Financing Options for CPG Brands

Jordan Buckner: [00:00:00] Products in the CPG industry. There's a lot of options out there for brands, but it can also be really confusing of which products that you should use and what works should you take on more money at the lower interest rate or higher money at a higher interest rate, there's lots of different options to really think through.

And so for this conversation, I've invited on Daniel Taylor, who is the CEO and co founder of bags to really walk through. What the different financing options that are available for CPG brands and which ones you should consider Daniel. Welcome. 

Daniel Taylor: Thanks for having me. It's good to be here. 

Jordan Buckner: So love you just to give a quick, like 30 second overview of what bags is so that our founders have a sense of what you do.

Daniel Taylor: Absolutely. So we started bags about 4. 5 years ago, really with the mission of building a better way for businesses to fund their growth. And we realized that in order to do that, we needed to help businesses 1st manage their finances to really see where the areas of opportunities are because the 1st step in understanding where to get money is understanding the money you have right now.

So we're a full suite financial management [00:01:00] platform, bookkeeping, accounting, They'll pay APAR. And then we also on the other side of it, it's getting access to working capital, right? And not just, Hey, here's a product. Good luck. It's really figuring out what debt strategy works best for your business.

So our platform helps you understand how to manage your money and then how to find new money. And we work with about 60 different lenders, 150 financial products, over 10 billion in available credit. And we work with primarily businesses within the sort of CPG category, just because there's so much to unpack there about, you know, CPG cash conversion cycle, expanding into retail, working capital.

And we really try to make it easier for businesses to understand how to use debt as a tool for growth. 

Jordan Buckner: I love that. You know, one thing that I've just been very transparent on recently is looking at the challenges that Most businesses and especially CPG founder space is that when starting the company, you're starting usually at a loss, right?

You've like taken on some money, whether it's your own money or a little bit of. You know, money that you got from family and friends to start the business. Like you're already starting in debt and the more products you [00:02:00] make, the more money you have to spend up front and you have to try to sell that to get that money back.

And it feels like you're constantly underwater until like some time in the future. And I went through this myself of running my brand. And so I really like when you mentioned like, you know, understand where you are Today. And like the cash that you have and the cash that you need. And using that as a frame for thinking about how to finance your business.

And so I'd love for you to kind of talk through, you know, what that financing funding landscape looks like at the beginning, how brands should think about the cash that they need before even thinking about where they're getting it from. 

Daniel Taylor: I love you size that up. So, you know, we like to think about it from the lens of the 1st stage, really being 1, like, what are the immediate goals for your business?

Like, what are you trying to do? What are the areas of opportunity and what are your pain points? And also just recognize, like, what type of business you want to build and what a success mean, because all of those variables play into the type of company, how you continue to grow, where to source capital and really what the vision is from what you're building.

Then, from there, it's getting [00:03:00] a core understanding of, like, your own numbers and where you're at. Right? One understand if you and what your cash conversion cycle is, if you're a CPG brand, meaning the amount of time it takes for your money, once you put it into inventory to come back to you in the form of revenue, right?

Like how long do you see 

Jordan Buckner: that happening? 

Daniel Taylor: Like what? Yeah. So, so it really does depend on a business. It also depends on shelf life. It depends on where you're selling it. Right. And in some cases, right, like a cash conversion cycle could be as short as in some cases, two months. And as long as two years in some cases, right.

For a lot of different businesses and we find the average is somewhere between, let's call it four months on the low end, right. To kind of six to eight on the higher end, depending on the shelf life of your product, depending on where you're selling. 

Jordan Buckner: People listening, I'm like, that's a really long time.

That's basically you spend money. Inventory packaging, all these other things, and you won't get paid for that, to convert that back to cash for, [00:04:00] for the six, sometimes months, sometimes longer, right? Like, which is ridiculous seeming and, 

Daniel Taylor: and, and it's also, it's tough because that's innately part of the reality of the business that you're in, especially if you're selling through retail.

Right, which many in the food and beverage space, right? And so when you think about that as being a pain point, and, you know, it's interesting for us. Of course, it's hard to sink your capital to something that doesn't return or takes a little while to return its revenue. But I think the other thing that you're doing, if you think about the opportunity to cost of the dollar that you're spending there.

Versus taking that same dollar and using it for other things is that the biggest thing, at least we found with a lot of businesses, it's not about getting a product on the shelf. It's not getting it off, meaning it's about marketing. And advertising and having the spend to activate around those opportunities so that you move product because that really is innately what drives your success.

