Ecommerce Debt Mistakes That Quietly Drain Your Margins

Welcome to the Ecommerce Finance Podcast. I'm Stephen Brown, COO with LedgerGurus, co-owner of direct to consumer brand Solé Toscana. And today I have my business partner Preston back on the podcast, and we're going to talk about debt.

Preston, welcome back to the podcast.

0:24 Preston Alder

It's good to be back, Stephen, as always.

0:28 Stephen Brown

We've been talking a lot about debt and lending the last couple of months, actually the last couple of years, as the business has grown and we have really long cash cycles. It's something that's come up a lot. We had a pretty robust conversation and I was like, man, we just need to record this. So hopefully we're going to try and reproduce some of the juicy nuggets that we had in that discussion.

But let's start with something simple. Why do you think ecommerce debt in particular is so confusing and challenging? What's your take on it?

0:59 Preston Alder

Yeah. I think as an owner operator, for me, there are so many people reaching out to offer, especially, they can tell we're growing somehow on Shopify, they know our store's growing. And so I'm getting emails and all sorts of people offering loans and financing.

And the claims they make on rates and fees can be very confusing on the surface until you dive in. And so I think a lot of people who are not finance savvy get caught in these loans that are much worse than they look on the surface.

1:34 Stephen Brown

Yeah, all the fixed fee loans. You and I have had conversations around Shopify Capital. It's like, they're offering this big loan for this amount, and then we break it down.

And like I said, a lot of brand operators don't have a finance background. And even if you do, remind us, what's your background educationally?

1:59 Preston Alder

Yeah, I was in business strategy, that's my undergrad.

2:02 Stephen Brown

So you probably took some finance and economics classes. But even if you have, unless you're living in that world of calculating every single day, it's easy to get blinded by the marketing.

2:20 Stephen Brown

When I think about debt, I think about a couple of things, and fill in my gaps.

I think about, there's an interest rate. And this is where part of the problem is, there are a lot of these merchant cash advances and other ecommerce lenders that obfuscate the cost of the loan by communicating it in different terms, like fixed fee terms that don't easily translate to an APR. So we'll come back to that.

The other thing I think about with debt is the timing of the paybacks. How is it going to be paid back?

2:55 Stephen Brown

Third thing I think about is terms and fees. What fees are associated? Are there application fees? Are there maintenance fees? Some debt can have a lot of fees. Are there early payback fees?

The fourth thing is, what am I using it for? Is it a good use of debt? And then fifth is, can I afford it?

So those are kind of five things I think about.

3:33 Preston Alder

Well, something I would add is just the situation your business is in. How confident you are in what you're financing, the growth and the operations, just how solid your business is at that point when you're taking on debt. It's just part of the risk equation.

3:55 Philosophy on debt, and buying a business

Stephen Brown

Let's explore that for a second, because it goes hand in hand with my last point, what am I using it for, and the confidence in the usage of it.

We had an episode a little bit ago, I talked with one of our customers here at LedgerGurus about how he's grown his business without ever taking debt. It was really quite brilliant and I'm quite amazed at what he's done.

But philosophically, what are your thoughts on debt? You and I have never really had a deep conversation on this, but I think this is a good starting place before you go out and take a loan. What is your philosophy on debt? We can hone in on business debt in particular, but let's start there and maybe see if we're on the same page.

4:40 Preston Alder

Yeah. So I'd say in my personal finances I'm generally debt averse. But in business I think about it a lot differently.

And I think it depends on, like you said, what you're using it for, and if you have a plan in place. In ecommerce, our growth is essentially stunted by our cash. And so to grow at a certain level, and we focus on profitable growth with our brand Solé Toscana, you have to get cash somewhere.

So then you're just putting it into the finances and making sure it makes sense and weighing the risks. So I think if used wisely in business it can be a great tool. But if not understood or used correctly, it could be dangerous, or you can be in bad spots.

5:38 Stephen Brown

And I think I'm on the same page with you. I've generally avoided debt in my personal life. Home loans. I have done a couple of car loans where once in a while you'll see these 0% interest loans and I'm like, all right, I'll stretch out the payments, sounds great to me.

Or sometimes, one of the things I hate about car dealers now is that you have to take a loan to get the better price. And so I'll go through the hoops and then I'll pay it off. But not everybody can do that.

