Podcast: How to Choose the Right Debt at the Right Time

Written By Sherilee Maxcy

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Kyle Rector discuss the intricacies of debt financing for direct-to-consumer (DTC) brands. They explore how to choose the right debt at the right time, emphasizing the importance of understanding risk boxes, cash flow management, and the evolution of debt products as brands grow. The conversation also highlights the significance of selecting the right lender and the potential economic impacts on lending criteria. Overall, the episode provides valuable insights for founders looking to navigate the complex world of debt financing.

Key Takeaways

  • Understanding risk boxes is crucial for securing appropriate financing.

  • Maintaining a healthy balance sheet is essential for long-term success.

  • Lenders bucket your brand based on risk. Knowing which box you're in can help set realistic expectations about terms and availability.

Meet Kyle Rector

Kyle Rector is the Co-Founder of Boundless AI, bringing a wealth of experience from top lending institutions, including Wells Fargo, GE Capital, Clearco, and most recently Outfund, where he served as VP of Global Sales. With a track record of helping deploy over $1 billion in capital, Kyle is a seasoned leader in fintech and alternative lending. At Boundless AI, he is focused on revolutionizing how businesses access financing by leveraging AI-driven risk analysis and tailored capital solutions.

Transcript

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00:00 Introduction to Debt Financing for DTC Brands

01:15 Understanding Boundless AI and Its Role

02:26 Common Misconceptions About Debt

06:09 The Evolution of Debt Products for Growing Brands

10:39 Navigating the Transition from MCAs to ABLs

13:56 The Importance of Choosing the Right Lender

16:54 Planning for Future Debt Needs

22:19 The Risks of Over-Leveraging

27:07 Understanding Debt Ratios and Financial Health

32:19 The Impact of Tariffs on Lending

39:06 Conclusion and Resources for Founders



Jon Blair (00:01)

Hey everyone, welcome back to another episode of the Free to Grow CFO podcast where we dive deep into conversations about scaling a profitable DTC brand. I'm your host, Jon Blair, founder of Free to Grow CFO. We're the go-to outsource finance and accounting firm for eight and nine figure DTC brands. Today I'm here with Kyle Rector, president of Boundless AI. Kyle, welcome man, thanks for being here.

Kyle (00:24)

Thanks for having me, Jon.

Jon Blair (00:26)

So ⁓ what are we gonna talk about today? We're gonna talk about how to choose the right debt at the right time. I get a lot of brands that come to me with being a fractional CFO of saying like, hey, what's the best debt? And I always say like, well, the answer, it depends, right? It's not about getting the best ⁓ debt in absolute terms. It's about getting the best debt for where the brand is at at any given point in time. ⁓And so today we're gonna dive deep into chatting about how a brand can choose the right debt at the right time. But before we get into the weeds here, Kyle, can you introduce yourself and also talk a little bit about Boundless AI and what you guys are doing to help brands choose the right debt at the right time?

Kyle (01:15)

For sure. So Boundless AI is a business financing tool that uses proprietary market intelligence to make sure that businesses are effectively applying to lenders that will want to work with them. think one of the biggest challenges that we've historically seen, and I think every founder can feel that, is going through a lengthy sort of credit process, underwriting process with lenders, and then it not being a good fit at the end of the day. So what we're really focused on is educating brands about what their funding expectations should be based on where they're at and then making that application process as seamless for them as possible. So to date, we've supported over 2,000 businesses, a couple billion in capital requests and formed for the platform. And, you know, we're really about to, I think, make a nice big splash in this space and then make it lot easier for founders. But just prior to that and starting up Boundless a couple years ago. I've been on the lending side directly, Wells Fargo, GE Capital, Clear Co, Outfund. our whole team is effectively ex-lenders. So we have a lot of, I think, interesting opinions on both sides of the fence here.

Jon Blair (02:26)

Well, the gap or the problem that you're talking about that you guys solve is it's a huge, huge issue. What I see, the problem that I see is that like one, brand owners get hit up constantly with cold outbound from all different kinds of lenders. And that cold outbound in my experience is not really necessarily targeted. And quite frankly, I don't know that it can be targeted unless they have like financial data on said brand, right?

