Summary
Stephen Brown, COO at LedgerGurus and co-owner of Sole Toscana, sits down with his business partner Preston Alder to talk about ecommerce debt. They break down why debt feels so confusing for operators, how bad loan terms get hidden behind simple marketing, and why cash flow pressure makes these decisions even harder in inventory businesses.
You’ll learn how to think about debt as a tool instead of a shortcut. This episode covers what makes debt useful, what makes it dangerous, and how to spot the difference before it creates bigger problems in your business.
Takeaways
- Debt is not the problem. Misunderstanding it is.
- Merchant cash advances look simple but cost far more than expected.
- Revenue-based lending drains cash as sales come in.
- Inventory debt is safer than unproven marketing spend.
- Strong margins do not mean strong cash flow.
- Fast growth increases cash pressure.
- Credit cards and supplier terms can reduce the need for loans.
- Easy money is usually the most expensive.
- Forecasting shows debt risk before it becomes a problem.
- Financial discipline matters more as debt grows.
What We Cover:
- 00:00 Understanding E-commerce Debt
- 04:41 Philosophy on Debt in Business
- 09:31 Using Loans to Buy Businesses
- 14:20 The Risks of Starting with Debt
- 19:06 Good vs. Bad Debt
- 23:56 Navigating Debt Terms and Paybacks
- 26:04 Understanding Merchant Cash Advances
- 28:50 The Risks of Debt and Loan Terms
- 31:30 Cash Flow Management Strategies
- 37:17 Leveraging Credit for Business Growth
- 40:56 Financial Discipline and Forecasting
- 45:44 Simplifying Financial Management for Growth
Guest Information
- SoleToscana.com
- Preston Alder on LinkedIn
- buongiorno@soletoscana.com
Preston is a business operator and co-owner of Sole Toscana. He brings hands-on experience managing growth, cash flow, and day-to-day decisions in an ecommerce brand.
Work with LedgerGurus
If you are using debt but still feel tight on cash or need help with your ecommerce accounting, reach out to us at LedgerGurus. We are an ecommerce-specialized accounting firm, and we can handle all your numbers so you can focus on growing your business.
Transcript
Stephen Brown (00:00)
real problem with e-commerce debt is not the debt itself. It’s misunderstanding how it works and how to use it wisely. Welcome to the e-commerce finance podcast. I’m Stephen Brown, COO with Ledger Gurus, co-owner of direct to consumer brand Sole 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.
Preston (00:24)
It’s good to be back, Stephen, as always.
Stephen Brown (00:28)
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. And it’s something that’s come up a lot. We had a pretty robust conversation. I was like, man, we just need to record this. So hopefully we’re gonna 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…
E-commerce debt in particular is so confusing and challenging. What’s your take on it?
Preston (00:59)
Yeah, I think as an owner operator, for me, there’s so many people reaching out to offer, especially they can tell we’re growing somehow in Shopify. They know our store’s growing. And so, you know, 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, right? So.
Stephen Brown (01:34)
Yeah, all the fixed fee loans, the… I mean, you and I have had conversations around Shopify capital. It’s like, they’re offering this big loan for this amount. And then we kind of talk about it break it down. And like I said, a lot of people, lot of brand operators don’t have a finance background. And even if you do, remind us what’s your background educationally.
Preston (01:59)
Yeah, I was in Business Strategy. That’s my undergrad.
Stephen Brown (02:02)
Yeah, so you probably
took some finance and economics classes and 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, right? 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 I think this is where part of the problem is there’s a lot of these merchant cash advances.
and other e-commerce 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? ⁓ Third thing I think about is terms and fees.
Right? 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 I think about with debt. So that’s more around the type of debt you’re getting. Fourth thing is like, what am I using it for? Is it a good use of debt? And then fifth is, you know, can I afford it? So those are kind of five things I think about. So the first one is, ⁓ go ahead. Did I miss one?
Preston (03:33)
Well, something I would add is just like the situation your business is, how confident you are in what you’re financing, the growth and, you know, just the operations and I don’t know the term I’m looking for, but just how solid your business is at that point when you’re taking on debt, right? It’s just part of the risk equation.
Stephen Brown (03:55)
Let’s explore that for a second because it kind of goes hand in hand with my last point, what am I using it for and the confidence and the usage of it. ⁓ We had an episode a little bit ago, I talked with one of our customers here at Ledger Gurus about how he’s grown his business without ever taking debt. And it was really quite brilliant and I’m really quite amazed at what he’s done. But philosophically,
Preston (04:07)
Yeah.