6:10 Stephen Brown

But in the business sense, the big challenge you have is cash conversion cycles, particularly in inventory based businesses. You've got to buy the inventory before you sell it. And depending on how fast you grow, you may have a greater need to buy inventory than you can afford.

Let me ask you a couple of scenarios. You bought another business. What are your thoughts on using loans to buy a business?

6:43 Preston Alder

Yeah. So the other business I bought, I used a loan that had a ridiculous, like a one or two year entry interest rate, I can't remember what it was. And so I went through the calculations, and even after that, though it was a variable rate, at the time it was super low.

And I had confidence in the business and my capabilities to grow it, and the cash flow that I'd be getting from the business was worth the cost of capital. So anyway, I used it to buy the business, and actually sold it, finished selling it at the end of last year.

So for me it made sense, just because of the rates and the confidence I had in the business and my ability to operate it, and what the numbers were telling me.

7:34 Stephen Brown

When you say confidence in the business, what were you confident in? The cash flows, the existing revenue run rates?

7:44 Preston Alder

Yeah, so it was a subscription-based business. That's where most of the revenue was coming from. It had been consistent for a long time, had a core group of subscribers, and was kind of this close-knit community.

So I was fairly confident in a certain amount of revenue continuing to come in for a long period of time, and then just getting more subscribers. So it was just a consistent cash flow business. It was not inventory based, so I wasn't going to have to put in more cash. It was essentially just SEO and marketing based with subscriptions.

8:21 Stephen Brown

Let me ask you a question. One of the pitfalls I've seen some of our customers get into is they'll start their business with an SBA loan.

If you think about it, launch a product, I've got to have some initial capital to buy inventory at minimum. Sometimes I'll see people go out and they'll get a warehouse at the beginning.

Neither of us have done that before, but how scary would that be if you're like, I've got this great idea and I need to go get a half a million dollar SBA loan that's personally guaranteed, that I've got to service for the next X number of years? How does that make you feel?

9:01 Preston Alder

Yeah, it feels very risky to me. So much of it comes down to marketing performance, and at that stage I feel like you haven't proven product market fit and you're going to be experimenting a lot. And so it may take longer than you think, and you may have to be putting in a lot more money, and cash is just going to be tight. So there are a lot of factors there.

9:35 What happened at Solé Toscana

Stephen Brown

Yeah. And maybe this is a good point to tell our story.

We bought Solé Toscana in early 2022. It was probably the very end of peak valuations. We had spent months, we had done a couple of offers, we ended up going on this one, it was a competitive offer, we had to put in a lot. Between the three partners we were able to do a cash purchase. It wasn't a big business.

10:05 Stephen Brown

And then we had this thesis that we were going to turbocharge the business, and we were all like, yeah, let's do it, let's go, let's throw a lot of money into marketing and it's just going to pay for itself.

And we've talked about this on our Profit First episode, if you haven't listened to that you really should, it's a great episode. But we threw a lot of money in. And we did that by, one, Preston didn't take a paycheck. Even though he was a hundred percent in the business, he was getting nothing out of it.

10:40 Stephen Brown

And to make things worse, we did a bunch of personal loans to fund this investment. And we did that for, I don't know, six, nine months, maybe six months.

But here's the interesting thing. We could have treated that as owner contributions into the business, but we treated them like loans. And it took us three years. We just barely paid off those loans back to ourselves. Three years to get that money back out. We had put so much into it.

11:20 Stephen Brown

And I think, to your point, we had this thesis it was going to go one way and it didn't. And thank heavens we read Profit First and got religion and made some really focused changes, and were able to get that business to not only stop bleeding cash but generate profits. But it wasn't a huge margin. So it took us a while to pay back all that investment that we'd put into the business.

11:55 Stephen Brown

And that was a big lesson learned. We were investing in marketing.

This is one of my things. When you're putting in debt, especially debt that you're backing up, and this is one of the things I say to people, if you're not willing to guarantee the debt, what the heck are you doing? A lot of people don't want to personally guarantee, but I'm like, if you don't believe in your strategy enough to personally guarantee it, you may not want to take the debt.

Now on the other hand, there are some people that are a little bit delusional. They'll have all these ideas of grandeur and maybe they will back it up. But it's like, what is it for?

