The Startup CPG Podcast

Daniel Taylor
So the main mission of Baggs is to solve access to capital for fast growing segments of the us economy with real focus on underrepresented business owners. But we work with all business owners and the reason why we specifically went after businesses in the CPG space is because this element of cash conversion cycle, like, you know, and you're expanding into retail and you're making that decision whether to fund your inventory or, you know, have enough dollars left over to activate around that retail opportunity, you know, making sure that you really build a strong debt stack is critical, critical in terms of growing your businesses.

00:41
Daniel Scharff
Hello CPG ers and financing friends. Welcome to the release of the startup CPG financing database. I am so excited to release this out into the world. If you're a brand that has struggled to raise money from VC's and angel investors because they're not writing checks or you don't know them, or the valuations are terrible, this is a great episode for you. It's going to go through all of the different loan types and Daniel Taylor from our sponsor bags is here to explain it in a way that you're actually going to understand. I promise because I was able to understand it. Check the show notes if you want to see the link to the actual database to explore all of the different lenders, their minimums, the loan types. Enjoy. Hello everyone. This is it y'all.

01:22
Daniel Scharff
This is the release of one of our most exciting resources ever. It's the startup CPG financing database in partnership with our friends from bags. So we made this because I was seeing early stage VC's pretty much have left the building. They're not out there. If you're looking for funding for your business, if they are still there, oh, they are going to hose you on some valuation, you know, like it's going to be a third of what it could have been in the early days. Which means to get that 100k or 500k, whatever you want, you're going to have to give up a huge chunk of your company. So there are a lot of ways that you can be scrappy.

01:58
Daniel Scharff
I'm a big fan, for example, of keep your day job for as long as possible, get paid and do your thing on the side and then you'll have the money you need to pay for the things. But if you are raising, if you want capital, one thing I wanted to put together was a crowdsourced list of all of the non dilutive capital sources. Which means, yeah, places where you don't have to give up equity to get that money because I was just seeing in the slack a lot of people saying, hey, anyone know where I can get this kind of a loan or that kind of a loan?

02:24
Daniel Scharff
And someone just giving like some answer, but it seems really inefficient because you don't know if that is even the kind of loan that you need or if they'll work with your kind of a brand if you're at their minimums. And so rather than everyone waste all their time doing this stuff, what we did was put together the first that I know of. Crowdsource list of all the CPG lending options with our friends from bags. And so I'm really excited to welcome Daniel Taylor today to the podcast. He's the co founder and CEO at Bags. Yeah, let's do it. So Daniel, welcome to the podcast. Can you just start by giving us. Yeah. Can you introduce yourself and tell us the four one on bags?

03:02
Daniel Taylor
Absolutely, absolutely. And Daniel, thank you so much for the opportunity. I'm really excited about the database because I think the real thing that we're trying to solve for there is information. Make information more easy for people, therefore enable more businesses to find the right dollars in order to help them grow. But yeah, a little bit of background on bags and myself started bags about four years ago after selling my last business. I was in the advertising technology space, primarily working with brands, and I saw firsthand the realities of when CAC starts to go up and cost of inventory starts to go up. And in reality, when it gets to be more difficult for venture investors to not just find great companies, but for the actual companies themselves to find dollars for growth, we needed to build something to help solve that problem.

03:42
Daniel Taylor
So the main mission of bags was to solve access to capital for fast growing segments of the us economy with real focus on underrepresented business owners. But we work with all business owners. And the reason why we spoke specifically went after businesses in the CPG space is because this element of cash conversion cycle, right, like when you're expanding into retail and you're making that decision whether to fund your inventory or have enough dollars left over to activate around that retail opportunity, you know, making sure that you really build a strong debt stack is critical. Critical, critical in terms of growing your business, especially when within a tightening venture environment.

04:16
Daniel Taylor
But like the reality is, for most businesses, it's difficult to figure out who to get funding from, how to build a real strategy towards growth that incorporates debt financing at each phase, and then really making sure that from the get go, you've got the right documentation, the right financial structure and the right financial visibility to be able to really, really go out and grow your business. And so that's what we do at Baggs, our financial growth platform for CBG brands with a real focus on underrepresented business owners. We've got a ton of lenders, most of which are on our database. So we're so excited for this to be a really great free resource for everyone to use. And by part of working bags, you get everything from bookkeeping, accounting in order to get better financial visibility.

04:56
Daniel Taylor
And you also get access to an infrastructure for you to be able to make the right decisions, to find the right lending products, to manage that debt effectively over time, and then potentially refinance when you get to be a bigger business.

05:09
Daniel Scharff
So I wanted to ask about this underrepresented founder part, because I think probably a lot of us know this disgusting stat about like only 2% of VC funding dollars wise goes to women. And I don't know the exact number for african american founders or hispanic founders, but I think must be similarly tragic, of course. So with this kind of financing, like do you see similar kinds of numbers right now? And I, you know, obviously that's a big part of your mission is to try to help, I'd say, democratize the funding a little bit more.

05:39
Daniel Taylor
Absolutely. So it's actually, there are more dollars and different types available when you think about sort of the alternative funding landscape. Right. So everything from dollars that exists within CDFIs, community development, financial institutions that have a mission to lend to underrepresented founders. Right, to various, call it community banks, to certain fintech lenders, there's actually a ton and a range of both products and dollars that exist out in the market. And what we're finding actually is that there are some incredible products that actually are easier to get than potentially that venture check.