Stephen Brown (04:25)
Like, what’s 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 is what is your philosophy on debt? And, you know, we can hone in on business debt in particular, but let’s start there and maybe see if we’re on the same page.
Preston (04:40)
Yeah, so I’d say like in my personal finances, I’m generally debt averse. But in business, I think about it a lot differently. And yeah, I think it depends on, like you said, what you’re using it for. And if you have a plan in place, like in e-commerce, we essentially like our growth is stunted by our cash. And so to grow at a certain level.
and we focus on profitable growth with our brand, Sole Tiscana, you have to get cash somewhere, right? So then you’re just putting it into the finances and making sure it makes sense and weighing the risks. So yeah, I think if used wisely in business, think it can be a great tool. But if not understood or used correctly, it could be dangerous or you can be in, you know.
bad spots. yeah, those are my general thoughts.
Stephen Brown (05:38)
And I think I’m on the same page with you. Like I’ve generally avoided debt as a, in my personal life. ⁓ Home loans. I have done a couple of car loans where like there’s once in a while you’ll see like these 0 % interest loans. And I’m like, all right, I’ll, I’ll stretch out the payments. Sounds great to me. You know, I’ve actually had that twice in my, or maybe once, I don’t know, but like.
Preston (05:57)
Thank you.
Stephen Brown (06:04)
or sometimes like one of the things I hate about car dealers now is that like you had 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. But in the business sense, I think the big the challenges you have is cash conversion cycles, particularly in inventory based businesses. You 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 scenarios. You bought another business. What are your thoughts on using loans to buy a business?
Preston (06:43)
Yeah, so I actually, the other business I bought, I used a loan that had a ridiculous like one or two year interest, 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 anyways, yeah, I used it to buy the business and actually sold it. Finished selling it at the end of last year. So yeah, I
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.
Stephen Brown (07:34)
When you say confidence in the business, what were you? Confidence in the cash flows, confidence in the existing revenue run rates?
Preston (07:44)
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.
and for a long period of time and then just getting more subscribers. So was just a consistent cashflow business. It was not inventory based. So I wasn’t going to have to put in more cash. was essentially just SEO and marketing based with subscriptions.
Stephen Brown (08:21)
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. You know, if you think about it, launch a product, I’ve got to have some initial capital to…
Preston (08:29)
Hmm.
Stephen Brown (08:36)
buy inventory at minimum. Sometimes I’ll see people go out. They’ll get a warehouse at the beginning. you and I, neither of us have done that before, but how scary would that be if you’re like, I got this great idea and I need to go get half a million dollar SBA loan that’s personally guaranteed that I’ve got a service for the next X number of years? Like, how does that make you feel?
Preston (09:01)
Yeah, it feels very risky to me. on, depending on the, ⁓ I mean, mean the cut, like so much of it comes down to marketing performance and you haven’t proven, like at that stage, I feel like you haven’t proven a product market fit and you’re going to be experimenting a lot. And so it may take longer than you think. Right. ⁓ and you may have to be putting in a lot more money. ⁓
Stephen Brown (09:03)
Why’s that?
Preston (09:30)
and cash is just going to be tight. anyway, so just there’s a lot of factors there.
Stephen Brown (09:35)
Yeah. And I mean, maybe this is a good point to tell our story. We bought Soli Tiscana in early 2022. It was probably the very end of peak valuations. So 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. we did between the three partners, we were able to do a cash purchase. It wasn’t a big business.
And then we had this, this thesis that we were going to turbocharge the business and we all like, yeah, let’s do it. Let’s, let’s go. Let’s, you know, 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 and we had to, we did that by one precedent, take a paycheck. And even though he was a hundred percent in the business.
was getting nothing out of it. 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, it like six, nine months of maybe it six months, I don’t know. But here’s the interesting, we could have treated that like as, you know, owner ⁓ contributions into the business, but we treated them like loans. And it took us
Preston (10:50)
think it was more like nine, yeah.
Stephen Brown (11:03)
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. 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 not only bleeding cash but generating
profits, but it wasn’t a huge margin, right? So it took us a while to pay back all that investment that we’d put into the business. ⁓ and that was a big lesson learned, right? We were, I think 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 things I say to people, if you’re not willing to guarantee the debt, what the heck are you doing? Right? A 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. So they’ll think they have all these ideas of grandeur and maybe they will back it up, but it’s like, what is it for? So for me,
I am a big fan of debt for working capital. And by working capital, I’m meaning this scenario that 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 I’ll get not only will I get that dollar, I’ll get whatever that multiple is, you know, in terms of that gross margin multiple 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. But when you think about lending, I think you and I were fairly comfortable with lending for inventory. But 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. I’m not versus I’m spending on something that may not come back out.
