🥗 3 Biggest Things To Look For In A Lending Partner

Hey there,

Welcome back for another bite to chew on.

We mentioned last week that since Ampla shut down, we’ve been on the hunt for a new lending partner 

Because no matter what, we still want to have a line of credit open just in case we want to cycle our cash flow properly.

So we asked you if this is a journey you’d like to follow

And the response was AMAZING.

In today’s newsletter, we’re telling you the 3 main things anyone should look for when searching for who to use for your next line of credit.

Let’s get into it.

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📖 Reading time: 4 minutes

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Size Matters

We’re talking line size - AKA how much money a lender will grant you.

Why is this a part of the main 3?

Because the bigger the line size, the more access to cash and working capital you have.

So, let’s talk about the two main lenders available to startups & what affects the given line size

1. Fintech Lending

If you’re an eComm brand just starting out, or in the midst of scaling and aren’t in retail

Then Fintech is likely the best fit

Because they underwrite things like revenue, management, historic growth, etc

Things that you have.

2. Traditional Asset Based Lending (ABL)

For ABLs, they underwrite and take liens on your assets, mainly inventory and accounts receivables (AR)

Which you don’t really have…yet.

Why?

Think about it.

If you’re a small eCom brand – you don’t consistently have a ton of inventory on hand (or keep about 60 days of inventory on hand), mostly run on a touch-and-go basis, and most of your revenue is online… 

Meaning you don’t have a vast AR balance.

That’s why we mentioned retail earlier. 

You only really get sizable accounts receivable once you’re in retail because they’re paying you on terms (net 60, 90, 120)

And since they’re constantly in a position where they owe you funds – there’s always a sizable AR balance.

For ABLs, these AR balances come in handy because they see them as collateral.

Let’s say your brand goes bankrupt during the partnership

The ABL gets first access to the assets that they underwrite - AKA inventory and AR. 

So if your brand is still owed $300K from the big retailer, for example, the ABL has first rights to it. 

This is why they can typically offer cheaper capital since they assume less risk.

If you haven’t scaled your online business to a point where you have a consistently high inventory balance, or you haven’t entered into retail yet

Then you probably won’t get the size you’re looking for.

In this case, your best option is to talk to a Fintech lender and show off the measurable assets that they value, (i.e. historic revenue growth, a clear path to profitability, etc).

Let’s play out a scenario to explain this → replace your own eCom brand with “X”: 

💸 After 2-3 years in business, X is making $500k in monthly revenue.

💳 Finance comes to you and says it’s time to find a lender.

🗣️You reach out to various Fintechs and ABLs

And they tell you the following:

Fintech: “You’ve grown your business over the last 2-3 years to a $500k monthly revenue, we see solid growth from here and are impressed with your historical track record. I will have our team underwrite your sales, and look to lock in a line based on an advancement rate on your revenue.”

Translate: these Fintechs are specific for startups, so they know what to look for in a good brand to back. They’ll look at your historical growth in revenue and trends in EBITDA, and even qualitative factors like who’s running the management team and what strategic approaches are being used, and ultimately make a decision based on that. 

ABL: “You’ve grown your business over the last 2-3 years to a $500k monthly revenue, but you don’t have much inventory on hand, and your AR balance is quite low as a majority of your business is online.. We can offer you an affordable line that will likely be cheaper than the Fintechs, but it won’t be too large.”

Translate: they can help you, but they really can’t.

🚨 It is important to note that while Fintechs give a bigger line, they:

1) Tend to be more expensive/aggressive 

This refers to the repayment structure – how much and how quickly you have to pay them back.

2) as your revenue declines, so does your line size. 

But they’re pretty cool about it when comparing them to the ABL’s:

A Fintech took you on because of your historic growth and future trajectory, so they understand the nature of the startup world and give you the leeway to figure it out and get your revenue back up if you ever have a tough month or two.

While ABLs, on the other hand, might even require an updated inventory and AR balance every 2 weeks and will adjust your line size accordingly. 

Overall when you’re small, the goal = getting the largest amount of working capital.

Funny enough, “small” is a range

Bc this is us rn

Why?

Because our inventory on hand and AR balances aren’t consistently high enough to justify the line size we are after.

While we are in retail, it’s mostly Walmart that makes up our AR – and the line size we’re offered from ABLs aren’t typically big enough to support our growth. 

Once we’re in more retailers and have a consistently higher AR and inventory balance, we’ll probably pivot.