06:16
Daniel Taylor
In reality, there's less of a gap, I would say, within the lending side, but I do find, and what we do find from an underrepresented founder perspective, and just talking about, let's take black founder specifically, these businesses often are forced to be more profitable in an earlier stage because they can't get the equity dollars or the debt dollars. But the way that they're funding the growth of their business is on things like your credit card, you're hurting your personal credit, which in turn affects your business credit. And so for us, what we really found with a lot of these business owners is that there actually are dollars that are out there in the market. They're too difficult to find one. It's too hard to figure out what eligibility looks like. Two and then three.

06:59
Daniel Taylor
For a lot of businesses, you might be perfect on paper, but if you don't have the docs to go after the lender or go start the lending process, you're actually not lendable from the get go. And so were getting so many businesses connected to great lenders, and they were just getting turned down because of lack of docs. Part of why we do a lot of the documentation here at bags. But no, I think what we're finding is that for 99% of businesses, not just underrepresented business owners, but for 99% of brands or businesses, they won't raise venture in order to grow their business. It doesn't mean they're not building a good business. In most cases, they are. And what we found time and time again is that most businesses stop growing due to lack of access to capital, not of lack of demand.

07:47
Daniel Taylor
They don't have the dollars to fund that inventory. What we're able to work with them to do. And some of the things that we'll talk about today is like, we're super obsessed with this correlation between debt financing and unlocking revenue, right. Because if you get the right types of financing product for the right use case, you should be able to articulate how that's going to return and result in more revenue.

08:10
Daniel Scharff
That's the game, man. It's interesting when you say that. I just remember, like, every book that I've read about, yeah. Super successful companies and founders, whether it's Elon Musk or Steve Jobs, anybody, there's always a point in the story in the book where they're like, and then we almost went out of business because were running out of money. We couldn't pay for things. And then something saved us. And so, I mean, I don't know, that really resonates with me, but that's.

08:35
Daniel Taylor
The whole game is. I mean, listen, we're in a tide is out environment, right, where venture is much slower, and eventually it'll start to come back in a little bit. But I think the writing on the wall is reading, wait a second, you still need to keep your business both alive and growing. And so it's about finding those dollars. And there are dollars out there. And over time, the real thing is debt actually ends up being cheaper than equity over time. Right? Like, that's the one thing that people don't often remember.

09:02
Daniel Scharff
Okay, so I think that's really powerful, by the way. I just almost. It sounds like you're going so far as to say, hey, if you're a black founder or a female founder, just, you know, when you start your business and have that probably that same vision that I have of like, oh, all big company successful founders, whatever, they start and then they go and raise a bunch of VC money and then they grow and they make it, whatever, like it's actually, it might be a different story for you. And you should be prepared to really maybe work harder for some of these other funding sources like financing, because it's that the VC world is not going to open itself up to you in the same way as maybe these other financing options.

09:39
Daniel Scharff
So just, it's good for you to kind of know that eyes wide open going in so that you can hopefully have a better chance of getting the funding.

09:45
Daniel Taylor
Without a doubt. And I also think, listen, the venture dollars that propped up a lot of the direct to consumer movement, they're seeing a little bit of the reconciliation of a lot of money being used for specifically inventory and marketing. I think what we've seen from a pullback perspective is now venture won't fund inventory or marketing in a lot of cases for a lot of CPG brands. What we're finding is most businesses need dollars for what inventory and marketing. Therefore, there is this gap there and there are products that are built to solve that. But now we just need to kind of restructure the culture around how we build our businesses. And in turn, it's forcing a lot of businesses to start to build a business at an earlier phase, which in turn people often forget.

10:32
Daniel Taylor
Like not needing venture money is the best way to get venture money. Like saying no makes them want to say yes. And other types of financing can help. You have the ability to say no because you can really be the one who's in control of your immediate growth and that potentially equity dollars can be a part of your journey going forward, but at a lesser rate.

10:54
Daniel Scharff
Okay, so then going back to like, let's say you are an early stage founder and you're thinking about ways that you want to finance this business. When do people typically start thinking about some of these financing options? In my mind, I didn't even know about this stuff when I was working at a big CPG company and had my ideas for products that I would launch. I was like, no, you just go to VC. What's their journey like? How do they even usually learn about these kinds of options?

11:24
Daniel Taylor
A big part of how they learn about them is through resources like this, free resources that exist online. Check out the database if you haven't yet but its interesting. We thought bags was originally made to be in the business of helping companies grow. And we thought therefore that would mean we would target slightly larger businesses who are doing the first couple million dollars. And what we found is its really about even from the earliest stages. For example, one of the first companies we worked with was a company called one with Swim, a swimwear line. Haley was the founder name. She was doing about $50,000 a year. She had purchase orders, but didnt know that she could finance those purchase orders. She had a crazy community kept selling out of stock.

12:10
Daniel Taylor
For her, the gap for growth was just being aware of the fact that there was a lender who was willing to finance a $15,000 po. And that gave her an immediate lift inventory which gave her the ability to go from fifty thousand dollars to two hundred thousand dollars with revenue for us. And this is really the important part. It's less about, hey, you need to be a certain size company to start to think about debt financing options. There are actually partners who will work with you all the way. As soon as you start to generate your 1st $100,000 in revenue, you should start to build relationships with different types of financing partners, even ones who are potentially youre not a fit for yet, because what ive found and what weve found as a business is that its so relationship based.

13:03
Daniel Taylor
And if youre able to start thinking critically about the elements of your cash conversion cycle, ways you can fund your growth using different debt products for specific use cases, then when you get to the point where a $15,000 po turns into a 50, that turns into a half a million, that turns into a three to five, you have the ability to say, oh wait, I can confidently scale into that retail opportunity because I know I've got various types of debt partners, or specifically, I know the type even of partner I need to be reaching out to in order to get that financed.

