When you’re trying to grow your CPG brand, financial planning is everything. It’s the way you ensure your unit economics are viable at scale, that you know where cash is and where it’ll need to go, and that you can efficiently track actions to outcomes. When you run a business that has to spend money to make money, unlock the power of a debt stack.

What Is A Debt Stack?

A debt stack involves using multiple loan products across your supply chain and revenue realization to improve your cash conversion cycle (the time from when you pay for inventory and get paid for the sale of it) and help you meet demand, which can be challenging for fast-growing brands that don’t have a ton of cash on hand to float purchases. A good debt stack can help you fuel expansion, maintain healthy cash flow, and optimize your business performance.

Why F&B Businesses Need a Debt Stack

1. Manage Cash Flow Better: CPG businesses inevitably face cash flow fluctuations due to a variety of factors: seasonal sales, supply chain disruptions, or huge orders/delayed payments from retailers. That’s why we recommend a (well-structured) debt stack. This can give you the necessary liquidity you need to keep up in these scenarios. All without sacrificing any growth opportunities.
2. Sustainably Fund Your Growth: Venture Capital investment in CPG has seen a massive drop off, so brands need to figure out alternative ways to sustainably fund their growth. By leveraging non-dilutive funding sources to improve cash flow management, they find the right mix of resources crucial for long-term growth and stability.
3. Optimize Cost of Capital: As you already know, different types of debt = different costs. Make sure to carefully select the right mix of loans and lines of credit. By doing so, you can minimize your overall cost of capital, freeing up more cash for resources.
4. Mitigate Risk: A diversified debt stack spreads financial risk across different lenders and loan types. This reduces the impact of any single debt source becoming unavailable or too costly, providing a buffer against market volatility or changes in credit conditions.

Need help getting started? Say hello to Bags. Bags helps businesses like yours find the right debt opportunities to finance growth and production, all while helping you maximize time and cash flow by handling your financial documentation, bookkeeping, and accounting. With Bags’ extensive lending network, you can secure faster, larger, and more cost-effective financing, plus get a long-term debt management strategy to boost credit over time.

How to Build an Effective Debt Stack

1. Assess Your Needs: You can’t start building something without knowing what you need out of it. Start by understanding your business’s financial needs and objectives. Are you looking to smooth out cash flow, finance a major expansion, or reduce your cost of capital? Your goals will guide the composition of your debt stack.
   
2. Explore Your Options: When it comes to financing your business, understanding the different types of debt available is key. Whether you’re looking into purchase order financing and factoring to support your supply chain or considering a line of credit to boost your marketing spend or navigate seasonal challenges, each option has its own set of pros, cons, and unique requirements. Not sure where to begin? Bags is here to help. Bags assess your needs and guides you step-by-step to build a custom debt strategy that works for your business.
   Quick Tip: Short-term debt can be ideal for immediate needs, while long-term debt is better suited for significant investments. A mix of both allows you to address current challenges while planning for the future.
3. Consider the Lender’s Perspective: Most businesses in a loan application process skip this step, which often leads to a less than ideal outcome. Get ahead of the curve by understanding what lenders look for in a borrower and structure your financials to present the most attractive risk profile. This might involve restructuring your income statement or demonstrating strong cash flow management on your balance sheet.
   
4. Review and Adjust Regularly: Remember, the optimal debt stack is not static. Regularly review your financial situation, market conditions, and business goals, and adjust your debt stack accordingly to stay aligned with your growth strategy.
   

When it comes to financing your business, it’s not just about finding the cheapest option—it’s about securing the right type of capital for your specific needs. Whether you’re managing cash flow or investing in growth, the key is to align the type of funding with the right situation.

Think about it this way

You have $100,000 in the bank, and spend it all to fulfill a major retail order. Now, you may have to wait 3-4 months to get that back plus profit. If you have a 20% margin, you get back $120,000 for a $20,000 gross profit. Over those months, you’re down $100,000 that you could have invested to drive more revenue.