Now that we've made it through that ridiculous amount of information, here's a brief summary of what we've covered so far:

• If you’re a small business, ABL’s, while cheaper, might not offer you the line size you want

• You should typically use a Fintech lender, which underwrites against your monthly revenue, giving you access to a larger line.

Now, for the second thing to look for: the never-ending fees

The Not-So-Hidden Fees 

The overall objective here and why it’s important is that you want to have the lowest finance fees and interest rate on your monthly P&L.

So you need to look out for lenders and line sizes that come with the lowest amount of fees.

And there’s a ton:

Interest rates 💸 finance fees 💸 monthly monitoring fees 💸 upfront fees 💸early prepayment fees 💸

With Fintechs, depending on their unique structure, you can get flexible financing.

Remember how we said Fintech lenders usually offer bigger line sizes?

The fees within Fintechs can be more expensive, but they usually vary depending on the term length (how long you borrow the money for)

This allows you to pick and be flexible on the finance fees and how much extension or runway you want on the capital you’re borrowing.

The lesser amount of time you borrow, the lesser the fees

For example, one month vs six months – the fees will vary significantly.

For ABL facilities, you’ll get APRs around Prime rate* + 0 - 5%.

(*Prime rate = the interest rate lenders charge their best customers for loans. This can fluctuate - as of today it’s 8.5%.)

Typically there aren’t different loan durations, so you’re stuck with the one offer they can give you…

…and they might even charge you for the whole line size, whether you use all of it or not.

Don’t get us wrong; this one option can be beneficial if you’re at the point where you can benefit from it. 

(It is often cheaper, after all on a long-term basis)

They are technically the best place to be (before you can work with a valid commercial bank) – but not everyone is at a place where they can utilize it. 

Because, like we said, if you don’t have the assets they underwrite against, they won’t be the best choice in getting the most working capital.

The last thing on the list, but not the last thing overall, that we look at is something that may be obvious but is essential.

Who Do You Know?

In this day and age, lenders are going under more frequently.

So reputation is everything.

Do your own due diligence just like they do theirs.

And reach out to everyone.

Take your time in researching the lender’s reputation and get multiple opinions:

🗣️ Ask your board

🗣️ Ask your mentors

🗣️ Ask your community

And don’t forget to get referrals, if you can.

This way you’re already starting off on a more comfortable foot knowing that someone you trust, trusts them. 

💡Tip: Keep an eye out for lenders backed by banks – they have cheaper funding and can often scale with you.

For example, if a lender is backed by JP Morgan, they can afford to have a more affordable rate than a lender that isn’t backed by a commercial bank. 

And overall, reputable lenders even tend to offer competitive interest rates, flexible loan terms, and solid customer service.

Which are 3 things you definitely want to watch out for on top of reputation.

Tool Of The Week

Before we let you go, we wanted to touch on a ‘hot’ topic within DTC and paid media spaces lately…

The big, the bad - TikTok.

Is it going to be banned? Restricted? Will nothing happen at all?

This debate likely won’t be totally settled for years - and all WE can do as founders is focus on the now.

Which just so happens to be the power of TikTok shop.

We’re still learning how to scale this mountain, but we made sure that before anything else we lock the creator side of things down. 

And the best part? We’re not sending a single outreach message to find these creators. 

You might be wondering how…

One word - Insense.

Insense is a powerful tool that lets qualified, talented creators come to US - and all we have to do is set the terms/offer for commission, create a detailed brief with what we want the, to create and how, 

Then sit back and wait for these creators to pump out quality, on-brand content.

Just 3 weeks ago we started a new campaign with Insense - and we were able to hire 29 creators for Obvi. 

(And 80% of them have already sent us content)

If you’re searching for a tool that makes finding, managing and generating fresh user-content simple, then we can’t recommend Insense enough.

Upcoming Events

SubSummit is approaching in just a few weeks — and we’ll be there!

We’re doing a live Chew On This podcast, hosting our own dinner event (get on the list!), and diving into our retail strategy

If you’re a DTC brand, we can even get you a free ticket AND $750 in travel reimbursement.

DM me (Ron) on Twitter and I’ll sort you out.

Thanks for Reading Along

We’ll stop here for today.

This process of finding a new lender can definitely be overwhelming, so we’re happy to take you through the journey as we go through it. 

While we’re still in our first few weeks of it, we’re excited to keep you updated on who we decide to go with and what we find on the way.

We started with building Obvi in public and we’ll never stop.

If you haven’t already – follow us on twitter to know more about any other criteria, what else we look for, the commonalities in the market, and anything else that pops up.

Ron’s Twitter | Ash’s Twitter

Until next time,

Ron & Ash

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