13:40
Daniel Scharff
Okay. And again, the main cause, probably a lot of people are thinking like, well, what if I just grow well, and then like, why would I need all of that money if I'm going to sell the stuff? Like the main reason it seems like, is just it's going to be a lot about the cash conversion, which is you have to pay for stuff so far before you're actually going to get paid. Whether it's the actual purchase of the, like the product that you're going to later sell or even like, yeah, if you need equipment that you have to buy and like, man, you're really going to be using it forever and have lower cost savings. But like, yeah, you need cash up at the beginning to pay for all this stuff and you're not going to get paid for a while.

14:13
Daniel Taylor
Of course, it's just a. It's the element of leveraging your business to access additional dollars in order to fuel your growth, using other people's dollars in order to help fuel that growth. Again though, the real trick is it's finding the right dollar. Not all money is good money, not all debt is good debt. We can talk about what some of the bad debt options look like, but it's all about, hey listen, if you're an early stage business and most business owners, CPG or Napa, specifically CPG phase, are faced with that decision, I can either expand into a new channel or a channel that's opened up for me, or I can have enough operating capital to extend my Runway another few months or I can go activate around this new marketing campaign.

15:01
Daniel Taylor
All of those are necessary elements when you're at that stage of growth within your business. Even though you might lose part of your margin by for example, financing your inventory or funding your purchase order, or using some sort of ar financing or factoring if that allows you to free up additional cash to use in other areas of the business, it's often, if managed the right way, a really good way to expand your accessible dollars and expand your ability to activate around your business. Because the name of the game doesn't matter what business you're in, it's momentum, right? Like when momentum starts, we got to keep going. And it's about using some of those leverage points to build momentum.

15:49
Daniel Scharff
And tell me if this is a too simplistic way to think about it, but let's say those early stages, like you think it's going well, you're feeling really confident, let's say right now, an early stage vc might say, okay, yeah, your business is worth 2 million. In the past it might have been five, 6710, I don't know. But now it's 2 million. You need that 100k for that big purchase order and the marketing stuff. Okay, then that's like you give me 5% of the company, right? So this is basically like you can get that money and like you're going to pay points on it, like a margin. Obviously it's going to hit the margin.

16:17
Daniel Scharff
But then, man, maybe save that 5% so that you can, once you like, in six months or a year, get your valuation up to 5 million, then you can get that same hundred k for a much smaller fraction of the company, right?

16:30
Daniel Taylor
Without a doubt. And I think the thing that people have to recognize is like when you take money from an equity investor, whether that's a venture capitalist or angel investor, those dollars stay with you forever. You could potentially get rid of them if you try to negotiate at XYZ. But no, they own a piece of your business. Depending on what your end goal is, whether that's to pay out dividends, sell to someone else, continue to hire great people, expand, you name it, that investor will always be on that cap table. That's what equity means. In a nutshell. They are taking a piece of percent ownership of your business. Again, we're not in the camp of don't take any equity, but do it from the seat of most leverage.

17:16
Daniel Taylor
And if you're tactical in the early days about how you use other types of financing in order to fuel that growth, then when you go back to that investor and say, hey, listen, our business is x bigger, we want y valuation, they're going and saying, wait a, and by the way, I actually don't need your dollars in order to get to a two x revenue growth, but I would take your dollars in order to get to a forex revenue growth. So it becomes a different conversation. Because again, if investors know you need their dollars to stay alive, they're going to hold that over you like this the whole entire time. And in turn, you're going to end up giving up a really solid chunk of your business.

18:01
Daniel Scharff
Oh, it's all scary stuff, but people find a way.

18:06
Daniel Taylor
Yeah, I mean, listen, that's the truth. Our game is to both stay alive and keep growing.

18:10
Daniel Scharff
Yeah. All right. Well, if it was easy, everyone would do it. So. Okay, so back in time, before there was bags, before we had this amazing database, what actually is it like? So let's say a founder or their early CFO or whatever is like, okay, I got it. We need to get some financing for the business. How were they going and finding sources?

18:32
Daniel Taylor
Absolutely. So often what we found is businesses would go likely on Google or some other search platform and they would search small business loan, inventory, loan line of credit for my business. And what we found is often the best option for your business wasn't even on the first three pages. Not first page, first three pages. What was happening is you would apply to all of these different either online lenders or lending programs. They would take your data and they would eventually go out and sell it out to a bunch of people that you'd apply to some loan saying, hey, we're going to give you x dollars at x rate. They get all your data, and most of the time you would get rejected or your phone would start blowing up with calls from potentially unwanted lenders.

19:25
Daniel Taylor
And then often the options that were most, that were highest on the list usually were the most predatory. So if you were getting approved, the rates were super high, they were filing a lien on your business. There were all of these sort of hoops that businesses had to jump into. And then from there, often you start the lending process, apply for a certain amount, send us some docs, and the document process would go back and forth and back and forth. And then you get to the end, and maybe 30% of the time they'd be like, here's the money. The rest of the time they'd say, hey, yeah, we found this one thing in this one document. Sorry, we can't do anything about it, right.

20:04
Daniel Taylor
So there was an element of market inefficiency that was happening, that was driving a lot of people towards a lot of different places. And then often businesses were going to their banks, right? Often in today's context, banks aren't doing as many small business loans as they were in the past, where they post SVv collapse, First Republic world. It was resulting in a lot of people who are often feeling somewhat upset, and rightfully so, that they were spending all these times applying for loans that they weren't actually a fit for from the get go.

20:37
Daniel Scharff
Okay, before we get into the database, just in the bags world, so if somebody wants to work with you guys, I know they. I mean, you can book a call with bags. You'll see that in the show notes here if you want to chat with someone on their team. But it sounds like, you know, something kind of like a broker or somebody who can help, at least like, okay, this is what you need. Great. Like, we have all these verified partners already, so, you know, like, we can basically listen to what you need and try to eliminate a lot of that inefficiency just because we know that world. And who would be the most appropriate for your business? Is that like, kind of how it works?

