, not gross.
This is why a brand doing $2M in retail revenue might actually collect $1.2M. The cash gap math runs on net, not gross. If your working capital plan assumes you'll collect the invoice amount, you'll run out of cash even with growing sales.
Funding Instruments That Don't Dilute
If the diagnostic says “timing problem,” there are three non-equity funding tools designed specifically for working capital gaps. Each has different cost structures, qualification criteria, and best-use scenarios.
Revolving credit line
A $200K–$2M facility secured against accounts receivable and inventory. Draw when you need cash, repay when retailers pay. Typical cost: 8–14% APR. Best for brands with consistent PO flow and existing retail relationships. This is the most flexible and lowest-cost working capital tool for established CPG brands.
PO financing
A lender advances cash against confirmed purchase orders from retailers. You use the advance to fund production and fulfillment. Typical cost: 15–30% annualized. Higher than a credit line but works pre-revenue or with limited operating history. Best for brands with strong retail POs but no track record for traditional lending.
AR factoring
Sell your receivables to a factor at a 2–5% discount and get cash immediately instead of waiting 60–90 days. The factor collects from the retailer. Best for brands with strong retailer payment history but long terms. Faster than a credit line to set up, but more expensive per dollar over time.
The right instrument depends on your stage, your retailer relationships, and your cash cycle length. Many brands use a combination—a revolving line for ongoing operations and PO financing for large seasonal orders that exceed the credit line.
$500K Credit Facility, Zero Dilution
Epicutis needed to fund inventory expansion from 3 to 21+ SKUs without diluting the founding team. The cash conversion cycle was stretching the business—production payments went out months before retail payments came back in, and the inventory gap was running 30–60 days between PO placement and product availability.
Logic Agency helped structure a $500K revolving credit facility backed by purchase orders and receivables. The facility gave Epicutis the working capital to fund production runs, maintain inventory levels, and fulfill retail orders without selling equity to cover the timing gap.
When Equity IS the Right Tool
Equity isn't wrong—it's wrong when applied to a timing problem. There are situations where equity is not just appropriate but necessary. The key is knowing the difference.
Equity is the right tool when:
Unit economics don't work
You're losing money on every unit and need runway to reformulate, re-source, or reprice until the model works. Debt against negative margins is a death spiral.
R&D or category creation
You're building something that doesn't exist yet. There are no purchase orders to finance and no receivables to factor. You need patient capital while you create the market.
Team before revenue
You need to hire a sales team, a marketing lead, or an operations manager before the revenue is there to support them. Debt can't fund payroll for positions that don't generate immediate receivables.
Pre-product-market fit
The product, the positioning, and the channel strategy are still being validated. You don't have the predictable revenue base that working capital instruments require. You need money to figure out the model, not to scale it.
The brands that preserve the most ownership are the ones that solve timing problems with timing tools and save equity for what only equity can buy—time to build something that doesn't exist yet.
Sources: Cadent Consulting Group 2024 Marketing Spending Study (trade spend 15–25% of gross) · PwC Strategy& ($200B+ annual trade spend in US retail) · CSCMP State of Logistics Report (20–30% carrying cost) · Inmar Intelligence (chargebacks 5–15% of gross)