Debt financing can be a life-line for CPG brands looking to scale, meet increasing demand, or expand their reach. For many founders, accessing capital can feel challenging, especially when you’re navigating the complexities of financing alone.

Whether you’re expanding production, funding new marketing initiatives, or boosting inventory, debt financing provides a structured and accessible way to access capital without giving up equity. But what does it take to qualify for this type of financing? Here’s everything you need to know to prepare your business for debt financing success.

Understanding Debt Financing and Its Benefits

Debt financing involves borrowing funds that you’ll repay over time, typically with interest. Unlike equity financing, where you give up a stake in your business, debt financing allows you to maintain full control and ownership. For CPG brands, debt financing can be especially strategic. Here’s why:

1. Preserve Equity: You retain full ownership and control over your company. Debt financing offers a way to fuel growth without diluting equity, which is particularly valuable for CPG founders with long-term vision and growth potential.
2. Tax Deductible Interest: The interest paid on many business loans is tax-deductible, which can reduce the overall cost of borrowing and provide an added financial incentive.
3. Predictable Repayment Structure: Debt financing often comes with fixed repayment terms, which can make cash flow management easier. With the right loan in place, you can plan your repayment alongside your growth goals.

Basic Requirements to Qualify for Debt Financing

Debt financing can be accessible, but most lenders require businesses to meet certain qualifications. Here are the foundational requirements for qualifying:

• Creditworthiness: Both your personal and business credit scores matter. A higher credit score signals to lenders that you’re a reliable borrower. It’s important to maintain a healthy credit score or work with advisors like Bags to build your credit over time.
• Strong Financial History: Your business’s financial statements—such as cash flow statements, profit and loss reports, and balance sheets—demonstrate your ability to manage and repay debt. Lenders want to see stable revenue, consistent cash flow, and a history of prudent financial management.
• Collateral (if required): Some loans require collateral as security, especially for higher amounts or riskier businesses. Collateral can be physical assets, inventory, or even accounts receivable, depending on the lender’s requirements and the structure of your business.

Essential Documentation and Preparation

Documentation is key to proving your business’s financial health and reliability. Here’s what most lenders will require:

• Financial Statements: Lenders will ask for profit and loss statements, balance sheets, and cash flow statements to assess your business’s financial performance. Up-to-date and accurate statements increase lender confidence.
• Tax Returns: Lenders often review both personal and business tax returns for the past few years. These documents offer insights into your financial stability and historical income.
• Financial Projections: Cash flow lenders look at your debt coverage ratio (DCR) when deciding if you can repay a loan. If your current DCR doesn’t meet their standards, they might ask for financial projections. This is a good chance to show how your business is growing and might meet their requirements soon.

Need help? Bags is a debt advisor and their team can assist in ensuring that your financial statements are in top shape. Their team provides loan-optimized accounting support, helping you present a clear, compelling financial picture that meets lender standards.

How Bags Can Help You Succeed in Debt Financing

As a partner dedicated to your financing success, Bags goes beyond traditional funding support. Their approach includes:

• Funding Coaches: Experienced funding coaches guide you through the financing process, advising on the best types of loans for your needs and helping you develop a funding plan.
• Customized Funding Plans: Bags tailors financing solutions to your business’s unique requirements. This customization can make a significant difference in selecting the right lender and loan terms for your goals.
• Loan-Optimized Accounting: Presenting a polished financial picture can improve your chances of securing a loan. Bags provides accounting support designed specifically for loan applications, ensuring your financials align with lender expectations.
• Lender Network Access: Bags has cultivated a broad network of lenders who understand the challenges and growth potential of CPG businesses. This network opens up opportunities for funding that might not be available through standard financing channels.

Tips for Strengthening Your Application

The more you can do to demonstrate financial responsibility, the stronger your application will be. Here are some actionable tips to prepare:

1. Improve Your Credit Score: If your score needs a boost, focus on paying down debt, keeping credit utilization low, and resolving any outstanding issues. Learn more about it here.
2. Reduce Debt-to-Income Ratio: Lenders often look at the ratio of your debt to income as an indicator of risk. Lowering this ratio by increasing income or paying off debts can make you a more attractive candidate.
3. Refine Cash Flow Management: Consistent cash flow is a key indicator of financial health. Take steps to manage accounts receivable, control expenses, and ensure steady revenue.
4. Consistency in Financial Statements: Ensure all financial statements are current and consistent. Lenders look for coherence in financial records, and discrepancies can raise red flags.

Navigating the Debt Financing Process

Once you’re prepared, the debt financing process involves several steps, including application, underwriting, and loan approval. Here’s a high-level overview:

1. Submit Application and Documentation: With your documentation ready, apply with one or more lenders. Bags can assist in preparing a compelling application package.
2. Meet Lender Requirements: Each lender has specific criteria and may ask for additional documentation or explanations. Bags’ funding coaches help you navigate these requirements smoothly.
3. Understand Loan Terms: Carefully review loan terms, interest rates, and repayment schedules. The right loan terms will support your business’s growth without straining cash flow. Bags’ team can help you negotiate and understand these terms.
4. Follow Through on Repayment: Once your loan is approved, maintain steady repayments. A strong repayment history can pave the way for future financing opportunities.

Debt financing can be a powerful tool for CPG founders ready to scale their business. By meeting lender requirements, preparing strong documentation, and partnering with experienced advisors like Bags, you can confidently pursue the financing you need. Book a free call with a Bags funding coach and get an initial breakdown of the debt stack that would help you scale.