Preston (13:22)
Unless you have a very proven like 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’re we’ve what we’ve been around 30 % growth the last couple 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
Stephen Brown (13:26)
Mm-hmm.
Preston (13:49)
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 and napkin math in my head where maybe I would be comfortable funding a marketing plan. Right. But like it, we, we funded our marketing plan and high growth plan with no proven model at that point. Right.
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.
Stephen Brown (14:20)
Yeah.
Yeah, and I don’t know how stressed were you during that experience?
Preston (14:33)
Very stressed.
Stephen Brown (14:35)
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.
Preston (14:44)
Stress was the
business failing and putting in all this money, right? Like it was at that, we were at that point.
Stephen Brown (14:50)
It, it,
it double sucks for you because this, this was your, you had this other business on the side and your wife was working, but this was, we were trying to make this your, your primary income. Um, it wasn’t for me and our other partner, Brittany, you know, we had ledger gurus, but, um, 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. So.
Preston (15:01)
Yeah.
Stephen Brown (15:19)
You know, it’s compounded by, know, and that we didn’t have the stress of a third party who’s like expecting payments every month. That’s, that’s a little bit scary. There’s even some risk on the inventory. I have seen some customers look a way too big and you know,
I mean, I’m trying to think of some extreme examples, but like if your business model, if your sales velocity is not keeping up with the inventory, I did see, 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. ⁓ and I think this kind of, you know, we’re kind of working our way backwards to that list, which is one.
Do you have confidence in the usage of the debt? And can you afford it? So one of the big problems I see with LedgerGu is customers 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. And in my mind, one of the things I think about with using debt towards inventory is can I service, 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. just says, yeah, you have enough profit margin. 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, can be like on an accrual basis, I have enough profit to service the debt, but in a cash flow reality, months a 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 like, Hey, we don’t have enough money for operating expenses. And we’re pretty OpEx lean. And most businesses are like this, learning, you know, not only can you afford it, but can.
the cash flow support it.
Preston (17:59)
And I think there’s kind of this double whammy in that first second quarter of slow down with cash. So you need some operating, you know, cash, and then you’re starting to plan for your season, your big BFCM like end of spring for us, we’re starting to make orders and plan those orders and put cash out by, you know, 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. ⁓ So.
Stephen Brown (18:42)
Yeah. So
yeah, there’s 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 their field, what their bank account tells them they can afford. And so that’s one of those things I think you have to have dial. It’s very helpful.
to have that dialed in. Otherwise, what I’ll see is sometimes you hear this concept of a debt spiral where you’re, you’re having to get more debt to serve us 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 them?
Preston (19:27)
And it’s likely
really bad debt at that point because you’ve gone through your good debt options, right? Like we’ve been constrained with the good debt that we have. ⁓ We’ve kind of maxed out to some degree, right? Because we’re a small growing business. And so you’re going to have to turn, if you’re spiral debtting, you’re have to turn to some really bad debt. So that’s bad.
Stephen Brown (19:30)
Correct.
Yep. Yeah.
Yeah.
Yeah, let’s talk about some of those, but let’s talk a little bit. I mean, this kind of gets into it. Let’s talk about the first parameters of good and bad debt, which is kind of coming back to the top of my list. Understanding the interest rates. And a lot of people, think they understand have a concept of APRs, right? Annual percentage rates of a loan of, you know, 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.
Preston (20:31)
And I think I’ll add in there, I think people need to pay attention to effective APR, right? People will see APR and think that’s the effect of APR. And maybe that’s like where I wasn’t deep in finance, that’s something I had to learn quickly, right?
Stephen Brown (20:35)
Yeah.
Well, and I think let’s kind of layer the obfuscation that has emerged in this industry for whatever reason. I don’t know why like all these merchant cash advanced lenders do it this way, other than if you calculate the APR, maybe nobody would loan from them, but they switch it to these fixed fee percentage loans. And Bill De Alessandro, who’s on e-commerce fuel, he talks about this and he’s got this nice spreadsheet.
think it’s buildda.com slash debt, that 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 don’t know, I think a lot of people probably won’t take that debt if they knew it was going to be that expensive. Now I have a…
Preston (21:43)
And it’s because
of the timing, right? So it’ll say like a 15 % APR, but it’s due much quicker and it’s based on revenue, 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, right?
