What CPG startups must know about debt financing in 2025

2025 is shaping up to be another rough year for financing a consumer-packaged goods (CPG) startup with the threat of inflation rebounding and potential new tariffs pressuring early-stage brands, Founder and CEO of asset-based lending company JPalmer Collective, Jennifer Palmer, shared during an episode of the Founders’ Fundamentals podcast.

“Tariffs that are imposed on foreign trade will likely raise prices for consumers since companies — by and large — will absolutely raise their prices on goods to account for these extra costs. As we look to 2025, we really see a lot of headwinds going into this new year. It is very important that companies be prepared as best they can. As 2025 arrives, the best chance of getting venture funding or debt will be to have solid fundamentals,” Palmer elaborated.

‘Do not forecast any additional rate cuts into your plan’ for 2025

2024 was a “perfect storm” for funding challenges as “banks tightened up their lending standards,” and “equity continued to be very difficult to come by,” Palmer explained.

In the second half of 2024, the US central bank started cutting interest rates — providing some relief for those seeking loans — but the cost of doing business remained high, she added.

“We are still mindful of the impact of inflation on operating costs as well as purchasing behavior. Small businesses are facing increased costs for raw materials, wages and overhead expenses,” Palmer said.

The US central bank is projected to make two quarter-percentage point rate reductions by end of 2025, according to Reuters. However, founders should not factor these potential cuts into their financial calculations for the year to prevent a worst-case scenario, she explained.

“When we are talking to our clients in our portfolio, we are saying, ‘Please do not forecast any additional rate cuts into your plan.’ Just be as conservative as you can and assume the worst-case scenario that there are no further rate cuts, even though we think there will be,” Palmer said.

“Under promise over deliver because we certainly know in CPG — for particularly food and bev — we do not know when things are going to go wrong, but it often feels like it all goes wrong at the same time,” she added.

The pros, cons of debt compared to VC funding

Historically, many early-stage startups turn to venture capital in the early days without realizing the benefits of debt financing, Palmer explained. However, the conversation around debt vs. venture capital funding “definitely changed” in the last year, with more startups realizing debt’s benefits, she added.

Debt financing allows a founder to build a credit history, and “interest payments are usually tax-deductible,” Palmer said. Most importantly, founders retain equity in their business with debt financing – unlike venture capital debt – and do not run the risk of being run out of their company, she added.

This happened to high-profile TV chef Miyoko Schinner, founder of plant-based Miyoko’s Creamery, in 2023, when board members unanimously voted to remove her from the company over a dispute about the best direction for the company.

“Oftentimes, we find that the founder is asked to leave by the equity, by the sponsor that they have brought in,” Palmer said. “You may have a financial stake in your company, but you have lost control. A debt provider will never be able to step over that line and make management changes.”

Leaning on expertise to understand debt options

Given the various types of debt financing options, founders should work with a financial expert, to understand the terms of their deals, the repayment schedule and how to access the money to prevent any costly misconceptions, Palmer noted.

“There are so many different types of debt out there. There are so many different products. And for founders who do not have a finance background, it is really overwhelming. So, the best advice is to lean on your controller, your CFO, your accountant, anybody that you know from the finance world who could help guide you,” she elaborated.