Most startups are hard to build without some initial cash on hand. Consumer goods businesses, or those that have physical products and associated COGS (cost of good sold) that scale with the growth of the business, are especially hard to build without some initial capital. Simply put, you need to produce your goods and pay for them before you can sell them.
We’ve put together this basic guide to sources of funding for food startups here. While this guide applies to food startups, it’s also applicable to beverage startups and other consumer goods businesses as well. Reach out with questions or let us know if we’ve missed anything!
The List: Sources of Funding for Food Startups
I cover equity sources of funding in this post, and will summarize them again here along with non-equity sources as well.
Many founder start business using some of their own personal cash. Make sure you record any cash contributions you make to your business on your books so that you can pay yourself back once your business starts to generate cash flows.
Airbnb famously started their business with a “Visa round.” The founders used to collect baseball cards. On their episode of How I Built This with Guy Raz, they shared that instead of baseball cards, they had a book of credit cards, all of which they had used to fund the early days of their business. Many credit cards will offer 12-18 months of 0% interest, offering a buffer of time to scale your business up with free cash. Have a plan in place for how to pay off your balance before the 14-26% interest hits, as that’s expensive capital.
Friends & Family
Friends and family can be another source of funding for your business. They’ll often offer more generous terms than angel or institutional investors — and certainly better terms than credit cards. You’ll want to think carefully about the terms for paying back any loans you might get from friends and family (and be sure to put it in writing) — or how their contribution might be reflected in an ownership stake in your business.
Pitch competitions typically provide one or more qualifying and participating businesses with a small cash grant to get started. We’ve saved you a little time searching for relevant pitch competitions, and have put together a list of food startup pitch competitions here. It’s worth noting that it often takes a substantial amount of time, energy, and work to apply, qualify, and attend these events (whether virtual or not) and that you’ll want to be strategic in how you use your time, knowing that there may not be a prize payoff.
While a crowdfunding campaign can theoretically be conducted at any point in a business’s lifecycle, it’s often used as part of a new business’s launch strategy and as a way to pre-sell inventory before the business has to produce it. Note that there are different types of crowdfunding — for gifts, as donations, and in exchange for equity. We’ll cover the different types in another post.
Most accelerator programs offer some form of cash, often in exchange for equity in your business. We provide a list of food startup accelerators here — and provide a basic Q&A for thinking about whether to apply for and attend a program in a separate post. A good program will not only provide some much-needed cash for young businesses, but will also provide mentorship and direct connections to suppliers, retailers, and other partners who will help drive growth.
Angel investors are individual investors who invest their own capital or as part of an angel group. Their deal sizes tend to be smaller than institutional capital and their terms may also be more flexible. I cover angel investing in this broader post on sources of equity financing for food startups here — and list some specific groups of interest as well.
Inventory financing is essentially a revolving line of credit or short term loan that a company can get to fund business operations. Inventory, or the products your company produces, serves as collateral for the loan. Terms are generally fairly reasonable and cash is usually available quickly, so this can be a good option for companies that are already producing goods.
Accounts Receivable Financing
Similar to inventory financing, accounts receivable financing is good for businesses that are already producing products and/or cash flow — they can then borrow against their future cash flow. (Accounts receivable, for those who don’t know, are the assets a business has on their books equivalent to the outstanding balance of invoices sent to customers but not yet paid or received.)
VC money is often harder to get than the other types of funding on this list, but can a strategic way to finance and grow your business. We cover venture capital as a form of equity financing on our post here — and include a long list of VCs that have historically invested in food and other consumer businesses.
Commercial or Bank Loans
Bank loans typically require that a business has its books in order and has been in business for at least a year. While the cost of capital tends to be lower than credit cards and may be lower than inventory or accounts receivable financing, the process for applying and receiving funds can be more lengthy.
Wrap Up — Sources of Funding for Food Startups
Anything we missed? Do you have a business that provides financing for food or consumer businesses? Get in touch.