21:07
Daniel Scharff
And then also just because I think I told you, I'm, like, looking for an apartment in New York right now. One of the things I'm most afraid of is the broker fee that I'm gonna have to pay. So, like, so, like, do brands pay you a fee for that, or does it come from the lender? Because obviously they're very excited to find the brands 100%.

21:23
Daniel Taylor
So were very intentional when we built this business to ensure that our customers weren't our lenders and the customers were our businesses. Right? And so, and part of, and we'll talk about how we make money, but, and part of that was stepping away from the I make a broker fee, right. I get an origination fee model to a model where we're actually our customers, our businesses are paying bags for our services and not the other way around. We have to reconfigure those incentives. And so the best way to think about bags, to be honest, we ran a lending marketplace for a little while, right, where were just a meets b lender, meet business, go, go. And it was fine, but our incentives were misaligned. One, and then two.

22:03
Daniel Taylor
What were finding was that in order for businesses to really grow, they needed a strategy, a debt strategy that fit into that growth, rather than just looking at, hey, what do you need money for today? It's what do you need money for six months from now? What new opportunities are coming along for your business? How do you think about your business seasonality? The way to think about bags is we operate within two functions. You onboard into our platform. You get access to a funding coach that works with you every single month to help you understand your debt options.

22:32
Daniel Taylor
They also help you build a debt strategy in our platform which shows you not only which lenders you should apply for and your eligibility, but also shows you which ones you might be eligible for in the future based off of other businesses in that segment. So if youre in CPG, we can show you the typical debt stack CPG businesses build over time. And then we do everything from loan offer reviews, managing the application, understanding the cost of capital, building custom calculators, and then the other side of what we do at Baggs is all centered around financial management. So by being your sort of bookkeeping and accounting firm of record, what that does for you is it allows us to flip the conversation around debt from being in, call it reactive one, to being a proactive one.

23:10
Daniel Taylor
So we always run your finances against lending options, help you manage that debt over time, and then help you really ensure that financial growth is meeting financial management in one experience. And so the way we make money is work on a subscription basis, tiered, based off of revenue, so we can work with earlier businesses versus later businesses. It's as low as $280 a month and sort of caps out around two grand for someone who's doing a call it 10 million plus. But what that does for us is really allows for us to align our incentives with our businesses and then really ensure that, you know, hey, listen, you should hopefully be able to find some really good options within our database.

23:46
Daniel Taylor
But as you're starting to think about the bigger picture, as you're starting to think about that growth, as you're starting to have those conversations, bags is here as a resource in order to make sure that you're doing it the right way.

23:56
Daniel Scharff
Okay. So if somebody books a call with you guys, then that probably is not part of the subscription, but it'll be like, okay. And then you'll basically do a try.

24:04
Daniel Taylor
To give that strategy. Exactly. So you're going to book a call with us. It's usually either myself or one of my teammates who hops on. I spend all my day talking to entrepreneurs. And we'll talk through what that debt strategy will look like. Likely talk to you about a couple different options. We're not in the business of getting options. Our job is just to try to be as helpful as possible. And given we're helpful, hopefully you want to work with us.

24:23
Daniel Scharff
Okay. Amazing. So now let's get into this database. So I'm super excited about this. So today is actually the day. Like, we're record. Daniel and I are here recording this. Yeah, we actually released it this morning. And first of all, Daniel, I'm happy to tell you this email that we sent out today announcing it, this has gotten the greatest click through rate of any email that we've ever sent. It's ridiculous. It's looking like everybody needs money. Yeah, I had no idea that would happen. I was like, yeah, I want to do this because I know people are looking for these funding sources, but the email's just been sending for like 3 hours right now and it's already at 16%. That's a crazy number for us. Which I think just validates like, yeah, people are very interested in this topic.

25:08
Daniel Scharff
And I think also kind of like what we talked about before is they don't even really necessarily know what that financing options are even out there, much less which ones to look at. And so I think it's just having sent this out, even I think will be a really important part in the education for people just to start knowing they're not just beholden to some crappy valuation that they can get from somebody. There's stuff out there. So then once they learn that, they can dig in here into this database. And so what we have in here is this is a list of almost 60 different lenders. And, you know, we crowdsourced a lot of this and just talked to people in the industry that we trust and ask them for their lists and their contacts.

25:46
Daniel Scharff
And then at startup CPG, what we always like to do is basically just try to centralize a lot of the effort. So probably a lot of CFO has made their own list like this, you know, based off their contacts, they have their list of ten or whatever. We just like to go out there and get all those lists from all those people and do a little bit more analysis on the data and categorize things and then send it out to everybody. And then we just sit here and squeal and delight as everybody just benefits from the increased efficiency. So that not everyone is like doing the same thing over and over. It really does actually make us very happy. So what we did is we list the company, then we list the description of them, and then after that we list their services.

26:26
Daniel Scharff
So what are the things? Do they offer revenue based lines of cash or like cash flow reporting, the kind of stuff that they do. And then we give their contact info, whether it's a specific form that they've given us, because we actually validate these listings with all of these lenders, most of them reply to us, not 100% of them, but most of the time they do. And they'll say, yeah, that's the right contact, or give, no, give them this email. And then we have a column that says bags verified. So do you mind just telling me quickly if there's a green check in the bags verified column, what does that mean?