12:35 Stephen Brown

So for me, I am a big fan of debt for working capital. And by working capital I mean this scenario I've talked about, where I've got to buy inventory, I'm going to sell said inventory in the future. So I'll get that money back out in the form of sales. And not only will I get that dollar, I'll get whatever that multiple is in terms of that gross margin back out of that business. But it could take a while.

Like in our case, we have a supplier that's a little bit slow. And it can take months to go from initial payment to getting it out of the factory on a boat to our warehouse and then sold. And so that's a really long cash cycle. And this is what most people experience.

13:22 Inventory debt, marketing debt, and seasonality

Stephen Brown

But when you think about lending, I think you and I were fairly comfortable with lending for inventory. One of our lessons was, I don't know if we want to just take debt on any sort of business activity. I'm moving cash into inventory, versus I'm spending on something that may not come back out.

13:22 Preston Alder

Unless you have a very proven marketing model and the numbers have been solid for a long time. And our numbers aren't quite, we've gotten to a point where we've been around 30% growth the last couple of years, we've gotten profitable, decent profits, but our marketing isn't quite at the level where I would feel comfortable taking a loan and putting that into a bunch of marketing spend.

13:55 Preston Alder

If our performance was, I don't know, I'd say 30% better, and it's been at that level for a long time. We'd have to run the numbers, but I think that's the point, with my back of napkin math in my head, where maybe I would be comfortable funding a marketing plan.

But we funded our marketing plan and high growth plan with no proven model at that point. Which I would never do again. I would have to prove to myself that the business was performing, marketing was performing at a certain level, for a very extended time before doing that.

14:20 Stephen Brown

Yeah. How stressed were you during that experience?

14:33 Preston Alder

Very stressed.

14:35 Stephen Brown

Yeah. And we didn't have a lender who was going to come after us. We were just putting our own money into it, which still sucks. Probably double sucks.

14:44 Preston Alder

The stress was the business failing and putting in all this money. We were at that point.

14:50 Stephen Brown

It double sucks for you, because you had this other business on the side and your wife was working, but this was, we were trying to make this your primary income. It wasn't for me and our other partner Brittany, we had LedgerGurus.

But we were stressed because we're like, dude, what if Preston gets tired? He just throws up his hands in the air and says, I can't do it anymore.

15:20 Stephen Brown

So it's compounded by that. And we didn't have the stress of a third party who's expecting payments every month. That's a little bit scary.

There's even some risk on the inventory. I have seen some customers go way too big. If your sales velocity is not keeping up with the inventory, I have seen some customers, especially in those peak years, where they got huge orders and then they just sat in the warehouse. They couldn't move the product. If the unit economics aren't there, like really crappy gross margins.

16:00 Stephen Brown

And I think this kind of works our way backwards to that list, which is, do you have confidence in the usage of the debt? And can you afford it?

So one of the big problems I see with LedgerGurus customers is they don't even know how much margin they have. And we've been on this journey to a certain extent as we're learning about the joys of inventory and damages and all the ways that you can see margin creep out around inventory. But I've seen some people that are just completely blind, which means they have no sense of profitability.

16:50 Stephen Brown

And in my mind, one of the things I think about with using debt towards inventory is, can I cover the interest payments first? Does the cost of interest, is it less, hopefully significantly less, than the profit margins that I'm generating? Then in theory I can service the debt.

But on an accrual basis that doesn't always show you the cash flow. It just says, yeah, you have enough profit margin.

17:20 Stephen Brown

And one of the things that you and I have really dialed in this last year is, cash cycles throughout the year are not always equal. And so there's an element of, on an accrual basis I have enough profit to service the debt, but in a cash flow reality, month to month.

One of the things that we learned, and this was more around our operating expenses, less around our inventory, but there was a reality like January's a big slowdown. And if we haven't built up some working capital from the holiday season, what we found was, hey, we don't have enough money for operating expenses. And we're pretty OpEx lean, and most businesses are like this. Learning not only can you afford it, but can the cash flow support it.

17:59 Preston Alder

And I think there's kind of this double whammy in that first, second quarter of slowdown with cash. So you need some operating cash, and then you're starting to plan for your season, your big Black Friday Cyber Monday.

Like end of spring for us, we're starting to make orders and plan those orders and put cash out by the summer. So it's kind of this double whammy of inventory, and it's just the seasonality of not as much cash that part of the season, and you're going to start putting in cash for your big cash season ahead of time.