Stephen Brown (22:03)
Well, I
have a thesis because merchant cash advances, right? We’ve never taken a Shopify loan. I won’t let us. You’ve asked me once or twice, Hey, what do think about this? like, don’t do it. can’t do it. They’re just marketing to us. They make it so easy. Easy money is not the money you want. And I think a lot of people paperwork scares them. Like 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, but it was like year two maybe. You got to fill out a lot of forms. You got to do all sorts of stuff. You 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. it’s like, well, yeah, somebody’s got to pay it, right? ⁓ And 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. you know, and sometimes you gotta talk to a lot of banks. Sometimes you gotta 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. Like I know that the bank line of credit, it took a couple of weeks. So that’s the other thing. Don’t get the debt when you need it tomorrow. Don’t be desperate. Like think ahead. ⁓ I would encourage people if you’re going to do a debt strategy to get a line long before you need it so that it’s already there. Cause once you, once you’re
utilizing debt, it’s harder to get more debt.
Preston (23:55)
And I think that
was super important for us when we kind of right-sized the business, got it on the right track. You started thinking like, okay, let’s get some debt in place. And we got it in place just in time, I feel like. I…
Stephen Brown (24:10)
Yeah, we got it a couple months before we needed it, but like 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, you know, some of these banks are black boxes. Like I went to the, ⁓ one of them’s with Wells Fargo and I said, Hey, give me, how do I grow the line? We want to see three years of, of usage. We want to see, you know, on time payback and
But when I asked them more detailed questions, they didn’t, 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. so it is, and this is the thing is probably another principle is 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 DA one.
The second thing I think people get tripped up is on 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 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 require you, they will just take a percentage of cells every single time.
Preston (26:11)
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, right?
Stephen Brown (26:18)
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 actually was like her merchant cash advances were some of the best. She had another lender that was, it was, it’s incredibly the prohibitive, the terms. was shocked. It’s fixed payback every month.
early payback penalties. And I was like, you need to consolidate. at least, you know, 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 kind of the second thing is understand the terms. payback periods, early payback penalties, that’s, would
I would watch out for anything that has an early payback penalty. Now the reality is 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 kind of 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.
Preston (28:16)
Yeah, I drive past those like day loan companies. Yeah. And I just don’t under, I don’t understand it. just, I…
Stephen Brown (28:20)
Paycheck paycheck lenders. Yeah, that’s the same thing Merchant cash advances
are the paycheck lenders of e-commerce Yeah, paid at payday loans. That’s what they’re calling payday loans merchant cash advance lenders are the payday loans of e-commerce If you don’t like the idea of payday loans, you should really avoid merchant cash advance I’ll give you another horror story on this front I had another customer they were
Preston (28:30)
the economics. Yeah, it’s just
Stephen Brown (28:49)
really desperate for a loan for, ⁓ in a property investment in their making. They went and got, 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, their system, the bank, cause of these things, they all talk, you know, when you do credit stuff, some, 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.
Preston (29:27)
I’ll add there, like 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, you know.
Stephen Brown (29:31)
Mm-hmm.
Preston (29:51)
what our Wells loan is. 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, like connect all your accounts and then their system will know when we’re in a position that they can increase the loan. Right. So it knows our cashflow and knows our other loans. And I don’t know, you know, how many loans out there you can hide from systems like that. But, but in general, I would say like,
these lenders know your general picture of what’s going on, right, based on the info that you’ve submitted. So.
Stephen Brown (30:29)
Yeah. And
the, 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, you know, 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. But I’ve heard that I’ve heard, ⁓ talk to a guy.
who he had some customers in 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? What are this? They couldn’t tell me. But the reality is for these banks, things can change and they can, 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. And so you need to be, you know, 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.
Preston (31:50)
could slow down growth, but it would be in a tough spot,
Stephen Brown (31:54)
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 mean, 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. 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’s stories out there people that have gone not just business bankrupt, but personally bankrupt when a business failed.
Preston (32:44)
feel like to some degree that’s tied to like debt ratios, right? When you have a solid debt ratio and they were required to you to like retire a line, it’s likely that the business could handle that, right? To some degree. And so just watching the debt ratio versus a really high debt ratio and something like that happens, then it’s like, it’s all on you, right? If the business isn’t able to help then. So.
