Your guide to production financing for CPG brands

Navigating manufacturing: why CPG brands need specialized production financing

Consumer packaged goods (CPG) brands require specialized production financing to overcome unique manufacturing hurdles that standard loans cannot solve. We understand that managing cash flow during long production cycles is a significant pressure point for growing brands. These financial challenges create a critical gap between paying for production and receiving revenue from sales, making targeted funding essential.

Key challenges that create this cash flow gap include:

• Long Lead Times: It's common for complex global supply chains to stretch from three to six months between paying a supplier and seeing revenue from the final product.

• Large Supplier Deposits: Industry-standard practice for manufacturers, particularly overseas, often requires upfront deposits of 30-50% to secure raw materials and begin production.

• Work-in-Progress (WIP) Costs: Capital remains tied up in raw materials and unfinished goods throughout the manufacturing cycle.

Production financing is a targeted solution built to bridge these gaps. It provides the manufacturing capital needed to cover pre-shipment costs before goods are finished. This funding is secured by the purchase order itself, allowing fast-growing brands to access capital to scale production and meet customer demand without stalling business operations.

What is production financing, and how does it differ from traditional PO loans?

Production financing is a specialized form of funding that covers the earliest stages of the manufacturing process, such as purchasing raw materials and paying supplier deposits. It injects capital into your business at the very beginning of the supply chain, enabling you to secure the components and labor needed to create your products.

This structure differs significantly from traditional purchase order (PO) financing, which provides capital to pay for finished goods backed by a confirmed purchase order. Standard PO financing is designed to pay a supplier for a completed order that is ready to ship, not to fund the upfront costs required to start production.

The key distinction is timing. Production finance addresses the "manufacturing gap"—the period before goods are completed. In contrast, PO financing focuses on the later stages of the supply chain. Tools like a letter of credit can be structured for  pre-shipment advances via LCs , effectively serving as production financing by releasing funds to the supplier before shipment. Understanding this difference helps CPG brands seek financing that aligns with their actual cash flow needs.

How can CPG brands fund essential supplier deposits for manufacturing?

CPG brands can fund essential supplier deposits using specialized tools like 'red-clause' Letters of Credit (LCs), advance payment bank guarantees, and transaction-specific purchase order loans. These instruments provide suppliers with the assurance or upfront capital needed to begin production while protecting the CPG brand’s working capital from being depleted.

A 'red-clause' Letter of Credit is a powerful tool that authorizes the advising bank to make an  advance payment via red-clause LCs  to the supplier before goods are shipped. This unsecured advance allows the supplier to purchase raw materials and start manufacturing, with the advance directly funded by the lender against the LC.

Bank guarantees can serve a similar purpose. An  advance payment bank guarantee  provides the supplier with a formal promise from a financial institution that payment will be made, significantly reducing their risk and often negating the need for a large cash deposit. Some lenders also offer specialized  purchase order financing  structured to release a portion of the funds to cover these initial deposit stages.

What is work-in-progress (WIP) funding, and how does it cover raw materials?

Work-in-progress (WIP) funding is a type of financing that supports costs incurred as raw materials are converted into finished products. It provides essential manufacturing capital throughout the production cycle, covering the acquisition of materials and costs at various stages, which differs from financing that only targets completed goods.

WIP funding is a form of asset-based lending, where the loan is secured by the value of the raw materials and the in-progress inventory. As raw materials are transformed into partially completed goods, their value increases, and so does the lender's collateral. This structure allows lenders to provide capital against assets that are not yet ready for sale.

Funding can be structured with progressive draws, releasing capital at key production milestones. For instance, a brand might draw funds to purchase ingredients and again to cover co-packer fees. This ensures a steady flow of  working capital  that aligns directly with production expenses, preventing liquidity shortfalls that could halt manufacturing and helping brands avoid costly delays.

How do lenders verify overseas factories for pre-shipment financing?

Lenders verify overseas factories for pre-shipment financing through a multi-step due diligence process that can feel daunting but is designed to protect all parties. This includes Know Your Customer (KYC) checks, third-party pre-shipment inspections (PSI), and a thorough review of all transaction documents to mitigate the risks of funding production in another country.

The process starts with Know Your Customer (KYC) checks, a standard procedure to verify a business's identity and legitimacy and ensure it is not involved in any illicit activities. Next, lenders often require  third-party pre-shipment inspections  (PSI), where an independent agent physically verifies the factory, production quality, and that the goods match the order specifications before shipment.

Documentary checks are also critical. Lenders will meticulously review valid purchase orders and pro forma invoices to ensure all details align, establishing the legitimacy of the transaction. CPG brands can speed up the approval process by preparing comprehensive documentation and demonstrating a clear, transparent understanding of their supply chain.

Comparing production finance options: why Bridge Marketplace offers distinct advantages

Finding the best providers for production financing can be overwhelming, as the landscape includes many different models. Bridge Marketplace simplifies this by providing a direct path to a curated list of lenders—including banks, specialty finance companies, and asset-based lenders—who fit your specific needs. This ensures you are matched with a partner equipped to handle complex pre-shipment financing.