26:57
Daniel Taylor
So we've been doing this work for about four years, have called over 65 lenders that we're currently working with, many of which were on this list. And a big part of what we do at Baggs is we do the work to understand their eligibility, understand the requirements, and ensure that they're doing their best to provide as equitable of a lending option as possible. As mentioned, theres a lot of money in the market. Its not all really good money. Its about finding people that you really want to work with, that care about keeping your business in business and help build a product thatll actually help you grow. And so weve done with the bag verified lenders. Those are lenders that we actively work with at Baggs on a weekly, if not daily basis.

27:37
Daniel Taylor
Weve also helped verify their eligibility requirements, really to make sure that the description and the products that they offer fit some lenders. When you go on their site, you're not sure, is it a perfect fit? Is it not? We've done that work. We'll hopefully be continuing to grow this list over time with startup CPG. Because really, the game here is just information. Let's make information more accessible to people.

27:58
Daniel Scharff
Yeah, yeah. Good for everybody. And I think, again, our goal is just the efficiency here. If you're looking for funding, to be able to go out and find the right partner with the best rate, ideally, and for you just to not also have to spend as much time digging through a bunch of stuff that's not going to work again, like best financing, best option. So I think that's a really helpful column. And then after that, we have columns that you can filter on, and it says, do they do all of these loan types that I had never really heard of before, but it's been an education for me as well to build this thing. And so do they do factoring? Do they do inventory? Do they do accounts receivable? Do they do venture debt?

28:34
Daniel Scharff
All of these different kinds of loans that we'll go through in a second with Daniel. But you can basically just filter on all of those. You can do the choose financing type and select only the ones that you're interested to see. And then the very last column, I think, is maybe the most useful one and actually says minimum brand revenue or other criteria. Because, like Daniel was saying, the worst is you go through this process and then they disqualify you for just some really basic thing like, okay, thanks. You could have told me that yesterday before I spent all this time where I could have been growing my business. So I think we'll keep getting better with that over time as well and adding in more info. And I think everyone benefits from the transparency here.

29:10
Daniel Scharff
There's nobody that doesn't benefit from the more transparency, except for maybe somebody who wants to, like, hide, I don't know, behind something. So, yeah, anyways, that's our goal here. I'm really excited that we have this out here and anybody can access it. The link is in the show notes here. And again, I really have to say thank you to bags because they make it possible for us to do all of this work and then release this out into the community. So I hope you guys appreciate that as well. And then the other thing that I wanted to do is maybe just a quick, like, 101 on what are all these kind of loan types? Because for me, like I was telling Daniel, I actually am.

29:44
Daniel Scharff
I went to Wharton for my MBA, which is known as the finance school, and I didn't know what a single one of these things was. I'm terrible at finance. I'm, like, embarrassed by it. So I'm hoping that you can explain it in a way where I'll understand it and everyone will understand it along with me. So do you mind just giving us the primer?

30:01
Daniel Taylor
And by the way, as you're going through the list, right, like bags, you can book a call with our team here at bags at any point. We're here as a resource. Like we want to really make sure that you go to the right place. But again, I think all the information there, especially the information that we verified, should give you the ability to start the process and have conversations with any of these lending partners because there are some incredible partners on that list. Okay. So just do a quick 101 on the different types of debt financing products, starting with the most basic. So, you know, your classic term loan is a loan typically year to ten year period of time where someone is lending you money and in turn you're repaying those dollars on a fixed rate that might include some principal.

30:44
Daniel Taylor
So total amount of the money lent and some interest. Right. So you pay that monthly with monthly installments until the term length. And then in turn it's either repaid in full or maybe there's a balloon payment at the end. Balloon payment just means I, there's a lump sum in order to pay it off. That's your typical bank loan, right. If you have a mortgage very similar, just different structure and often, like there might be some sort of security on your business. I'll get to a second and let's.

31:10
Daniel Scharff
Do some pros and cons as we go through some of these options. So that one, I don't know, is a pro that, you know, maybe.

31:17
Daniel Taylor
So term loans are really good for longer term investments in the business, right? Like if your business is seasonal, having a term loan gives you the ability to deal with some of that seasonality, have additional cash that you can use in order to help deal with some of those operating expenses or reinvest in that growth. So its more of a general use case lending product. And typically term loans, the amount you receive is the amount that youre going to get. When you take out a term loan for your business. You cant call the same one up and say, hey, I need more. Now, typically it's a fixed structure with fixed interest pricing that you pay back on a fixed basis. What's also great about that, you know how much you're going to pay every single month, right.

32:00
Daniel Taylor
There are some other products that we're going to talk about that might fluctuate month to month and make it a little bit more difficult for you, knowing exactly what you're going to pay gives you the ability to plan accordingly. Right. So just keep that in mind as you're thinking about different products.

32:13
Daniel Scharff
Okay, perfect.

32:14
Daniel Taylor
Okay, term loans, next, lines of credit, very similar to a term loan, but the core difference is you can tap into those dollars at any given time. Right. So say rather than $100,000 term loan, you can have $100,000 line of credit. You're basically pre approved to tap into that $100,000, and then as soon as you take out a percentage or the full amount, you pay it back. Like a term loan. Right. What's great about lines of credit is it allows for that flexibility. You can take on debt when you need it. The reality with lines of credit in today's market, there aren't as many people doing it. One, two, they're often a little bit more expensive than term loans. Three, again, there's a cap on the amount that you can take out.

32:56
Daniel Taylor
So if you're in the case where we'll get to where you've got a big purchase order or need more inventory, lines of credit will help you get there. But often there's a ceiling. What we typically try to advise people is choose the right product for the right use case so that there's a direct correlation between use case and debt financing. So lines of credit are really good, but again, more difficult to get. And if you do get one, just ask to read the fine print, because often you want to ensure that theyre not sort of putting any sort of security or lien on your business, but it just basically means that they, in the case of you not paying it back, they have the ability to leverage some assets of the company. All right, so weve covered term loans, lines of credit.