18:42 Stephen Brown

Yeah. So there are cash flows, and almost nobody understands their cash flows. Or sometimes they do, I will occasionally see some people that have some pretty elaborate spreadsheets, but a lot of people don't. They're kind of going off what their bank account tells them they can afford.

And so that's one of those things I think you have to have dialed in. It's very helpful to have that dialed in.

19:10 Stephen Brown

Otherwise what I'll see is, sometimes you hear this concept of a debt spiral, where you're having to get more debt to service the other debt. And before you know it you're buried in debt. You're just constantly having to get more debt, because you never really worked out the economics of, how does the debt get paid back, can I support it?

19:27 Preston Alder

And it's likely really bad debt at that point, because you've gone through your good debt options. We've been constrained with the good debt that we have, we've kind of maxed out to some degree, because we're a small growing business. And so if you're debt spiraling, you're going to have to turn to some really bad debt. So that's bad.

19:30 Interest rates, terms, and payback penalties

Stephen Brown

Let's talk about the first parameters of good and bad debt, which comes back to the top of my list. Understanding the interest rates.

A lot of people have a concept of APRs, annual percentage rates, of a loan or an interest bearing account. Although if you've gone through the math there's some nuance to that, compounded daily, monthly, weekly. But you kind of get a sense for how much an APR is.

20:31 Preston Alder

And I'll add in there, I think people need to pay attention to effective APR. People will see APR and think that's the effective APR. And maybe that's where I wasn't deep in finance, that's something I had to learn quickly.

20:50 Stephen Brown

Well, let's layer in the obfuscation that has emerged in this industry for whatever reason. I don't know why all these merchant cash advance lenders do it this way, other than if you calculated the APR maybe nobody would borrow from them. But they switch it to these fixed fee percentage loans.

And Bill D'Alessandro, who's on Ecommerce Fuel, he talks about this and he's got this nice spreadsheet. I think it's billda.com slash debt, where you can run some numbers and see what the effective APR is on these fixed fee loans. And a lot of times when you translate it, it's 20, 30, 40%. And I think a lot of people probably wouldn't take that debt if they knew it was going to be that expensive.

21:43 Preston Alder

And it's because of the timing. So it'll say like a 15% APR, but it's due much quicker and it's based on your revenue. And so you end up paying this 10 or 15% APR in six months. And so it turns into that 20, 30, whatever it is.

22:03 Stephen Brown

Well, I have a thesis. Merchant cash advances, we've never taken a Shopify loan. I won't let us. You've asked me once or twice, hey, what do you think about this? And I'm like, don't do it, we can't do it. They're just marketing to us. They make it so easy. Easy money is not the money you want.

22:30 Stephen Brown

And I think a lot of people, paperwork scares them. When you go get a traditional line of credit, like we did, we got an unsecured line of credit from our bank early on, not right away, it was like year two maybe. You've got to fill out a lot of forms, you've got to do all sorts of stuff, you've got to personally guarantee it.

And I think people get scared by personal guarantees, because they're like, well, what if it fails, then I have to pay it. And it's like, well, yeah, somebody's got to pay it.

23:00 Stephen Brown

So the more work you have to put into the loan, usually the better the rates and the terms are, is what I've seen. So my advice to most people is, don't chase the easy money, chase the hard money. Chase the money that takes some effort to do. It's worth it. It's not like you haven't done hard, complicated things.

And sometimes you've got to talk to a lot of banks. Sometimes you've got to look at a lot of options. We've gotten kind of lucky that we got approved on some of our first tries, but it wasn't like we didn't have to go through some effort. I know the bank line of credit took a couple of weeks.

23:40 Stephen Brown

So that's the other thing. Don't get the debt when you need it tomorrow. Don't be desperate. Think ahead. I would encourage people, if you're going to do a debt strategy, get a line long before you need it, so that it's already there. Because once you're utilizing debt, it's harder to get more debt.

23:55 Preston Alder

And I think that was super important for us when we right-sized the business, got it on the right track. You started thinking, okay, let's get some debt in place. And we got it in place just in time, I feel like.

24:10 Stephen Brown

Yeah, we got it a couple of months before we needed it, but we've definitely leveraged it. And now we're like, how do we grow this line?

We've grown one of our lines, but we're trying to think about how do we grow. Some of these banks are black boxes. One of them's with Wells Fargo, and I said, hey, how do I grow the line? We want to see three years of usage, we want to see on time payback.