Stephen Brown (32:56)
Yeah.
Preston (33:11)
I feel like the debt ratio just gives us an instant picture of risk, debt risk, right?
Stephen Brown (33:18)
Yeah.
The other thing I think about is people don’t always think about other tools for cashflow because for us, we’re using that to accommodate cashflow issues. And really there’s two issues. There’s the cash conversion cycle. How long does it take for cash to go in to your business in the form of inventory and come out in the form of cash from sales?
Now for some businesses, for most e-commerce businesses, I see inventory cycles of at least 90 days. Ours is longer because we 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 will, 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.
Preston (34:36)
adding onto your supply chain delay. Like how long it takes to get there, yeah.
Stephen Brown (34:42)
And so there’s 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. Like 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 if let’s say I’m growing faster than replacement rate, like 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. So now I got to look at my profit margins and say, do I have enough profits to fund growth? But people always go straight to debt, but 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. So 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, but in a business, I don’t know how to operate without a credit card. Like how do you pay for all your SaaS tools without a credit card?
⁓ I have had a customer who’s extremely conservative. ⁓ they had a credit card, but they pay it, pay it down regularly. And I’m like, and yet they’ve needed loans. And so I’ve been like, Hey, this is free cashflow for you. This is free float. You could just, so to take advantage of it. And then you get into some of these, these special e-commerce specific credit cards. So like Parker, for example, that have like 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 kind of reverse the system in your advantage, right? Taking advantage of free float. ⁓
If you’re doing wholesale, how do I, can I get better terms? If I can I get terms with my, my suppliers. Sometimes we have an Italian supplier. So I don’t think this is common, I’m like, 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’s one of things we talked to our supplier and got some better terms to spread out payments to give us more time to generate cash and people don’t always think about things they just like I need money and Tomorrow again, I think it comes back to thinking ahead
Preston (37:33)
Yeah, actually I have a short, I have like a case on this that just happened. So we were paying our ambassadors through a tool that we’re using in Shopify. And those were running through, we were having to pay like our ambassadors essentially through, I think it was, um, spacing. Um.
PayPal, like we were paying them basically with cash through PayPal or having to like 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, through a credit card, right? So that just delayed our…
are cash on paying ambassadors by what, you know, 30 to 40 days, whatever it is, 30 to 40 days, 45 days, depending on when you pay them. ⁓ and I think there’s little opportunities like that. Like 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. And so just paying attention to what are you, you know, what, what, costs are you paying?
with cash and can you be paying those with credit card? the way we make like keep our credit card in check is we know what our OpEx percentages and our forecast, right? And we’re all our credit card.
costs our OPEX and so if we’re out of line with our OPEX compared to forecast that’s when we would get in trouble with cash right and paying the credit card so we just have to make sure and we check that every almost every week basically every month but we’re kind of on it every week as well.
Stephen Brown (39:25)
We’re
talking about every week. Yeah. 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. like, um, like has that hit us yet? The Facebook.
Preston (39:42)
⁓ I’ve heard about that, yeah.
No, hasn’t hit a spot, but here’s another one. You can, you can request on Meta for a longer. I actually just did this with Google. I don’t know if you noticed, but we used to have to pay Google, um, every time our account hit $500. So payments were going like 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 like we were one Google payment less on like our last credit card or.
Stephen Brown (40:02)
Mm-hmm.
Preston (40:15)
before that, like just little things like that, right?
Stephen Brown (40:18)
If
there’s opportunities out there, stretch them, right? 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.
Preston (40:38)
I’ve heard that.
Stephen Brown (40:46)
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 a brand saying, I had to move to pay by ACH.
Preston (40:55)
Yeah, and that’s
one of our biggest op-eds expenses, our ads are so, yeah, that would, yeah, that would hurt.
Stephen Brown (41:03)
So
these are the things, you know, they can work in your favor and then they can work against you. And I think it’s just a constant battle. Financial savviness, cashflow savviness is just a tool in the tool belt that you need to have, unfortunately, to grow and succeed. So let’s wrap up and talk. We’ve talked about some of the tools that we use to manage our financials. Let’s talk about specifically things that we do towards debt.
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 pay, we can service the interest. The second thing we do, well, maybe let’s stop there. ⁓ Any thoughts on that? basically
We budget and then we look at our financials. How do we do against budget? And we are always asking ourselves what happened?
Preston (42:02)
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, right? And then we’ve got to get back on track.
Stephen Brown (42:13)
Correct.