Now, think about it in a debt stack. You borrow the $100,000 to fulfill the order and keep your $100,000 in the bank to spend on revenue growth. Now at the end of the cash conversion cycle, you make $15,000. That’s less, right? The power of the debt stack isn’t to increase profit dollar for dollar but to increase your capacity to sell products and keep cash on hand.

Imagine if you’d borrowed $300,000 instead (and still kept your $100,000 in the bank), you’d end up with $45,000 at the end of the same period because you purchased 3x the inventory versus what your cash reserves would have allowed.

Loan Types in an Effective Debt Stack

Flexible Working Capital

Loan products that add cash flow flexibility to your business and allow you to invest the money as you see fit. Quick Tip: Always invest debt capital in revenue-generating expense categories.

1. Term Loans: Term loans are ideal for major, long-term investments like purchasing real estate, machinery, or expanding your business. These loans provide a lump sum upfront, which you repay with interest over a set period. The clear repayment structure and fixed terms make it a great choice for larger, planned expenses.
   • Best for: Increasing cash on hand, business expansion, or any substantial investment that needs a clear repayment plan.
2. Lines of Credit: A line of credit works like a revolving credit account, giving you access to funds when you need them without requiring immediate use. This is excellent for covering short-term cash flow gaps, seasonal fluctuations, or unplanned expenses. You only pay interest on the amount you borrow, and once repaid, the funds are available again. It’s like a credit card, but usually with better rates and larger available credit.
   • Best for: Managing seasonal cash flow, covering unexpected expenses, or maintaining operational flexibility.

Funding For Specific Uses

Leverage tactical loan products for specific use cases like adding inventory, fulfilling wholesale orders, and unlocking accounts receivable, so you don’t need to spend too much out of pocket and wait too long to get paid as you scale up. Keep in mind that you can have a good debt stack with any or all of these solutions in place.

1. Inventory Financing: When your purchase order timelines or customer demand require you to maintain a higher volume of inventory on hand, inventory financing helps ensure you don’t need to lay out a large amount of cash to avoid delays in fulfillment. In a debt stack, a business can use inventory financing up to the point of receiving a PO, and then use PO Financing to repay the liability at a better rate.
   • Best for: Companies that take longer to produce inventory than their wholesale purchase orders allow for, meaning they need to buy inventory ahead of receiving a PO, or businesses with high omnichannel sales who need to stock up for both ecommerce and wholesale.
2. Purchase Order (PO) Financing: When your business has a confirmed order but lacks the capital to fulfill it, PO financing can help bridge the gap. The lender covers most or all of your cost of goods, allowing you to deliver on customer orders without straining your cash reserves. Then, once the order is fulfilled, you can use AR financing to get an advance on the customer payment (and many lenders offer both of these products, simply reducing the monthly rate at invoice issuance).
   • Best for: Companies that need upfront capital to fulfill large customer orders.
3. Accounts Receivable (AR) Factoring: If your business is waiting on customer payments but needs cash now, AR financing lets you borrow against your outstanding invoices. It’s a great way to smooth out cash flow without waiting for invoices to be paid.
   • Best for: Businesses with long payment cycles looking to access cash tied up in receivables.

There are two types of Accounts Receivable Factoring: 

1. Non-recourse factoring is a type of financing where a business sells its accounts receivable to a factoring company, and the factor assumes the risk of non-payment by the customer. If the customer does not pay, the factor absorbs the loss, meaning the business is not liable for bad debts. 
2. Recourse factoring is when a business sells its accounts receivable to a factoring company but retains the risk if the customer fails to pay. In this case, if the customer defaults, the business must repay the factor or replace the invoice with another receivable.

Next Steps

The lender you choose can make a significant difference in how smoothly the financing process goes. Different lenders offer different strengths, and matching the lender to your needs is crucial.

For CPG businesses, a thoughtfully constructed debt stack is more than just a financing strategy—it’s a powerful tool for sustainable growth. By strategically layering different types of debt, businesses can manage risk, optimize their capital structure, and position themselves for long-term success in a highly competitive industry. 

Get access to our top recommended lenders based on type of funding. Not sure which is right for you? Bags will help you design a custom funding plan with lenders that fit your needs. Book your free 30 minute consultation with a Bags Funding coach today.