24:45 Stephen Brown

But when I asked them more detailed questions, they weren't very useful. I was like, come on, man, help me know how to play the game. And they didn't have an answer. They went to the branch, they called somebody back in the back office, and they didn't have any good answers.

So I've gone off a lot of things I've heard from other people, from research. But sometimes these institutions don't even know what to tell you, because it's some underwriting team that nobody gets to talk to that has all the answers.

25:20 Stephen Brown

And this is probably another principle. Not only are you going to need to get debt initially, if you grow your business there's a good chance you're going to have to continue to grow your lines, because you're going to need more.

So first is cost of debt and understanding what the real cost is. Again, that calculator is a good one, the Bill D'Alessandro one.

25:40 Stephen Brown

The second thing I think people get tripped up on is terms, payback terms.

Merchant cash advances are taking a percentage of sale, they're just giving you a haircut. We've got one loan type that's a fixed fee, it's a term loan. And then we have the line of credit where we can service the minimum balance, it gives us a lot of flexibility. The merchant cash advances give you no flexibility. They will just take a percentage of sales every single time.

26:11 Preston Alder

And the way they market it is that it is flexible, because if you're not generating sales you don't pay as much. And so it's very enticing, the way they frame that.

26:18 Stephen Brown

Correct. And the problem with that is, sure, you're only paying the loan when you get sales.

And there are some things, like I have a customer I'm working with who's buried in debt and really needs to do some consolidation. And I was like, her merchant cash advances were some of the best. She had another lender where the terms were incredibly prohibitive. I was shocked. It's fixed payback every month, early payback penalties.

26:50 Stephen Brown

And I was like, you need to consolidate. At least if you had a consolidated MCA you could slow down sales. But she cannot slow down sales without not being able to service this really onerous loan.

And that's the second thing, understand the terms. Payback periods, early payback penalties. I would watch out for anything that has an early payback penalty.

27:20 Stephen Brown

Now the reality is with a lot of loans you might struggle to do that. But the only loans that I've seen with early payback penalties tend to have really crappy terms in terms of interest rates. And so it's like, if they're doing that, they're trying to trap you to a certain degree.

And I wonder about these companies, do they just have a model where they are servicing people who are less informed, maybe don't have the credit worthiness to get other debt, and they know that there's going to be a higher default rate, so they just do all this stuff to trap you? Or is it just straight up malicious, and they're like, hey, we're just going to trap people? I don't know. It almost feels like there's intent here, because it's so bad.

28:16 Preston Alder

Yeah, I drive past those payday loan companies and I just don't understand it.

28:20 Stephen Brown

Payday lenders. That's the same thing. Merchant cash advances are the payday loans of ecommerce. If you don't like the idea of payday loans, you should really avoid merchant cash advances.

28:50 Stephen Brown

I'll give you another horror story on this front. I had another customer, they were really desperate for a loan for a property investment they were making. They had some existing lines with a good bank. They got a merchant cash advance.

The bank calls and says, you have 30 or 60 days to retire your line of credit. The minute that got onto their system, the bank, because these things all talk, when you do credit stuff it set off some alert. And they were forced to retire that line, and it's taken them years to get back to where they could get a traditional line of credit again.

29:27 Preston Alder

I'll add there, our other loan, our Amex loan, it's connected to all our bank accounts. It's connected to our Wells, it's connected to our other account that we use to flow cash from Shopify into our bank account. So they're tapped into each other, and I think it knows what our Wells loan is.

29:55 Preston Alder

And actually when I talked to Amex about increasing the loan, which we did get an increase at one point, they just said to make sure that we're connected to all our bank accounts. Connect all your accounts and then their system will know when we're in a position that they can increase the loan. So it knows our cash flow and knows our other loans.

And I don't know how many loans out there you can hide from systems like that. But in general I would say these lenders know your general picture of what's going on, based on the info that you've submitted.

30:29 Stephen Brown

Yeah. And another horror story, some COVID horror stories.

One of the things we saw in COVID was people pulling their lines immediately. So I've always said, boy, I would love to see if we could have twice the amount of credit that we are actually going to use. Easier said than done.

31:00 Stephen Brown

But I've talked to a guy who had some customers, and the bank said, you need to rest your line for 30 days. Meaning you had to pay it all the way down, couldn't draw on that line.