And I think the biggest thing is not only having this forecast and understanding how you did against it, but when we’re not like you never like 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 implications for cashflow and
If we’re ahead, what’s the implications for inventory? Well, in both cases, like if you’re under it’s like, okay, do we push that inventory or order out? Do we size it down? If we’re ahead, it’s like, do we need to bring an inventory or order forward? Do we need to order more? And then this flows. Yeah, go ahead.
Preston (42:58)
And I’d say
the more we’ve done that over time, the closer we have gotten on our forecast. Like last year, we were pretty good last year, especially compared to the previous year. Like 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…
Stephen Brown (43:19)
Yeah.
Preston (43:26)
That we should get on track for the rest of the year and get much closer. Like, is what’s happening and there’s all these external factors in the economy, right? And things that are happening. But yeah, we just yeah. Yeah. Yeah, snow.
Stephen Brown (43:37)
War. We didn’t plan on a war when we did our predictions episode and like
it keeps going on, right? And this has been the big thing. Externalities will affect the best of plans and sometimes in significant ways like tariffs.
Preston (43:53)
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, right?
Stephen Brown (44:04)
Yeah, and that’s the second tool we take the profit forecast, the income statement P &L forecast. And we also translate that into a, we have an annualized 12 month cashflow forecast that really the way I think about that is how much, what do we think the debt utilization is going to be or the peak need cash needs are going to be? And do we have the tools to service that?
It’s not perfect, but it’s, it’s close enough. And then we use a 13 week to navigate, you know, week to week. And we’ve been doing that for years and it’s been pretty successful. And, as, 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, either way is a problem. Right. And, and, and I think we use those tools constantly.
to navigate the business.
Preston (45:04)
And I think because we have those tools in place, something nice for us this year was like, we had the most OPEX cash we’ve had going into the new year and we were able to like, you know, use some of our OPEX towards inventory. were tracking all of this, of course, but it’s helped delay some.
having to draw from our lines on inventory, right? 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 like kind of delay our cash draws from loans just because we knew what was happening.
Stephen Brown (45:44)
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 or our size. You have the advantage of having two partners who own an e-commerce accounting firm who are willing to give you like eight figure level service. What would you do if you didn’t have that capability?
Preston (46:01)
Bigger things.
Stephen Brown (46:13)
with your partners. You’re just on your own, you’re trying to grow it and you don’t have, you know, partners who can build cash flow models and forecasts and projections. How would you approach things?
Preston (46:25)
Yeah, as simply as possible. I want to make sure I knew my margins. Number one, super well. And that can be hard with an inventory business, right? Like 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.
Stephen Brown (46:39)
Very hard.
Preston (46:48)
That’d be number one. Number two, just doing monthly financials as easy as possible, but making sure after your product margins, kind of knowing what’s happening. ⁓ And then number three, knowing your cash cycles and have like a some sort of cash flow model that you’re following. ⁓ Trying to think what else, because you don’t want to.
I don’t know, there’s this investment of time, right? 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. Like utilize AI can analyze your data. It can be super helpful. Um, I feel like I was going to say something. Ah, profit first. Have a profit first. If you haven’t listened to our episode on that or don’t know about it, like look into it and
If you have push, if you’re kind of like pushing back on it at first, give it some time and like dig into profit first and understand it. You don’t have to follow it religiously, but understanding it and implementing it in your business in the right way. think if you do that and you have an understanding of your margins and your P and L and cashflow, I think you’ll be in a good spot financially.
And then understand like if you’re drawing, if you’re taking loans and debt, just what Stephen has talked about in this episode, like understanding what you’re using it for and the terms and what it means for your business and just being smart.
Stephen Brown (48:24)
And what I’d wrap up there on that point, merchant cash advances are terrible. Avoid them at all costs.
Preston (48:30)
Yeah. Revenue based.
That’s another way to say it, right? Revenue based.
Stephen Brown (48:34)
revenue based lending, know, the Shopify
loans, the Amazon loans, they’re all, all of these that are taken, uh, you know, 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, the credits are the most affordable. So 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 is if you’re in a good spot, go get that lending sooner so that you can and then work on building up your financial profile, your financial credit, your business credit score. In between, you have some things like Preston mentioned, we use American Express’s business line of credit. It’s a, 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 e-commerce specific lenders out there that are gonna 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 wanna make sure it doesn’t break your business before you decide it’s gonna make your business.
All right, I think this is a good conversation. Thanks, Preston. Until the next time.