And so as much as it is about, Hey, wait, it takes a little bit of time for that money to come back. It's actually [00:05:00] about the fact that, wait, that let's say 30, 000, that you sunk into inventory could have been dollars that you could have spent towards advertising and marketing around that inventory. So you sell it, right?

So it's all about where to use those dollars. And then, you know, this is really where financing potentially could come in as one use case to help unlock a little bit more cash within that equation, tighten that cash conversion cycle and give you a little bit more leverage so that you can put your dollars to work on things that manifest in terms of returning to you in more revenue, because at the end of the day, like getting closer to more revenue, more profitability is really kind of what we're working towards.

Jordan Buckner: I think that's so important. And I think the starting place where if you're listening to this and you don't understand your own cash conversion cycle for your business, then you need to really take the time to sit down and evaluate what that looks like. It doesn't have to be incredibly complicated.

Right. And so I love Daniel. Like, are there simple ways to start looking at what that cash conversion cycle looks like? Is it [00:06:00] saying like, Hey, I'm going to pay a manufacturer for my product in this month, it's going to take about this much time to sell it, and then like, I should get paid it. X number of months later, it's going to help to go about doing. 

Daniel Taylor: Absolutely so in the simplest form, I think you already broke it down. Well, if, and again, the thing is, it depends on which channel you're selling through, right? So if you're selling through retail, do the math, right? You need to go out and actually call your manufacturer and place an order for products. Then figure out how long it takes to make the product, plus how long it takes to ship it to the distributor or a logistics company.

Then once it actually hits the retailer, how long it takes the retailer to pay you, right? Which could be another 30, 60, 90, some cases, 120 days, right? So add up that entire time. And that's sort of the time it takes for you to manage your cash conversion cycle and in the form of e commerce, obviously it depends on what your hero products are, but a similar exercise, right?

Which is how long does it take for you to likely sell through a certain skew of inventory that can give you an understanding for, you know, how long that cash conversion cycle really is. 

Jordan Buckner: And I can tell you, this is the number 1 reason where [00:07:00] founders will be running the business. Maybe they did some calculations that, Hey, my product costs 30 cents to make.

I'm going to sell it for a dollar. I should be making. 70 cents. That's going to be coming back to me on every dollar that I make in in short time. And I think they don't realize that not only does it take months to get that cash back, but in the meantime, as you mentioned, they have to spend additional money on marketing because of the product moving online or off the shelf.

And then they may even need to produce more product. In the meantime, and so you have to produce new orders that might even be larger than that additional 

Daniel Taylor: 1 and Jordan. 1 thing that I want to circle back to in your original question of, like, what's the 1st thing really you should do when you're thinking about, you know, growing your business before you go out and explore lending options.

Like we really do think the best way to grow your business is revenue, right? If there's an area of opportunity for you to drive more revenue for your business, always start there. Go explore that first exhaust exhaust that , to the largest degree you can, because in doing so it'll force you to figure out, okay, what are the levers I can pull to continue to drive [00:08:00] that growth?

Then from there, we have a conversation about debt and how that can play into that growth path. 

Jordan Buckner: I love that. So let's move into some of the debt financing options. I know personally, and this is a limiting belief that I have, which is the phrase I've learned from Keith Kohler, but limiting belief of that, if I take on debt.

I will like bankrupt myself. And I think it's probably from like growing up in the 90s and seeing all those like credit card bankruptcy ads on TV where was like terrified. Yep. 

Daniel Taylor: Yeah. Well, I just want to say you're not the only one. You know, there are like, I, you know, more broadly, there's a student debt crisis that exists.

Right. And many people have a negative affinity towards different types of debt products. and I'm here to say. The reality is, is that not all business that is good, right figuring out the right type of product for the right use case for your business's growth.

And it's about. Making sure that there is a correlation between debt financing and unlocking revenue growth, right? And you're [00:09:00] using that cash to drive more potential revenue, which increases your likelihood of repaying that debt. And in turn, you being successful within the pathway of the growth of your business, right?

So I'm. Like part of what we're trying to do as a business, but also just like a motivation of mine is to try to demystify some of the elements of debt, really ensure that there is a step by step approach towards that. So, so let's definitely talk about the different products. 

Jordan Buckner: Awesome. So where maybe do most brands start or where should they start when they're looking at different options?