And like I said, I asked Wells, hey, do we have to, is there mandatory rest? They couldn't tell me. But the reality is for these banks, things can change. Like the one horror story I said about the customer, they can require you to retire your line of credit. They can require you to rest your line of credit. Just because you have terms today doesn't mean that they can't change in the future.

31:40 Stephen Brown

And so, one of the things that I worry about, Preston, is right now if we were forced to retire the lines, I think we could collectively back it up and pay them off. Wouldn't be fun, but we could do it.

31:50 Preston Alder

It could slow down growth, but it would be a tough spot.

31:54 Stephen Brown

What worries me is if we get debt that was at some point bigger than we could backstop personally without some serious pain. That's where I worry.

I think that's where people have personal guarantee concerns. To a certain degree I was comfortable personally guaranteeing our loans because I could personally guarantee it. It's not going to mess up my personal life, it's just going to make me really unhappy if something were to go belly up. But we could pay it off and not be in trouble.

32:30 Stephen Brown

What scares me is when you get to that place where you can't pay it off personally. And nobody talks about that. I'm sure there are stories out there of people that have gone not just business bankrupt, but personally bankrupt when a business failed.

32:44 Preston Alder

I feel like to some degree that's tied to debt ratios. When you have a solid debt ratio and they required you to retire a line, it's likely that the business could handle that, to some degree. And so just watching the debt ratio. Versus a really high debt ratio, and something like that happens, then it's all on you, if the business isn't able to help.

I feel like the debt ratio just gives us an instant picture of debt risk.

33:18 Other cash flow levers

Stephen Brown

Yeah. The other thing I think about is, people don't always think about other tools for cash flow. Because for us we're using debt to accommodate cash flow issues.

And really there are two issues. There's the cash conversion cycle, how long does it take for cash to go into your business in the form of inventory and come out in the form of cash from sales?

33:50 Stephen Brown

Now for most ecommerce businesses I see inventory cycles of at least 90 days. Ours is longer because we've struggled with our supply chain, and we're small so we don't have leverage, and we talk about this all the time. But the dollars get tied up in inventory.

When you get into wholesale it gets worse, because a lot of times when you're going to these big retailers they don't want to float things, or they have the leverage to say you're going to float it. So they won't pay out on inventory for 30 days, 60 days, 90 days. During COVID again, stories I heard from some customers where retailers were raising their net terms to 180 days. So you could have incredible sales but not a penny for six months, which is just crazy.

34:36 Preston Alder

Adding onto your supply chain delay, how long it takes to get there.

34:42 Stephen Brown

And so there are two things. There's how long does your cash get tied up if you're using it for working capital. And then the second thing is, how fast am I growing?

Because the faster you grow, like you and I have talked about it, when I make a sale I can basically take the funds that went towards that cost of goods and put that back into purchasing additional inventory. But let's say I'm growing faster than replacement rate. That would be like a flat growth strategy, but most people want to grow faster than 0%. The minute you do that you have higher cash demands than your gross margins can sustain.

35:30 Stephen Brown

So now I've got to look at my profit margins and say, do I have enough profits to fund growth? But people always go straight to debt, and they're not always thinking about all the other things that they could use to accommodate cash flow.

And an obvious one is credit cards. A lot of people, I don't see a lot of people that don't think credit cards are a good thing. You can definitely get into trouble with credit cards, you hear about the woes of that in the consumer world. But in a business, I don't know how to operate without a credit card. How do you pay for all your SaaS tools without a credit card?

36:10 Stephen Brown

I have had a customer who's extremely conservative. They had a credit card but they pay it down regularly. And yet they've needed loans. And so I've been like, hey, this is free cash flow for you, this is free float, you could take advantage of it.

And then you get into some of these ecommerce specific credit cards. So like Parker, for example, that have rolling 45 day paybacks. That's a great vehicle if you want to leverage some cash flow. We've used Parker and it's a nice tool. So how do you reverse the system in your advantage, taking advantage of free float?

36:50 Stephen Brown

If you're doing wholesale, can I get better terms with my suppliers? We have an Italian supplier, so I don't think this is common. But China is known to have really good lending facilities for their manufacturers, so a lot of times they can have better terms than you can.