So it's very top of funnel, ⁓ you know, spray and pray. And the problem is they'll lure in a business owner to get on a call and even provide some initial diligence information, financials, maybe AR/AP aging, ⁓ maybe, you know, inventory on hand, but without like really vetting if there might even be a fit here. And so what I've found, I've had so many brands come to me and the founders like, hey, JP Morgan said they're gonna give me a $2 million loan. I'll look at their financials for two seconds and say, no, they are not gonna give you a $2 million loan. But that's because I know the box that they play in. So that leads me to kind of the next question that I wanna talk about is like, what do you see as like maybe, I know there's a lot, but what do you see as maybe the most common misconception of brand founders thinking they can get some type of debt that they really can't?

Kyle (03:58)

I think the most common thing that we see and that we're educating our clients on is what risk box they actually fall into. ⁓ That risk box, every lender has a bit of a different one, but that affects your term length, your APR and all these things, right? The truth is that lenders look at your business and you might have a really cool brand, an amazing story, working on something really interesting, but...

Jon Blair (04:07)

Mm, yeah.

Kyle (04:26)

they're still going to slot you into a risk box. And I think one of the biggest misconceptions that founders come to us with is understanding what could be available to them, what those terms might look like. And then spending time on maybe those options that could provide those terms, but that they're not going to be qualified for similar to your JP example, right? So we'll have founders come in and say, Hey, yeah, I'm looking for 10 % APR. And, you know, maybe they do 50 K a month and they already have

Jon Blair (04:36)

Totally.

Kyle (04:56)

45 grand in debt, whatever the case is, right? The reality is like, you're not big enough for any deal. You're probably not going to get a bank line of credit. And if you do, it's not going to be enough capital, right? You can look at your personal line of credit or some other option to maybe get there. But is that the most important thing to you or is growth or is cashflow or is something else, one of these other projects you have more important than whatever that cost might be. So I think we see that a lot.

We're really trying to help educate them and we're obviously building some pretty interesting tools ⁓ to get founders on the same pages as lenders. But I think that's usually where we see a lot of sort of ⁓ gap in the process as it exists today.

Jon Blair (05:40)

Totally, yeah, so I'm both with our free to grow CFO clients and I'm also a mentor in an e-comm group called Daily Mentor. I've done several trainings on debt financing options and I always start with don't optimize purely for cost of capital or APR, right? And why? Because optimizing for cost of capital or lowest APR, that's usually something, well actually, I don't even wanna say usually.

It's basically always something that happens at scale. At scale, you get to the point where you can really optimize for cost of capital. When you're in the early stages of growth, ⁓ you rarely, if ever, get to optimize for that unless the founder or one of the owners has a bunch of net worth and they're willing to PG some line of credit that would not be provided. It wouldn't be provided to the business otherwise. It's underwritten based on the owner's

Kyle (06:35)

Yep.

Jon Blair (06:37)

credit worthiness, which is not usually, that's usually not the case for most of the brands that we work with in the lower to middle market. I'm assuming that's not the case of what you usually see. ⁓ with that being said, I wanna talk about what is a typical path or evolution that we see ⁓ as the optimal debt stack for a fast growing bootstrap DTC brand. Where do they start and how do they kinda start evolving to different credit products

over time and what are some of the mile markers for brand founders to be on the lookout for. So let's start with where do you typically see them start in the earliest days?

Kyle (07:17)

Yeah. So let's put it in terms of like that risk scoring from a lender's perspective, right? Earlier, newer business, smaller revenue than they might have in two years, right? You're going to be looked at as generally a riskier business just based on revenue, time in business, whatever the case might be. Right. So most often you're going to get a merchant cash advance, which is effectively a lender buying the rights to future revenue. Right. Is it more expensive? Yes.

Right. But you're playing in a risk box that only certain lenders will fund and the odds of those businesses at the earlier stage of the company not working out a significantly higher than when we got to, you know, the later ABL type conversations, which we'll get to in a moment. So I would say generally we started off seeing MCAs a lot of personal financing, right? If you're able to maybe leverage your own personal line of credit to keep costs lower terms good.

Jon Blair (07:50)

Mm-hmm.

Kyle (08:15)

We can definitely start there. But generally we'll see those MCA type products, which are maybe six month term ⁓ cash advances effectively. I generally see that in businesses anywhere from like 10 grand a month in revenue all the way up to ⁓ a few hundred thousand, even in the millions sometimes. It depends on again, why you're taking the capital and what the objective of it is. But we'll generally see MCA ABLs, so ⁓ asset based loans.