Daniel Taylor: So I think there's, there's a couple of pieces when thinking about that, right? And then there are variables for your business that contribute to who you should go after when you should apply and what you should use the money for. Right. And so the variables that, that lenders consider are everything from, you know, what you're selling, the industry that you're in, how much you pay.

So, you know, have you sold 50, 000 worth of products? That's kind of that initial threshold where you start to think about different types of debt financing products. And then have you been around for at least a [00:10:00] year, right? And then from there, how close are you to being profitable? And if you're not right, what are the other levers in your business that we can potentially look at financing and drive towards that profitability?

And then the other things to consider are like, do you have POs? Do you have accounts receivables? Do you have outstanding invoices that need to be paid on your side? So those, those are the sort of business variables. And then from a lending product perspective you know, we typically like to start with the ones that people typically assume exist, right?

So there's a term loan, which is your classic business loan. business loan that you typically get from everything from, you know, retail bank to private lender to community banker, or what we call a CDFI term loans are, you know, typically repay them with a fixed interest over the scope of anywhere from three to 10 years, depending on who you get the product from and the financial product.

The thing about term loans is that they're really, really good for longer term investments in your bedside. Right. So when thinking about the different products, term loans are good. If you are making a longer form cash outlay, [00:11:00] that will in turn take a little bit more time, even potentially a little bit more time in your cash conversion cycle to manifest in terms of revenue.

Right? So that's really what you like. What I like to think about is sort of a more general purpose, longer term loan that you can use for longer term investments that still should manifest in increased revenue growth. Or increased cash flow. So those are term loans, then lines of credit. Easiest way to think about them is more like a business credit card that eventually turns into a term loan, right?

So lines of credit are good. They're typically more expensive. It's typically the thing that every business wants. Every business is like, I'll lot of credit, but you have to remember, line of credits are a little bit more expensive, a little bit harder to get, and not as many lenders are giving them.

Why? Because what you're, they're agreeing to is locking up a little bit of their cash. for you to be able to draw down whenever and they're in the business of moving that cash So you'll see there's not as much of an incentive for as many lenders to provide lines of credit typically lines of credit are good for things like seasonality in your business Right, and really to [00:12:00] think about them as an insurance policy less So the thing that you want to max out and keep and pay down over a period of time if you're going to do that Let's have a conversation about a term loan instead 

Jordan Buckner: Because the good thing about lines of credit is you're only paying interest on the amount that you withdraw.

And so there, like you mentioned, like in case of seasonality emergency things that you need to jump into, but you, you're probably taking on a limited basis. 

Daniel Taylor: And they typically have a they're a smaller amount and they have a smaller ceiling, right? Typically lines of credit aren't, you know, massive, massive, massive cash outlays compared to, you know, your revenue and profitability.

Okay, then we're going to get into some of the more specific products for, let's say, consumer product businesses, right? Inventory financing, it's getting financing for the purchase of inventory, right? And then It's really, really good that, you know, we find that inventory financing can play a really great role in tightening that cash conversion cycle.

But just like with any financial product, it's really, really important to make sure [00:13:00] that you're calculating the shorter term interest on for the implications on your gross margins, because it will make you You know make a little bit less money on that inventory that you're buying So you want to make sure that the math works out and you have enough margins to play with then there is And I want to make sure that I break this down as simply as I can purchase order financing, accounts receivable financing, and then there's this thing called factoring.

Right? And so essentially purchase order financing is when you've got a purchase order from a retailer and you use those purchase orders. As a secured interest in receiving that capital, right? So rather than then the lender lending against your business and its assets, even though that's considered their lending against the retailers willingness to pay that purchase order, right?

Personal financing is good as well. But again These are shorter term products. It's about making sure that they're managed appropriately. And you do the calculation of the implications of your debt accounts receivable. Similarly, you're owed some money. You have [00:14:00] accounts receivable. You use finance and you're secured.

And then the difference between financing and factoring factoring is when you actually sell that invoice. To a third party, meaning they are going to receive the money eventually, and they're going to give you some percentage of the total invoice or purchase order that you are innately owed.

Right. And that could be 90 cents on the dollar. That could be 85 cents. That could be 95 cents. And it really does depend on the one. 

Jordan Buckner: Do you find that companies. And financers specialize in like one or two of these types of investment vehicles, or do people have like all of them available? 