And so there's the ability to negotiate. And we did that, that's one of the things we talked to our supplier about and got some better terms, to spread out payments to give us more time to generate cash. And people don't always think about those things, they just say, I need money, and tomorrow. Again, I think it comes back to thinking ahead.

37:33 Preston Alder

Yeah, I have a case on this that just happened.

So we were paying our ambassadors through a tool that we're using in Shopify. We were having to pay our ambassadors essentially with cash through PayPal, or having to send them money through Zelle.

And this tool launched an ability to pay with a credit card with no additional fees, I think it was like last week or so. And so now we're able to pay those ambassadors their commissions through a credit card. So that just delayed our cash on paying ambassadors by, you know, 30 to 40 days, 45 days, depending on when you pay them.

38:30 Preston Alder

And I think there are little opportunities like that. I was paying one of our biggest software fees for a minute without a credit card, and then I talked to them and we were able to pay with a credit card.

So just paying attention to what costs are you paying with cash, and can you be paying those with credit card?

39:00 Preston Alder

The way we keep our credit card in check is, we know what our OpEx percentage is and our forecast. And all our credit card costs are OpEx. So if we're out of line with our OpEx compared to forecast, that's when we would get in trouble with cash and paying the credit card. So we just have to make sure, and we check that almost every week, basically every month, but we're kind of on it every week as well.

39:25 Stephen Brown

I think this is a principle. Build financial discipline early in your business, and if you don't have it, get it and maintain it.

I was going to ask you a question. One of the things I've been hearing about is a lot of these ad platforms moving to ACH. Has that hit us yet, the Facebook?

39:42 Preston Alder

I've heard about that. No, it hasn't hit us yet.

But here's another one. You can request on Meta for a longer window. I actually just did this with Google. I don't know if you noticed, but we used to have to pay Google every time our account hit $500. So payments were going every other day or every three or four days. And I got that extended to like 2000 the other day. So now it's longer. So we were one Google payment less on our last credit card. Just little things like that.

40:18 Stephen Brown

If there are opportunities out there, stretch them, and look for them. Keep your eyes open.

Now, everybody's trying to play the same game. What I've heard, and there must be a threshold, I'm not as familiar with it, we're a smaller brand so we haven't hit it. I've heard that Meta is making it so you have to pay via ACH. I heard Amazon's going to do the same thing for Amazon ads. So I don't know if they're putting a threshold, let's hook them when they're small, because it hasn't hit us yet. There's probably some threshold out there that I'm not aware of or haven't read about. But I've heard brands saying, I had to move to pay by ACH.

40:55 Preston Alder

Yeah, and that's one of our biggest OpEx expenses, our ads. So yeah, that would hurt.

41:03 What we actually do

Stephen Brown

So these are the things. They can work in your favor and then they can work against you. And I think it's just a constant battle. Financial savviness, cash flow savviness, is just a tool in the tool belt that you need to have, unfortunately, to grow and succeed.

So let's wrap up. We've talked about some of the tools that we use to manage our financials. Let's talk specifically about things that we do towards debt.

41:40 Stephen Brown

So one of the things is, we have a good understanding of our profitability and we interrogate that all the time. And part of the reason we're very tuned in on that is we are using working capital debt. We need to make sure we can service the interest.

We budget and then we look at our financials. How do we do against budget? And we are always asking ourselves what happened?

42:02 Preston Alder

And we quickly know if we're going to have a cash issue and where that cash issue is going to come from. Is it inventory? Is it OpEx? Because we aren't meeting our forecast. And then we've got to get back on track.

42:13 Stephen Brown

Correct. And I think the biggest thing is not only having this forecast and understanding how you did against it, but we've never been on track. It's always up or down, we're either ahead or behind. And then we're constantly trying to figure out, therefore what?

If you're behind, it's like, okay, what's the implication for cash flow? If we're ahead, what's the implication for inventory? In both cases, if you're under it's like, okay, do we push that inventory order out? Do we size it down? If we're ahead, do we need to bring an inventory order forward? Do we need to order more?

42:58 Preston Alder

And I'd say the more we've done that over time, the closer we have gotten on our forecast. Last year we were pretty good, especially compared to the previous year, we were pretty close to our forecast.

And then this first quarter of this year is the first time we've been off by quite a bit on our revenue forecast. And so we're having to realign. And I'm very hopeful that we should get on track for the rest of the year and get much closer. That's what's happening, and there are all these external factors in the economy and things that are happening.