Jon Blair (08:34)

Mm-hmm.

Totally.

Kyle (08:45)

Obviously you need to have the assets then, right? So a lot of the earlier companies, especially in the CPG space, run pretty lean on inventory. They're trying to collect AR pretty quickly if they're doing wholesale at all. So that ABL doesn't really come into play until you have probably a good million in assets, I would say at the minimum. And obviously if you have a million in assets, well, now you're in that sort of growth stage, right? We're probably looking at the millions in revenue. You know, I would say at least five mill likely.

Jon Blair (09:05)

sure.

Kyle (09:14)

Just based on how CPG metrics generally work to have enough assets there. And then obviously the end goal is a bank line, right? ⁓ Now you can use a combination of all these, right? Larger brands that we work with, they'll have their bank line and it'll be the lowest, best, know, rate available, longest term length for a payment, whatever the case is. They will typically supplement that with MCAs or bank financing. So even the brands that do 60, 50, you know,

Jon Blair (09:25)

Totally.

Kyle (09:43)

20 million, whatever the case might be, they'll usually have that ABL or that bank line and they'll use MCAs or other types of financing to supplement their total capital requirements for a year. generally I would say that's the life cycle. Always start with your bank, always keep conversations with them going. But generally speaking, you're going to be looking at MCAs early on to ABLs and then bank financing, I think is the ideal path for most founders.

Jon Blair (10:11)

for sure.

Yeah, yeah, I see, we see the same exact thing and like, so let's dig into that a little bit deeper. wanna echo a few things that you said and draw out a couple like conceptual things for founders listening here to think about. The first one is the move from MCAs to ABLs or asset-based loans, right? ⁓ I used to think that MCAs were always evil.

Because they're so expensive and generally speaking for a consumer goods brand They don't really match well with the cash conversion cycle of said brand. However, if you don't have the access to Equity investment either through the form of outside investors your own personal capital or retained earnings and you do need a little bit of capital and you don't have the asset based for an ABL it may be the only option right and so you

Another concept for, or consideration for everyone here to think about is what credit box are you in at any given time and what is truly available to you, right? Because you can't choose something that's not available to you, unfortunately. And so MCAs, I see oftentimes use transitioning to getting enough inventory and or AR on the balance sheet that you can sufficiently borrow against it.

Now to Kyle's point, when he was saying like at least a million dollars in assets to move to an ABL, the reason why that tends to be the case is if you look at it from a lender standpoint, let's take inventory for example, a very typical advance rate against a million dollars in inventory is somewhere between 50 and 60 % of that million dollars in value. So really, if you have a million in assets, they can lend up to 500 to $600,000.

Anything less than that, it doesn't move the needle for these lenders. need to lend a minimum amount of capital to make it worth their while, right? Because they're generating fees and interest off that. that's one of the reasons why you need at least a million or some minimum amount of assets, right?

Kyle (12:19)

Yeah. And I think one of the other things to consider, like from a founder's perspective, getting it like a $200,000 ABL doesn't make sense because you have to pay audit fees. You have to pay legal diligence fees. Right. So yeah. Exactly. Yeah.

Jon Blair (12:29)

Totally.

Totally. And monitoring fees, there's fixed costs basically, right? That you're ⁓ effectively like kind of amortizing these fixed costs over a smaller average amount like borrowed or average amount out on the line. And so what that, that basically, the annualized, the APR impact of those fees is massive for a small line compared to something that's more sizable.

Kyle (12:58)

Exactly. know, diligence and audit fees don't vary that dramatically, ⁓ from a $200,000 ABL to a 20 million, right? They still have to go fly out there, count up inventory, do whatever they need to do. So it doesn't always make sense, right? And it's also a time consuming process. That's one of the things that, ⁓ I think objectively, like if founders are always just interested in the lowest rate or whatever the case might be, you're going to spend a lot of time trying to find something that likely doesn't exist for you right now.

Jon Blair (13:02)

Totally.

Kyle (13:27)

Right? It could in the future, but you know, the reason MCAs I think are good in certain scenarios and obviously want to get the right letter, right? The MCA product itself is, you know, standard, but different lenders do operate in different ways and you want to make sure you're getting the right letter that will work with you on things. But yeah, generally speaking, I would say, you know, you don't want to spend all your time trying to find this Holy Grail facility that doesn't exist for you. Right?