33:36
Daniel Taylor
Now lets go to sort of the more CPG specific products. Right. You'll likely see on that list invoice factoring, inventory financing or accounts receivable financing or purchase order financing, they're kind of all within one bucket. But I'll try to break down each inventory financing. It's using someone else's dollars to fund the purchase of your inventory and then paying that back over time. Right. So inventory financing is really good when you think you need to do an inventory run. And what you're doing is you're leveraging the value of your inventory in order to be able to get that financing. So rather than it being secured by the business, you're securing your inventory in order to receive a loan. And typically you're paying that with interest. Interest within inventory financing often is a little bit much shorter than a term loan.

34:22
Daniel Taylor
So you're not seeing inventory financing that you pay back over the course of a long period of timeline. It's usually much shorter. Three, six, Max. Max, Max called twelve months. That's something to consider when you're thinking about inventory financing. Really, really good. If you need to expand or use your inventory or get more inventory, then on the immediate other side of that is purchase order financing. So if you're a brand that's expanding into retail, you're likely to get a purchase order. Great moment. Huge moment. You're like, great, that's awesome. How do I fill this purchase order? Right? Like how do I find the dollars in order to fund the creation of that inventory? That is what purchase order financing is. They are using the creditworthiness of the retailer. So the retailer, let's call it a Walmart.

35:06
Daniel Taylor
Walmart is not paying us for any of this, but let's call it a Walmart. They give you $100,000 in terms of a purchase order. You need to go actually out and create that inventory, send it to their facility, and then often they will pay you on net 15, net 30, net 60, net 90 terms. Meaning you're not going to actually get that money for a period of time. What do you do is you leverage that purchase order in order to receive that capital and produce the inventory. Often it's much shorter in terms of structure. It's based off of sort of the time of cash conversion of them paying, getting that purchase order paid back. Right. So if it takes, let's call it 60 days for that Po to be paid. Right.

35:47
Daniel Taylor
That's often what you're paying interest on and interest within purchase order financing is more expensive than a term owner line of credit. Right. But because it's a shorter period of time, that expensiveness in reality shouldn't necessarily break your bank if it's done in the right way and if it's managed accordingly.

36:03
Daniel Scharff
So, fun fact, we have in our database, we have, I think, 22 different listings for purchase order financing. Just to give you an idea like that's good. You get a lot of options there. Definitely. I hope that if that is what you're looking for, you'll be able to find the right partner in this database. Why is it that the rates would be higher for something like purchase order financing versus something like a term loan? I know you mentioned because probably you're going to pay it back faster, but just like. Yeah, just, yeah.

36:32
Daniel Taylor
So it's from a, call it finance one one perspective, it's risk versus reward, right. And everything is priced on a risk versus reward basis, right. And so when someone like a large retailer gives you a purchase order, you in reality, even though that bill will get paid, you still have to make the product, send the product like on time to some degree. And so if you know, hey, I can make it here, I can send it there, and it's going to take XYZ to pay. Great. You can factor that in reality. And then that's one part. And then the other part is what we find is with purchase order financing is often purchase orders are larger than the current size of the business. Meaning if the purchase order doesn't get filled, the business itself is much smaller than the size of that purchase order.

37:22
Daniel Taylor
So for example, you could be a business thats doing about $100,000 a year and get $300,000 worth of purchase orders. From a lending perspective, it is riskier to finance a purchase order than it is to finance your core business. You are leveraging that potential income in order to potentially thats it. Its a risk reward. Often purchase order financing is more expensive. You need to factor that in to the total net revenue that you're going to receive when you fill that purchase order.

37:55
Daniel Scharff
Okay, that makes sense. Like the example of your first Walmart order. That's going to be really big, much bigger than anything that you've ever done. And that's why you would need a PO financing. And because, yeah, it's so much bigger than you are as a company. It's probably a lot bigger of a loan even than you would be looking for term loan. And so obviously priced into the loan.

38:15
Daniel Taylor
Exactly.

38:16
Daniel Scharff
Okay, perfect. So went through some of then more CPG related ones. I think we got a couple more on here.

38:23
Daniel Taylor
Sweet. Yeah, I think we do. Okay, so invoice factoring.

38:27
Daniel Scharff
Right.

38:27
Daniel Taylor
So there will definitely be, Daniel, I'm not sure how many are on that list, but I'm sure between accounts receivable financing and invoice factory, there's definitely a few on that list. Yeah, you're doing the math.

38:40
Daniel Scharff
It looks like. Yeah, it looks like about 20 or 25 for factoring.

38:43
Daniel Taylor
20 or 25 just on its own.

38:45
Daniel Scharff
Yeah.

38:45
Daniel Taylor
So the thing about invoice factoring when someone owes you money so great, I've got an outstanding invoice, someone owes you dollars, let's call it $100,000. And that in turn is accounts receivable. You've already provided the services, now someone owes you that money and there's a period of time where you're going to get paid back. As a founder, you're like, man, I need this cash. They need to pay the bills or you're calling, you're calling, let's get it paid. So what invoice factoring does is they in turn give you a certain percentage of that total invoice upfront. That could be $0.90 on the dollar. That could be $0.85 on the dollar. That could be $0.94 on the dollar.

39:28
Daniel Taylor
What that does for you is that allows you to get that cash flow upfront and then you lose a little bit of that upside on the tail end. The reality in terms of invoice factoring is that, again, with that risk reward dynamic, it's often priced on a per day or per week or per month basis, meaning for every day that invoice is outstanding. In turn, that can have a net effect on sort of the total amount that you will pay on that invoice or how much you will lose in that invoice over time. And so that's why people only typically will fund, call it $0.90 in the dollar because they want to ensure that over time they're going to make that spread and everything gets paid out accordingly.