43:37 Stephen Brown

War. We didn't plan on a war when we did our predictions episode, and it keeps going on. And this has been the big thing. Externalities will affect the best of plans, and sometimes in significant ways, like tariffs.

43:53 Preston Alder

So we just have to adjust to it. And because we're checking it weekly and monthly, we can be nimble, because we know what's happening.

44:04 Stephen Brown

Yeah. And that's the second tool. We take the profit forecast, the income statement P&L forecast, and we also translate that into an annualized 12 month cash flow forecast.

Really the way I think about that is, what do we think the debt utilization is going to be, or the peak cash needs are going to be? And do we have the tools to service that? It's not perfect, but it's close enough.

44:40 Stephen Brown

And then we use a 13 week to navigate week to week. And we've been doing that for years and it's been pretty successful.

And as you start to get off course, we start to say, okay, well what is the implication of being off or ahead of sales? Either way is a problem. And I think we use those tools constantly to navigate the business.

45:04 Preston Alder

And I think because we have those tools in place, something nice for us this year was, we had the most OpEx cash we've had going into the new year, and we were able to use some of our OpEx towards inventory. We were tracking all of this, of course.

But it's helped delay having to draw from our lines on inventory. So we've delayed some of that, and it's kind of catching up to us now, but we knew that. We knew it would happen and we knew what we were doing when we did it. But it's helped us delay our cash draws from loans, just because we knew what was happening.

45:44 Stephen Brown

Now let me ask you a hard question to wrap up.

You have an unfair advantage compared to most sellers your size, and probably 10 to 20 times your size. You have the advantage of having two partners who own an ecommerce accounting firm who are willing to give you eight figure level service.

What would you do if you didn't have that capability with your partners? You're just on your own, you're trying to grow it, and you don't have partners who can build cash flow models and forecasts and projections. How would you approach things?

46:25 Preston Alder

Yeah. As simply as possible.

I'd want to make sure I knew my margins, number one, super well. And that can be hard with an inventory business, understanding your COGS. But spending the time to dig into COGS and know your COGS so you know your product margins. You have to know that. That'd be number one.

47:00 Preston Alder

Number two, just doing monthly financials as easily as possible, but making sure, after your product margins, kind of knowing what's happening.

And then number three, knowing your cash cycles, and having some sort of cash flow model that you're following.

47:30 Preston Alder

There's this investment of time. You're growing your business, you're running it, so you want to simplify it as much as possible. And AI should be super helpful with all that stuff now. Utilize AI, it can analyze your data, it can be super helpful.

Ah, Profit First. Have a Profit First. If you haven't listened to our episode on that or don't know about it, look into it. And if you're kind of pushing back on it at first, give it some time and dig into Profit First and understand it.

48:00 Preston Alder

You don't have to follow it religiously, but understanding it and implementing it in your business in the right way. I think if you do that, and you have an understanding of your margins and your P&L and cash flow, I think you'll be in a good spot financially.

And then understand, if you're taking loans and debt, just what Stephen has talked about in this episode. Understanding what you're using it for and the terms and what it means for your business, and just being smart.

48:24 Stephen Brown

And what I'd wrap up on that point, merchant cash advances are terrible. Avoid them at all costs.

48:30 Preston Alder

Yeah. Revenue based, that's another way to say it.

48:34 Stephen Brown

Revenue based lending, the Shopify loans, the Amazon loans, all of these that are taking a fixed fee percentage. Do the math, figure out what that APR is. But just know the revenue based loans can be really debilitating.

On the other end of the spectrum, bank lines of credit are the most affordable. Right now they're probably under 10% APR. They oftentimes have better terms. But it's hard to get them, and oftentimes you can't get enough credit. So get on that bus. If you're in a good spot, go get that lending sooner, and then work on building up your financial profile, your business credit score.

49:10 Stephen Brown

In between, you have some things like Preston mentioned. We use American Express's business line of credit. It's a fixed fee, but the APRs actually turn out to be not too bad, and the terms are pretty good. And there are some ecommerce specific lenders out there that are going to give you mid to high teens APRs that are much better than the merchant cash advances.

So know what you're getting into, do the math, spend some time on this. This can make or break your business. Number one, you want to make sure it doesn't break your business before you decide it's going to make your business.

All right, I think this is a good conversation. Thanks, Preston. Until the next time.