Daniel Taylor: So typically most lenders and like specialize in one to two financial products, so we've found it's rare to go to one lender and have them solve all of your financial needs.

So it's about finding the right lender with the right product based off of where you're currently at. Okay. Because the lender that will finance, let's call it 50, 000 of inventory is often not the same as the [00:15:00] lender who will finance 500, 000 who isn't the same as the lender who will finance 5 million.

And so a big, big part of what we try to do at BAGS is help businesses understand the lay of the land in regards to their optionality, which lenders that they should actually go out and have a conversation with today that they can qualify for, but also ensuring that you can Within your strategy, start to build relationships with lenders that you might need in the future, even before you need that money, because lending relationships is as much of a relationship as it is building relationships with investors.

And that's something that businesses often forget. 

Jordan Buckner: And then what do you think about? Revenue based financing from a lot of providers like Shopify and PayPal's of the world. 

Daniel Taylor: So revenue based financing as a category. So there's a sub category of that. And then Shopify is a really good example. They're called merchant cash advances.

Right. And you might get it from a Shopify, a square, QuickBooks, you name it. And I just want to go out and say, all of those businesses have great products. As their core business that are good for a lot of small businesses. [00:16:00] So we are not against those businesses, those financial products though, if not managed correctly can often be very hurtful for a lot of businesses.

Why? Because what they do is they charge a fee upfront which is often more expensive than an other, other form of short term financing capital. That's one. Two, you have to give a certain percentage of your revenues back to that lender. every single month. So if you have a month where you crush it, guess what?

You're still giving Shopify 10, 15, 20 percent of your revenues that month at point of sale, right? And then the bigger thing is that as part of those loans, they might not be that big, but they do file a senior secured lien on your business and its assets, which makes it very difficult for you to potentially apply to other financial products.

So that's just something always worth considering before you go out and apply for an MCA. Fast money often isn't good money, right? So if someone's willing to give you money in 24 hours, just double click into the fine print. Oftentimes it's , worth waiting. And in reality, those should be your last [00:17:00] ditch efforts and financing sources.

That you tap into. It's all about being proactive rather than being reactive. And the sooner you start to think about debt as a proactive approach towards business growth, the more likely you will be successful in using debt as a form of business growth. 

Jordan Buckner: That's super helpful to think about. Are there any other questions?

Last financing options that you think are really important to talk. 

Daniel Taylor: So I'd probably say two for those who are, let's say manufacturing their own products, there is such thing as equipment financing. So financing the purchase of equipment. So I always think that's worth noting and being aware of.

And then what I would say is. Who you get dollars from also is important as that in that equation. So just to give a quick breakdown, there are private lenders. Private lenders with capital will lend you money. There are CDFIs, community development, financial institutions. They are a very, very good source for smaller brands who are starting out.

They are geographically constrained. So I encourage everyone Google CDFI in your state. And figure out who they are. And then the last [00:18:00] categories are, you know, retail banks and FinTech lenders who all have good products, but again, it's about the right product for the right use case. 

Jordan Buckner: Daniel, thanks so much for being on the day and covering all these different debt products.

I think, you know, the one thing I would say is important for brands is make sure you understand your own business finances, not just at the product level, but your business level to make sure that. You have the means to pay back this debt. I think the one thing that's really important about difference between debt and venture capital kind of equity funding is that people who are loaning you money from debt expect to be paid back, right?

It's not going to be a hundred percent. They're probably expecting 90 something, 98, 99 percent of people to pay it back. And so even for you, like have that plan. On where the money is specifically going to come from, instead of just saying, like, we'll figure it out in the future. 

Daniel Taylor: Absolutely. And do the math in regards to before you take that product, how much every single month, you're going to have to pay back how it will affect your cash flows, build the debt schedule.

And if you don't know how to do any of [00:19:00] those things and want to get started, it's a big part of what we do at Bags, helping you get the financial visibility to make good decisions. And then even if you just want to have a conversation about what the debt landscape is, I'm here for it. We're here to support.

Jordan Buckner: Awesome. Well, I definitely appreciate that offer. I'm going to actually throw your info in the show notes. So if people have questions about debt, they want to get started, but don't know where they think it's going to tear down their business, which like if you miss management can be problematic.

So you want to make sure you're doing this right. And having an advisor who has done this plenty of times before Daniel's team, to make that work for you. Thanks for being on today. 

Daniel Taylor: Thanks Jordan.