Jon Blair (13:28)

Totally.

for sure.

Totally.

Kyle (13:56)

taking that cash today and turning it into something that can get you there is why, you know, lenders like Shopify have been really good with their capital programs because they're building you up. They're helping you grow that brand. Yeah, it's a little expensive, but it's quick. it lets you get back to building your business and not spending two or three months on some facility that may or may not exist. And the one thing I want to call out for founders is, and you kind of touched on this in the beginning, Jon, like it is spray and pray for lot of lenders.

Right. Lenders want lead flow. ⁓ you know, that that's the number one thing that a lender wants. They're going to send out pre-approvals. They're going to send out things that may materially not be what an offer would look like from them. Right. ⁓ and then you have a lot of brokers that operate like their lender saying, yep, we can, we just got you a pre-approval of 500 K.

Jon Blair (14:26)

Totally. For sure.

Totally, totally.

Kyle (14:49)

You're not a lender. Like how could that be possible? You don't even have my financials. You don't have my banking data. Like how are you possibly going to tell me that you can do that? So founders like get sucked in, I think. And obviously, you know, you're looking for capital. Some things usually in finance, if they sound too good to be true, probably are ⁓ in the debt space. So exactly. So.

Jon Blair (14:54)

For sure, for sure.

Yeah. Especially in lending. Yeah.

Kyle (15:12)

I just want founders to be really cognizant of that because the market is there's a lot of good actors. There's some bad actors for sure. Just making sure that you're spending time with the right people I think is probably the most important thing when it comes to your capital planning.

Jon Blair (15:15)

100%.

No, I couldn't agree more. like that's the thing is like, can you find a loan that's a good fit without Boundless or without a CFO who understands debt financing? Like, yeah, you can, but like it's kind of a roll the dice unless you yourself as the founder already have a lot of experience there, which some like serial entrepreneurs, they've been through this evolution of debt products that we're laying out here. And so they get it, but a lot don't. And here's the other thing too, like even if you get it, you don't wanna be the one spending the time on it, right? Like you want someone else to help you through it because you as a founder, most of the founders we work with, they're very product-centric, marketing and sales-centric, right? And like that's where they create the most value for the business, that's where they're most passionate. You wanna have a CFO or tools, you know, like Boundless to help you go further faster with these kinds of decisions. And here's the other thing too.

There's a lot of risk, and I wanna talk about this next, is like there's a lot of risk in even choosing the right debt product and lender for today or for this season and not thinking ahead on how do you get out of that and refi with the next product, right? And I made a ton of mistakes in that regard when I raised debt ⁓ at Guardian Bikes in the early days when we were naive and scale on the brand.

One story that I have is like, we got an SBA loan. We got a, I think it was a $600,000 or it was a $500,000, the Express program, a 7A loan, I think it was a 10 year term. And we were super pumped because no one else would give us anything like that at the time. We were losing a little bit of money on the P&L. But we were growing super fast and in like nine months, I was like, this is not enough capital and a term loan is not what we need right now. We need a revolving line of credit with how fast we're growing.

And so we got out of that loan, but within nine months, I was already looking for the next lender and we didn't consider the cost to get out of that loan, right? Like the termination fee, not to mention like how much money we spent on the diligence upfront on that loan, right? And the origination fees and everything. So like, what are some things from your perspective, Kyle, that like...brands need to think about, even if they find the right lender for today, what are the considerations they need to be aware of to make sure that they're able to either grow at that lender or roll out of that product and refinance it and move on to the next one when it's time.

Kyle (18:00)

For sure. Let's start with the find the right lender. the majority of lenders that early stage founders will work with are borrowing money from other lenders, right? That's the way that this market works. So you go, you find a cool, you know, fintech lender, they're raising equity. They're running effectively like a large scale fintech startup, right? And

Jon Blair (18:03)

for sure.

Kyle (18:25)

What I want to say is like, be cognizant of which lenders you're working with. ⁓ we've seen it over the last couple of years, you know, with the Amplas and things like that, where, yeah, really good money. ⁓ great product. People loved it. Probably giving a little bit too much money out to founders, right? ⁓ and for a founder looking at those deals they got, they were saying, wow, this is awesome. Like low APR, lots of money more than I probably thought I could get. But when that company, you know, went, went down.

Jon Blair (18:30)

Totally.

