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A Simple Guide to debt financing

Updated: Jun 28, 2022

Fata & Fleishman | Greg Fleishman | Mike Fata | CPG Investor | Founder | Operator

When should an early-stage company utilize debt financing?

Debt is great way to fund working capital and investment in fixed assets (i.e., equipment) that generate revenue. It’s not a good idea to use debt to fund losses.

What is “working capital”?

Many people think working capital is the money that you need for day-to-day operations. From a lender's perspective, working capital is the money that supports the increase or the change of receivables and inventory for a timeframe of twelve months or less.

What is asset-based financing?

Lenders prefer to use asset-based financing when the cashflow of a company is less than pristine. Asset-based financing mitigates the lender’s risk of repayment by offering collateral in support of a loan. Eligible collateral includes non-cancelable purchase orders, receivables, inventory, equipment or real estate. In an event of default, the lender primarily relies on its ability to foreclose on the collateral to ensure the loan is repaid in full.

What does a company need to qualify for debt financing?

B2B accounts receivable, inventory, purchase orders and equipment that can be offered to a lender as collateral for repayment of a loan.

Why do lenders request a personal guarantee?

The personal guarantee allows the lender the option to pursue the guarantors for repayment of the loan in the event of a default. Some founders are hesitant to provide a personal guarantee as they have been diluted to less than a controlling position in the company. In other cases, the founders are fully invested in their company and have no additional funds or liquidity.

So why do lenders want a personal guarantee? If the founders “drive the car into the ditch”, the lenders want your help to get it out! They don’t want you to turn over the keys and simply walk away!

Are there alternatives to personal guarantees?

In a validity guarantee, the lender's ability to pursue the guarantor is limited to events of default involving fraud or other kinds of illegal or deceitful business practices. Lenders may be willing to consider validity guarantees when sufficient equity capital has been raised which has diluted the founders below a majority ownership.

Want to learn more?

Visit the Fata & Fleishman Resources (Raising Capital – Investor and LOC Lists) and download “Debt Financing Solutions for Growing Companies”!


About Marshall Lebovits of Asset Based Financing Solutions

Marshall Lebovits works with growing CPG companies to help them solve their non-dilutive financing needs for working capital and equipment acquisition. He advises companies with finding the best debt financing solutions including mapping out a strategy and then matching to a select group of ideal institutional lenders.

Marshall has many years of experience in the secured financing industry, working deals, large and small, from $10,000 to over $100 million. In 2020, two of his CPG clients were included on the Inc. 5000 private fastest growing companies list.

Marshall is also the Debt Advisor Specialist for adVentures Academy, which is run by Christie & Co, serving CPG entrepreneurs. He additionally serves as a business mentor through Project Potluck and Pacific Community Ventures and is the founding chair of efforts to launch Naturally LA, a natural products networking group in Los Angeles.

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