40:12
Daniel Scharff
Okay, so if you're, let's say, considering between something like purchase order and factoring, I mean, one actually, sometimes in this industry, you don't really get purchase orders in that way that you think you would like. You just, I don't know, the distributor picks it up and then people start ordering, you know, you're getting in the reset. Who knows? But then, so we have factoring, and then we have accounts receivable. Factoring then, so I understand is like, yeah, you have invoices, like you've shipped the product or it's been picked up already, and then you might not get paid by a distributor for 90 days or even longer if they want to mess with you or if they don't have the money. So what's the difference between that and then the accounts receivable? Financing.

40:50
Daniel Taylor
Yeah. So the difference between factoring versus financing is that financing often is more of a, call it typical structure, if that makes sense, meaning they're going to just charge you with interest over a period of time. Factoring. Right. On the other hand, like often that clip, in terms of how they structure that interest can be really, really significant. And so I'd say the core difference is in one case they're actually buying that invoice from you. In the other case, they're not buying the invoice, they're actually using you. They're still lending the money to you. Right. So that's the difference between invoice finance. I've heard that they're taking the invoice.

41:27
Daniel Scharff
And then they're going to actually be the ones who get paid.

41:30
Daniel Taylor
They'll receive it whatever they can. Exactly.

41:32
Daniel Scharff
Oh, instead of you. So then, yeah, that's theirs now. Okay.

41:35
Daniel Taylor
That's theirs.

41:36
Daniel Scharff
All right. Super interesting. Okay, cool. And then, so our last two, or let's call it.

41:41
Daniel Taylor
So there's equipment financing. If you need finance, if you need to fund new equipment, you can leverage the purchase of that equipment, finance that payment over time. Really good. If you're in the manufacturing space or you're, you know, self producing your product, it's often a thing that we're seeing a lot of businesses in the CPG space do, depending on how close you are to the manufacturing side of things. And then there's SBA loans, or SBa lending. Typically, SBA loans are term loans, a little bit more classically structured term loans that are backed by the small business association, by the SBA, and offer a cheaper interest rate because they are backed by the SBA. What's great about SBA loans is that the interest rates are a little bit lower. Right. It's longer term in terms of structure.

42:27
Daniel Taylor
What's not great about SBA loans is that the process from application to receiving cash could take as long as three months. And so time to fund is something that you should always consider when exploring your options. I know that's one of the things that often comes up. It's like, hey, what are the things I should be asking lenders as I go into the process? Like, typical time to funds, given you have all the documentation, is one, two, have them restate their requirements. So all of those lenders who you have in that list, its worth asking. Again, just to be clear, hey, your minimum revenue requirement is x or is it y? Right?

43:07
Daniel Taylor
Theyll give you an understanding of whether youre fit, but asking those two things, and so SBA loans are really great long term, more patient capital that should be used in longer term, more patient investments into your business. And then venture debt is the last one. Venture debt, I'd say, is probably the least common type of financing that we're seeing businesses, especially within CPG, take. Venture debt was created specifically for high growth technology businesses where they could leverage equity in order to receive debt. So they'll say, hey, listen, I'll give you $100,000 loan. I. But if you don't pay it back, I get a large percentage of your company. Those products, typically we find, aren't as structured or as built for a CPG business.

43:56
Daniel Taylor
But it's always worth understanding what venture debt is in case you get into a conversation with a lender, because it often is related to the last valuation of your company, the future raises and all those other things. So it's really built for that, like rapid growth venture business.

44:12
Daniel Scharff
Okay. And I think like, especially last couple of years when fundraising got very tight, I saw some businesses existing long beyond when they probably should have existed. What I heard from people is that was venture debt, where they're like, yeah, they're getting that money, but man, people are getting bigger and bigger chunks of equity, which I don't know if you're the person giving that debt, if it's the best play, because I mean, a lot of those companies probably gave like, then stuck around for a while with that extra money and then went out of business anyways.

44:42
Daniel Taylor
Again, the covenants that they put on. Right. Like there are various things that they incorporate into that debt to ensure that their financing is de risked. Right?

44:53
Daniel Scharff
Yeah.

44:53
Daniel Taylor
And so, yeah, it's not. It can work for the right company, but often for CPG, it's nothing necessarily the best. One thing that isn't in our database, or isn't in our database as prominently, but is worth talking through is merchant cash advances, MCA loans. This is something actually that we see as one of the most common things that brands are doing. A lot of the big fintech platform, Shopify, Square, PayPal are now giving loans and they're called merchant cash advance loans, where they essentially look at your monthly revenues and then fund you a certain percentage of those revenues and they take a fee off the top. Right. And then you pay back that total amount as a percentage of your revenues. Right. The thing about MCA, merchant cash advanced financing, is that the fee structure of mcas over time. Right.

45:45
Daniel Taylor
Are often more expensive than term loans. So it's worth considering. And then the second is with some MCA loans, they will file a UCC on your business, which essentially means they will file a lien on your company, which makes it harder for you to get other types of debt financing products. And what we find with most of the brands that we work with today is that the name of the game isn't just, I've got just inventory financing or just equipment financing or just a term loan. Like honestly, the brands of today have multiple forms of debt financing and they have them work well together. And so having the flexibility of having different products is important. So it's always worth considering whilst applying for MCA loans.

46:32
Daniel Scharff
Got it. So they're like, yeah, we'll make it easy for you to get this money, but we get paid first.

46:38
Daniel Taylor
Fast money usually isn't cheap money.