Kyle (18:54)

It was really hard to refinance those deals. So you had a lot of like really good large brands that were now over leverage. And yeah, like they were working with Amplem. They loved it. Well, it was great, but they weren't really thinking about like the financial health of the lender. Right. And what happens if the lender goes bust? So, you know, I think in the early stages for founders, like that's what I mean by find the right lender as well. Like you want to do a bit of diligence on your lender. ⁓ you want to make sure that.

Jon Blair (19:09)

Totally.

Kyle (19:23)

You know, they, they're well backed, um, that they have been doing this for a long time. They haven't just popped up in the last two years. Um, and I think that's like a really big part of it because that can create a lot of sticky situations for founders. If they end up with a lender that goes bankrupt or goes in an administration and then, and then you have to pay it all back all of a sudden. Right. Yeah.

Jon Blair (19:30)

Totally.

Well, let's talk about this a little bit actually. No, no, this is a great point. So I learned this lesson, probably the second deal that I did with Guardian Bikes and we really did a lot of diligence on those lenders and we ended up, that time we ended up going to Dwight Funding who is a fantastic partner. I've become friends with Dan and Ben over there over the years but, here's the thing, when you read these loan docs, especially if we're talking ABL, and I know this is also universal to other loan docs, you read these, effectively every one of these ABLs and the like, they have this concept, this legal concept throughout them called discretionary. These lines are discretionary. What that effectively means is that, basically means at any point in time the lender can say, we're gonna stop lending, right?

And so there's all of these, and the bottom line is so, the reason I know this so well is because we try to negotiate that out of the deal with Dwight. And one of their founders over there who's a great guy and ⁓ kind of like a mentor to me at this point, he was like, he's like, listen, Jon, I can take this line out, but there are other places in these docs where it effectively, if we went to court, it effectively, we can very easily argue that this thing is still discretionary.

Our lines are always going to be discretionary. We're a lender. We have to protect ourselves. If something happens outside of these docs that we didn't foresee and we have to stop lending to protect ourselves, we have to do that. But what does that also mean? That also means if that lender gets into liquidity issues on their end, right? They have the ability to stop lending and call basically anyone's note to try to force your hand and to improve their liquidity situation. And so if you're working with a lender who runs into liquidity problems, can guarantee you they have the legal ability within your loan docs to stop lending and actually call your note and make it all due at the moment that they call it. And that's a huge risk to you if you're working with a lender that doesn't have solid financial backing. And that's a real risk to your business.

Kyle (21:39)

Exactly.

Yeah. And you know, it is a dime a dozen, but you don't want to be on the other side of that when it does happen. Right. And every couple of years it happens to a new lender. So, um, finding the right lender, making sure you're working with someone there that actually like understands your business, understand exactly what you want, that you can sit down and go through, you know, a loan agreement with to make sure you really understand the terms that's incredibly transparent for you. They're really important. Now debt product planning, right. Um,

Jon Blair (21:50)

You don't wanna be that, right? Totally.

Kyle (22:16)

that side of the equation.

Debt is kind of like, we don't really see that many smaller brands forecasting out their capital needs. Well, it's a lot of work, right? You got two year projections on stuff and it's just some assumptions and they've just dragged a cell over on Excel and done the math and then great. It's done. Right. I think making sure that a, whatever your strategy as a business is,

Jon Blair (22:27)

Totally.

Kyle (22:47)

is considered when you're trying to build your capital plan for the year is important. If you're DTC now and you want to go into wholesale, well, larger upfront orders, larger costs for maybe pulling a container over upfront costs for logistics, right? You got to sit down and actually do the math. I think that's when CFOs are incredibly valuable. It's like actually plan your debt with the same amount, if not more considerations than you plan like your business strategy or revenue, right? People don't forecast expense as well. Interest is an expense. It's, know, principal payments are an impact on cashflow, right? ⁓ So build a plan, build a two-year plan. It doesn't have to be perfect, but think about what you're trying to do as a business, ⁓ what those growth goals are gonna be, what the costs on inventory or these other elements will be. And then sit down and say, okay, like, so here's our response today, we're an MCA world, we're going to move to wholesale, which means we're going to have invoices. So maybe we should consider or make sure that our MCA is cool with us taking an AR financing line in a year when we start to do more wholesale, right? Maybe you work with a bank right now and that bank has a 25 grand LLC with you.