While other solutions exist, it's crucial to understand their purpose. For instance, revenue-based advances or consignment-style crowdfunding platforms are often better for post-production needs like marketing or smaller inventory purchases. Likewise, using pre-order apps on platforms like Shopify is effective for gauging interest and funding small, direct-to-consumer launches but doesn't typically scale to cover large wholesale production deposits. These models may not efficiently address the large upfront capital required for manufacturing.

Furthermore, it is important to distinguish production finance from post-shipment supply chain finance. Programs like Walmart's supplier financing, often facilitated by platforms such as C2FO, are a prime example of the latter. These early payment platforms allow a supplier to get paid sooner on an already approved invoice for delivered goods. While valuable for improving cash flow after the sale, they do not provide the capital needed to start production in the first place.

By connecting brands with lenders who specialize in CPG, hospitality, and franchising, we ensure you get tailored  CPG financing  that directly aligns with your manufacturing cycle, which is a gap that  funding for post-production needs  doesn't fill.

Can government programs like EXIM and SBA fund my CPG brand's pre-shipment needs?

Yes, for U.S.-based CPG brands that export goods, government-backed programs from the Export-Import Bank of the United States (EXIM) and the Small Business Administration (SBA) are valuable resources. These programs provide guarantees to lenders, making it easier for exporting businesses to secure financing for production.

The  EXIM's Working Capital Guarantee Program  provides a 90% guarantee to lenders on loans that cover the costs of raw materials, labor, and overhead required to fulfill export orders. This pre-export financing allows a brand to accept large international orders without being constrained by cash flow.

Similarly, the  SBA's Export Working Capital Program  (EWCP) offers comparable support with guarantees of up to 90% on loans up to $5 million. These government guarantees significantly reduce risk for commercial lenders, often making them more willing to provide larger facilities or offer more favorable terms. Bridge Marketplace can connect you with lenders who participate in these programs, simplifying your access to this powerful form of financing.

What documents, timelines, and costs should CPG brands expect for production financing?

For production financing, CPG brands should provide documents like purchase orders, anticipate underwriting timelines of one to three weeks after receiving term sheets, and plan for costs typically ranging from 1% to 6% per month. Preparing for these requirements helps streamline the funding process.

You will need to  prepare key documents , including the official purchase order from your customer and the pro forma invoice from your supplier. Note that some financing platforms focus on invoice financing or lines of credit for finished goods, which may not suit pre-shipment deposit needs. At Bridge Marketplace, our goal is to help you  find PO financing term sheets quickly . After accepting a term sheet, the formal underwriting and documentation process takes one to three weeks.

It is essential to understand the associated costs. Brands should factor in  financing costs from 1% to 6% per month  on the funded amount. This rate reflects the specialized nature of pre-shipment financing. By incorporating these costs into your Cost of Goods Sold (COGS) analysis, you can ensure your product margins remain healthy. For more details, our  PO financing Q&A  offers additional insights.

Bridging the manufacturing gap: secure your CPG brand's production future

Specialized production financing is an essential tool for CPG brands managing the cash flow demands of long manufacturing cycles and large upfront costs. It is the key to unlocking growth that would otherwise be constrained by a lack of operational liquidity.

By funding supplier deposits and work-in-progress expenses, brands can ensure uninterrupted production and facilitate sustainable growth. Bridge Marketplace simplifies this landscape by offering efficient access to a diverse network of lenders providing competitive and tailored financing options. This empowers CPG brands with the right capital to focus on innovation and expansion, confident that their supply chain is financially secure.

Ready to bridge your manufacturing gap and secure predictable capital for your CPG brand?  Explore your purchase order financing options through Bridge Marketplace today .

Frequently Asked Questions about CPG Production Financing

Q: What is the main difference between production financing and traditional purchase order financing?A: Production financing specifically covers costs incurred before finished goods are ready, such as supplier deposits for raw materials and work-in-progress expenses. Traditional purchase order financing typically covers the cost of finished goods that are ready to be shipped or are already in transit, with a confirmed purchase order from a creditworthy buyer.

Q: How do lenders verify my overseas manufacturer for pre-shipment financing?A: Lenders verify overseas manufacturers through several key steps, including Know Your Customer (KYC) checks, factory audits, and third-party pre-shipment inspections (PSI) to confirm production quality and quantity. They also scrutinize documentation like purchase orders and pro forma invoices to ensure legitimacy.

Q: Are government programs available for CPG brands seeking pre-shipment financing?A: Yes, U.S. exporters can often leverage programs like the Export-Import Bank (EXIM) Working Capital Guarantee Program and the Small Business Administration (SBA) Export Working Capital Program (EWCP). These programs can guarantee a portion of the loan, making it less risky for lenders and potentially leading to more favorable terms for financing raw materials and pre-export production costs.

Q: How quickly can a CPG brand typically secure production financing through Bridge Marketplace?A: Bridge Marketplace aims to provide CPG brands with multiple, competitive term sheets from its lender network within 48 hours of a single application. The subsequent underwriting and documentation process can take 1-3 weeks, with final disbursement depending on specific conditions such as the completion of inspections or the issuance of letters of credit.

Q: What kind of documentation will I need to apply for production financing?A: To apply for production financing, you will typically need key documents like official purchase orders, pro forma invoices from your supplier, and any existing supplier contracts. Lenders may also require pre-shipment inspection reports and drafts of letters of credit or bank guarantees. Having these documents prepared can significantly speed up the approval process.

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