46:40
Daniel Scharff
All right, that's the game. Okay. So just back to the things that you should ask if you're talking to one of these companies. Right? So you mentioned a couple of things, like time to fund. I've heard a couple other things. I heard like, okay, obviously you want to ask about the size of the line or the loan that they could potentially give you. Obviously what the interest rate is going to be, the term of the loan, whether or not you need a personal guarantee.

47:03
Daniel Taylor
Yes.

47:04
Daniel Scharff
And then if there are early termination fees, and then if there are borrowing advance rates, if it's an asset based loan, do those all make sense? Any that you want to add color on or any additional things that you.

47:17
Daniel Taylor
Would say that is the prepayment penalties. Right. Like it's worth asking those questions. And again, as long as you're covering the initial questions of whether you're a fit, whether there's personal guarantee, what their typical type of fund is on the personal guarantee side of things, that is something that often comes in later in the conversation with lenders. Make sure to bring that into the forefront, because in the case where you're not willing to give a personal guarantee, and that's okay, completely making that explicit will allow you to potentially save some back and forth in the future. And so the other thing we're thinking about when you're going into those lending conversations, before you even go into the conversation, you should have updated p and l balance sheet, cash flow statement, last year's taxes from the year before.

48:07
Daniel Taylor
And if you have debt, a debt schedule at a minimum, those are all the things that you will be required to have to even start to have a productive lending conversation. It's always worth doing a little bit of that work prior to so that you don't start the lending conversation. Then the conversation gets halted because you don't have your documents. Get your documents prepared prior to going out, pursuing lending and funding options. It will save you time again. Most lenders are people just like us who are building relationships and who want to invest in people, don't give them any reason to give any sort of red flag and really, really come prepared.

48:55
Daniel Taylor
That is one of the number one things that we see and also part of the reason why we do a lot of that work with our customers at bags because 80% of lender underwriting is spent cleaning up financial documentation. So have your docs prepped. It will enable you to get more money faster. That's simple.

49:17
Daniel Scharff
All right. Amazing. So, Daniel, final question for you as we wrap up here, which is what would your game plan be? Let's say, you know, Daniel starts his, Daniel's chips company. I don't know, whatever it is. And let's say it's, you know, it's going well. You're in the early days and yeah, you don't want to raise a bunch of money like what's your, you know, top one, two, three? Kind of like how are you going to think about your personal financing game plan in an ideal world?

49:43
Daniel Taylor
So I think the first step, and this is how we think about things in bags, first step is like where do you want to go? What type of business do you want to build? Is your dream to build the hopeful venture scales, multi billion dollar. We're going public. Really understand what your long term goals are and then once you do that, understand what your immediate action steps are. Honestly, the best way to grow your business is revenue first, debt second, equity third. If there's an immediate opportunity to unlock revenue, go do that. Don't search through the list, go start there. Let's grow the business from a revenue perspective. So thats one really set tangible goals and understand heres exactly what I need to do in order to grow this business.

50:26
Daniel Taylor
The next step for me, if I were in that seat is in order to get to that goal. What does money look like? And be somewhat rational about it. We get on calls. I did it before as well. Before I got into this business. Id get on the phone with a lender. Id be like, listen, were doing 50 grand, I need half a million dollars. Thats going to get us to the next phase. No, no. The reality is you need 25k. Thats going to get you to the next phase. And so really break down what is the immediate step that you can go achieve with the right or the minimum amount of debt financing dollars to get you there. Thats the next piece.

51:06
Daniel Taylor
And then once youve figured out those two things and once you figure out what dollars you need it for, then based off of that, take your requirements, meaning what size business you are, go through the list, start to build out your list of, hey, I might be a fit for this person, this person and this person, and then reach out and start having those conversations. Even if you're not a fit for a lender today, you might be very soon. It's worth having that relationship. And then the real thing is manage that debt appropriately over time. Build a debt schedule. If you don't know what that is, hit us up. We'll send you a template. It allows you to visualize your cash flows against your interest payments and the net cash every single month.

51:52
Daniel Taylor
So understand how much every single month you need in order to pay off that debt. Once you have all those things, that should give you the ability to grow your business. And then the flywheel is revenue growth, secure debt financing. Reinvest that growth, revenue growth again. And run it back, and run it back. Because I think that's how the business of the future are going to get built.

52:12
Daniel Scharff
All right, let's go. I love it, man. Daniel, thank you so much. I personally learned a lot during this one, which is not a surprise because I started at a very low level of understanding of it. Now I feel like I at least am at level one with you. So thank you very much. And again everybody, I really encourage you to check out the database if you are looking for financing options. Yes, free. You don't need to give an email or anything to get in there and you know, would love for you to share it with any other CPG founders you think could benefit from looking at it. So again, thank you to Daniel Taylor and the bags team for their partnership with us. It makes all of this possible. And thanks to all of you for learning about financing with me.

52:52
Daniel Scharff
We'll see you soon. Thank you.

52:54
Daniel Taylor
Thanks, Daniel.

52:55
Daniel Scharff
Bye. All right, everybody, thank you so much. Thank you so much for listening. If you enjoyed the podcast today, it would really help us out if you can leave a five star review on Apple Podcasts or Spotify. I am Daniel Scharff. I'm the host and founder of Startup CPG. Please feel free to reach out or add me on LinkedIn. If you're a potential sponsor that would like to appear on the podcast, please email partnershipstartupcpg.com and reminder to all of you out there, we would love to have you join the community. You can sign up at our website to learn about our webinars, events and Slack channel. If you enjoyed today's music, you can check out my band. It's the super fantastics on Spotify music. On behalf of the entire startup CPG team, thank you so much for listening and your support.

53:41
Daniel Scharff
See you next time.