Jon Blair (24:02)

Mm-hmm.

Kyle (24:09)

But maybe it's first position, right? And as you grow, great, another first position lender wants to come in and give you more money. Like, okay, what are the considerations that your bank has? What are those costs to get out of that agreement? So in short, like I think plan debt well, don't be reactive. I think we see a lot of brands reactive and you want to make sure that you are having an actual strategy to your capital.

Jon Blair (24:27)

Yeah.

Kyle (24:38)

and not just kind of doing it when you need it because that's if you go out to look for debt when you absolutely need it, it will be the worst time.

Jon Blair (24:38)

Totally.

Totally, yeah, yeah, 100%. And so a couple other things that I want to say about that. One is when you are negotiating or structuring a debt deal, give yourself options for your product, the product to evolve, right? And just be honest with the lender. Like I've negotiated the ABLs and they wanted a two-year term and I said, hey, we fully anticipate like, if everything's going well, we literally want to stay with you for two years because I don't want to do another debt deal. But we need to make this one year only because we're growing so fast. I actually can't predict everything that's going to happen in the next 12 months. I want to work with you and I would like for us, we know that you guys are able to handle lines much bigger than this. So our hope is that we can keep working together. But I do need this to end in a year and let's talk about renewal 12 months from now instead of 24 months from now because our business is changing so fast. And you know what they said?

Totally understand that fair and what we'll do is some of the annual fees, you know, like they were gonna already kind of split them up into annualized. We won't put that second one in the contract as like you owe it to us unless you renew, right? And so just, mean, it's truly a partnership. They want to, a good lender is gonna want to and needs to understand your business and your strategy. So the more that you're willing to tell them, what you feel confident about happening and what you're not sure is gonna happen and how like the lender needs to work with you. I mean, a good lender wants to have those conversations. The other thing I wanna mention is not getting over levered, which is something that you brought up, Kyle. There's a couple points that I'm thinking of. One is what's the best way to protect yourself against your lender's liquidity crisis, even if you've vetted them and they run into issues?

Make sure you haven't over levered yourself, right? Because if you don't over lever yourself, in a worst case scenario, can you pay back that loan if it does get called for some reason? If you're over levered, you're like, man, I have no choice but to try to refinance this in a hurry, which is not good for anyone. And so like, what other advice do you have about like, how brands should think about... ⁓

Like are there any sort of thresholds, debt to equity, debt to assets, or just some general advice you have for guidelines to think about like when, where the line is of being quote, over levered.

Kyle (27:19)

Yeah. So founder's got to remember that there will be lenders that will be willing to give you capital pretty much no matter how much debt you have on your books to a degree, right? It's going to be incredibly expensive, low amounts, but if you start with, you know, a good capital provider or an ABL, and then you add a little bit of Shopify on, then you add a little bit of, know, whoever else, right? They're lenders. There's hundreds, thousands of them that are lower and lower on the totem pole of what their risk tolerance is. And they will deploy money to you until the only thing you're doing with your cash flow is paying back all the lenders. It's really hard to get out of that situation because no lender wants to in and refinance five, six other positions out. Right. Also think about like the actual terms of these loans. So if you have RBF, right, revenue based financing, and it's a percentage of your revenue but then you also have a term loan, right? Repayments are going to vary, but they might be as high as possible at the same time, right? If you're going be doing 30 % payback and you go from 50k a month to 100 the next, like that's a big impact on cashflow, right? So my general advice for founders is think about the cashflow and less about the term or the interest rate or whatever the case is, right?

Jon Blair (28:25)

Hmm.

Totally.

Kyle (28:46)

Can you afford to pay this back? Does it put you in a bind? Like taking debt can be scary if you're not doing it intelligently. Nobody wants to take debt because they have to cover payroll costs that they didn't plan for. Right. Make sure you're actually thinking about the cashflow impacts. What's the optimistic pessimistic sort of scenarios for your business over the next three months? ⁓ review your capital stack, right? People take time every quarter. They go through their tech stack. What am I paying for?

Jon Blair (28:46)

Totally.

Kyle (29:16)

Should I cancel this subscription? Like do that with debt, right? You want to be on top of your debt. You want to figure out if their way, their way is to take advantage of earlier payments, waiving interest, things like that. So think about the cashflow side, right? Don't just get sucked into this term or that term's great. You're not going to go off and brag about how good of an MCA deal you got, right? What you might brag about is how much you've grown your company because you were so smart with your cashflow, right? So that's what I would say focus on.

