Designing Your Debt Stack: A Practical Guide for CPG Founders
In the CPG industry, debt is especially useful for reducing the cash conversion cycle. The CCC metric tells you how long it takes to convert your resources from sales into cash. A long CCC ties up cash, delays growth, and makes it difficult for CPG brands and wineries to invest in upgrades.
As an angel investor and mentor to emerging CPG brands, I often meet Founders who aren't sure how to create the right mix of debt tools after raising equity funding. Creating an effective CPG debt stack can be confusing if you don't have a detailed playbook to follow.
I wanted to help Founders make strategic decisions, so I created this playbook to explain what a CPG debt stack is and how to build one. You'll also learn when to layer in tools like Settle, Flex, and term loans.
What Is a Debt Stack, and Why Does It Matter?
Your debt stack is the combination of borrowing tools used to fund operations, inventory, marketing, or expansion. Think of it like a layered toolbox, where every component serves a different purpose. For example, short-term debt can help you manage cash flow, while long-term debt is ideal for funding capital investments.
No two CPG businesses are exactly alike, so there's no single debt stack that works well for every brand. The right combination depends on your growth stage and cash-flow profile. You can use multiple debt tools, but you have to structure your stack intentionally.
When to Use Working-Capital Tools Like Settle or Flex
Many Founders eventually compare Settle vs. Flex vs. term loan options. Settle, Flex, and similar platforms are working-capital tools designed to help businesses cover timing gaps.
For example, if you distribute products to retailers, you might experience a gap between the time you fill an order and when you get paid for it. Tools like Settle or Flex can cover things like packaging purchase orders while you wait for a retailer's payment.
These platforms differ from traditional term loans, which allow you to borrow a lump sum and pay it back over time. You can get funds to buy ingredients, fund purchase orders, or cover manufacturing invoices. Another major difference between a term loan and these funding options is that platforms like Settle and Flex pay your vendors directly.
Strengths of Working-Capital Tools
These working-capital tools provide quick access to working capital. If you regularly deal with slow-to-pay retailers and long lead times, working-capital advances can help you meet production demands without using up your cash.
If you had to wait for payments, you'd have to delay production and other business activities for 30-90 days at a time. Working-capital tools make it easier to respond to changing market conditions.
Here's an example:
Assume you work with a retailer who usually takes 90 days to pay. Instead of waiting the full 90 days, you could use Settle to fund a $25,000 packaging purchase order right away. Settle would send the funds to your supplier, and you'd receive your products almost immediately. After receiving the retailer's payment, you'd simply pay off the advance from Settle.
Weaknesses of Working-Capital Tools
Working-capital tools have their place in the CPG industry, but it's critical that you understand the potential drawbacks. In exchange for the flexibility of an advance from Settle or Flex, you usually pay a higher interest rate than you would with term loans or traditional working-capital loans for CPG businesses.
Payment frequency is also an important consideration. With a term loan, you make predictable monthly payments. Short-term advances often have daily, weekly, or monthly repayment schedules. If you have several active advances, making such frequent payments could strain your company's finances.
What You Need to Know
When planning your start-up credit strategy, you need to know the true annualized cost of working-capital advances. It's also important to understand how automatic withdrawals may affect your financial situation. Platforms like Settle and Flex are ideal for funding purchase orders or inventory, but they're not a long-term funding solution.
When to Layer in Term Loans or Credit Lines
Unlike working-capital advances, term loans and lines of credit are ideal for addressing long-term funding needs. When you take out a term loan, you pay it back over several years, making this type of financing suitable for equipment, major expansions, and other strategic investments. For instance, a loan from the Small Business Administration might be a good fit for a company looking to purchase manufacturing equipment.
An operating line of credit gives you access to a revolving pool of capital instead of a one-time lump sum. You can draw from this pool any time you need funds, so lines of credit are ideal for funding bulk buys or inventory purchases. For example, if your company sells cocoa mixes, you might use a line of credit to ramp up production before the holiday season.
These funding options usually come with competitive interest rates and higher borrowing limits. However, they have stricter documentation requirements, so it takes longer to get approved. You may have to provide tax returns, bank statements, company financial statements, and a copy of your business plan. Many lenders also require proof of valuable collateral to secure a loan.
As a result, term loans and lines of credit are well-suited to strategic moves designed to support long-term growth. Healthy scaling usually involves combining long-term financing options with realistic cash-flow projections and a strategic plan for using the funds to maximize your return on investment.
If you decide to apply for one of these funding sources, be prepared to explain your repayment strategy. Lenders also want to know that you understand inventory cycles and have the discipline to pay back borrowed funds.
How to Layer, Time, and Monitor Your Stack
When it comes to debt financing for consumer brands, it's not an either/or situation. You need to know how to adjust your debt stack as your business needs change. Capital stack planning requires intentional decision-making.
A growth-stage brand usually starts out with short-term financing to cover inventory and purchase orders. For example, you might want to use Settle to purchase ingredients. The next step is to add a line of credit for stability. Finally, an SBA loan or other term loan can help the business expand or make other strategic investments.
As you build your debt stack, watch for these common errors:
Too many tools: When you have too many loans, lines of credit, and working-capital advancements, it's tough to keep track of them all.
Lack of visibility: If you don't know exactly how much your debt costs you or how it's helping your company, you can't make strategic decisions.
Wrong repayment timelines: If all your payments are due at the same time, you might run out of cash.
It's helpful to use a capital calendar or cash model to forecast your repayment risk.
A Well-Structured Stack Buys You Time, Control, and Clarity
Remember, there's no perfect CPG debt stack that works for all brands. You need to find the right fit for your business stage, goals, and timeline. Capital is a strategic tool, so don't be afraid to use it to your advantage.
Reach out to Cultivar if you’d like help designing a flexible, Founder-friendly debt stack that supports your growth without adding unnecessary pressure.
Debt Stack FAQs
Can I use both Settle and a line of credit at the same time?
Absolutely, Settle helps address short-term financing needs, while a line of credit can help you make strategic investments.
How do I decide how much debt is too much?
You may have too much debt if you can't make your payments without straining cash flow or delaying strategic investments. Think about whether you can repay your debts on time even if sales slow down or you have a large, unexpected expense.
If you can't make on-time payments unless you receive every retailer payment the second it's due, debt may be hurting your business instead of helping it.
What are the red flags that my current debt mix isn't working?
One of the biggest red flags is that your current repayment schedule is preventing you from making strategic investments. If this happens, you may have too much short-term debt and not enough long-term debt.
Another red flag is if you lack visibility into how your debt affects your business. You need to know your total debt balance and understand how each tool supports your growth.