Jon Blair (29:29)

Totally.

Totally.

Yeah, no, I think that's a really great point. look, mean, look, shameless plug for having a fractional CFO. mean, that, but seriously, like, is one of the things that's at the core of what a CFO does to you, for your brand. And I'm not talking about an accountant. We have an accounting service also. That's creating the books in a timely manner in a way that can be used by a CFO for decision making. Our CFOs, they're helping with forward-looking projections and forecasting, forward-looking planning, the types of planning that you're talking about, Kyle. And we're forecasting and projecting not just a P&L, but a balance sheet and a cash flow statement, right? 12 to 24 months out in the future. And I think a lot of people think about P&L forecasting and cash flow forecasting, but forecasting the balance sheet is so important for us as CFOs, because we're going and we're looking at what some of these future debt balances are going to be, right? We have formulas in our cells that like show the amortization or payback of these different, you know, debt structures your business has. And we're going and we're looking in different P&L scenarios, different inventory purchasing scenarios, where is that debt balance gonna be or what does it need to be, right, in order to be able to execute on this strategic decision. But then furthermore, is it healthy? So for example,

I was looking at a potential debt projection of what it would take to buy for a brand's Q4 season and they were experiencing massive year over year growth. They had done 30 million in revenue the year before and they wanted to hit 60 in the upcoming year. And when I looked at how much debt they needed to take on, it was gonna put them at like an 80 % debt to asset ratio, which what that effectively means is that in their capital structure, 20 % of it was gonna be equity and 80 % of it was gonna be debt.

Is that good? Is that bad? Well, it's riskier than a 50-50 split, right? And so I just, I pointed that out to them. Like, hey, look, 80 % of our capital structure is going to be debt. Do we feel good with that risk? Because there's two sides of this coin. You know, it is true, it is mathematically true that debt can enhance return on equity. Because you can use someone else's capital to generate a return that...

but your equity investment stays fixed. That's true, but the other side of that coin is debt needs to be paid back, right? So debt carries risk with it. That's why it's called financial leverage, right? Leverage meaning it can enhance returns, but it's also risky. do you like, do you have anything else to say on that point? Cause it's important that brands understand this.

Kyle (32:19)

Yeah. Yeah.

Yeah, I think, I mean, when you mentioned like the balancing forecasting, last thing people do seriously, we find, right? It's always the P&L that people forecast and they want to forecast them getting the profitability. You know, first time founders or smaller teams or whatever the cases, they focus on that. They don't focus on the balance sheet, right? That's where I think you kind of hit the nail on the head. Like it could be good. It could be bad, right? Are you comfortable? Like if in two years,

Jon Blair (32:58)

Totally.

Kyle (32:59)

You've grown the business double, but you have, you know, 3 million in MCA payments a month. Are you comfortable with that? Like, yes, no. Okay. Then we have to plan around that. Right. ⁓ so I think that's a really good point. It's just, you know, it's, you want to be in a healthy spot, but you also want to make sure that you're comfortable with where you're, you know, balance sheet actually is and that you're comfortable sustaining that much debt. Right. ⁓

So that's what I would kind of like, I would double down on. I think that's a really good point.

Jon Blair (33:33)

Totally, yeah, mean, the balance sheet, which is also called the statement of financial position, right? It shows how your assets and your liabilities and your equity in one respect are relating to one another, right? And that's really important because $10 million worth of debt for a brand that has 20 million in total capital may be less risky than the brand that has $10 million in debt and 12 million in total capital, right?

Those are completely different makeups of like equity cushion, right? That's able to soften the blow should something not perform according to plan. And so it's important for brands to understand that for sure.

Kyle (34:16)

Yeah. And it can affect like what your strategy is. If you want to sell in three years and in three years, you have a ton of debt on the balance sheet and you're not profitable. Like, well, yeah, sure. The goal might be to sell for 20 million bucks in three years, but if you're not in a financially healthy spot, like that deal might not get done. verse your zero debt on the balance sheet and you're trying to sell for 20 mill and you're doing whatever in revenue. Then yeah, like so

Jon Blair (34:37)

Totally.

Kyle (34:45)

There's different implications to that balance sheet forecasting and it might affect like what your strategy is as a business as well.

Jon Blair (34:53)

So I want to turn our attention to recent tariff news. I feel like we can't have an episode on the Free to Grow podcast, at least for now, without talking about that. As of today, it's April 21st, 2025. Over the last couple weeks, there's been a ton of noise in the e-commerce and I guess, you know, really just in the broader US and global economy about the impacts of these proposed Trump tariffs, which, you know, have changed several times. Now they're on pause for 90 days, supposedly, but I wanted to bring up the impact on lending because there's been moves in the 10 year treasury. The 10 year treasury is like plummeted. I'm a real estate investor. So I actually like track those daily and I was like, yeah, let's go baby. And then they shot back up, right? but then there's also other implications. I'm thinking specifically around asset based lending. Cause I, I was the CFO for guardian bikes during the first Trump tariffs. And I was actually in the middle of underwriting an asset-based loan deal. We're in the middle of the inventory appraisal as Trump was slapping tariffs on China where we were manufacturing at the time. And I sat down with the appraisers and they were like, hey, we're concerned about how your margin is gonna get compressed. We are expecting our term sheet had a 65 % advance rate on it. After the deal was underwritten, it went down to 58 % specifically because of the tariffs. So I threw out a bunch of different things right there, but are you seeing anything in particular or talk from any lenders about how they might be changing underwriting criteria or anything in wake of the like tariff uncertainty?

Kyle (36:31)

Yeah. Going back to my first point earlier, which was, lenders are borrowing money, right? Similar to like an ABL structure where a business might borrow on, you know, a floating rate. Lenders are doing the same, right? So higher benchmark rates typically mean that a lot of these lenders are also paying more for their money. And they're not just going to eat that cost. They're going to pass it on. Right? So what we've seen is a little bit more, ⁓

Jon Blair (36:38)

for sure.

Kyle (37:01)

a little bit more aggressive, you know, on the, on the pricing side from like the MCA lenders in the world. Folks that have ABLs, are now maybe paying a point or two higher, just based on benchmark rate plus two or 3 % for their deal. so we're seeing a lot more on that. but I also anticipate like a tightening of these credit boxes and you know, there's an overhaul with the SBA program going on right now. ⁓

there's a whole bunch of stuff that all these ABL lenders are looking at and they also need to maintain returns. know, tightening of credit boxes, absolutely. Likely higher rates for smaller businesses that are not necessarily in that bank rate world just yet. ⁓ But also considerations on exposure limits, right? ⁓ These things are changing very fast for everyone on all sides of the table. And whether you're a lender or

Jon Blair (37:44)

Mm-hmm.

Totally.

Kyle (37:55)

you know, a founder, everyone's trying to work together to figure out what's going to happen next. But I do anticipate that in the wake of all the volatility around how much something might cost for a lender to deploy or what their return might need to be, there being tightening of credit boxes and tightening of exposures, right? If you're on a 500k LLC from your bank, there's a world in which, you know, depending on how things go, that gets reduced a little, right? If you're growing, might go the other direction.

Jon Blair (38:22)

Makes sense.

Kyle (38:25)

but I just anticipate that, and we've already seen that on a number of transactions over the last couple of months, ⁓ but it's very fluid. So I think, you know, for founders just keeping that in mind that nobody knows what's going to happen. Tariffs could be gone tomorrow. It could be triple tomorrow. You know, focus on what you can control. Exactly.

Jon Blair (38:43)

Yeah, exactly. knew he like, don't know. Well, something might have happened while we were recording this, for all we know. ⁓ Well, look, man, this was a super insightful conversation. I really, really value your perspective, not just because of what you're doing at Boundless, but because you personally have experience on the lending side, both in the bank world and in the non-bank world, right, which is not like always super common to find. So I appreciate you coming on.

This has been really great. think it'll be super helpful to our audience. Before we land the plane though, I'm curious if you could let the audience know, can people find more information about you and about Boundless AI?

Kyle (39:20)

Yeah, for sure. Find us at www.getboundless.ai. Feel free to book anytime with our team and we're happy to kind of take you through what we do and see if we can help support your business there.

Jon Blair (39:33)

Awesome, awesome. everyone, I hope you enjoyed the show today. ⁓ And don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com. And until next time, scale on. Thanks, Kyle.

Kyle (39:59)

Thanks, Jon.

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