Podcast: How to Navigate Debt Options for Scaling DTC Brands
Episode Summary
In this episode of the Free to Grow CFO podcast, Jon Blair and Melissa Cafagna discuss the complexities of debt financing for DTC brands. They explore various debt options, including merchant cash advances, lines of credit, and SBA loans, while emphasizing the importance of choosing the right financing partner. Melissa shares her journey to Settle and how the company provides unique capital solutions tailored for eCommerce brands. The conversation highlights the critical role of fractional CFOs in navigating financial decisions and the significance of understanding inventory management in relation to capital needs.
Key Takeaways
Over-leveraging or picking the wrong debt partner can jeopardize your business.
MCAs are often easy to access but come with high costs and risks to cash flow.
Debt isn’t inherently good or bad—it’s a tool. The key is choosing the right type for your specific stage of growth and strategy.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Melissa Cafagna- https://www.linkedin.com/in/melissacafagna/
Free to Grow CFO - https://freetogrowcfo.com/
Settle - https://www.settle.com/
Meet Melissa Cafagna
Melissa Cafagna is a passionate advocate for mission-driven brands, known for her customer-focused approach and her role as a 'financing fairy godmother.' With extensive experience in the financial industry, she is dedicated to helping small businesses grow through innovative and personalized financing solutions. While living in Europe for three years, Melissa transitioned from finance and accounting to sales, gaining cultural insights and developing a dynamic empathy that shapes her approach to building relationships. In her free time, she enjoys spending time with her family, exploring Chicago’s beautiful parks and city centers, and immersing herself in hip-hop and R&B music.
About Settle
Settle is the best way to power up your brand’s cash flow and operations—designed specifically for consumer brands ready to grow. With a unified platform tailored for 'finventory' management, you can seamlessly plan, purchase, manage, and pay for inventory, all in one place. Automate payments, 3-way match purchase orders, and real time accurate COGS. For businesses that qualify, Settle Working Capital offers founder-friendly financing, so you can Settle now, pay later, and scale confidently. Join brands like Thread Wallets, Truvani, and Olipop to confidently scale for what's next. Learn more about Settle today.
Transcript
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00:00 Introduction
01:18 Melissa Cafagna’s Journey to Settle
06:01 Understanding Debt Options for E-commerce Brands
12:02 Evaluating the Pros and Cons of MCAs
18:01 Understanding Asset-Based Lending (ABL)
28:15 Navigating Cash Flow Challenges in E-commerce
39:34 The Role of Fractional CFOs vs. Accountants
44:37 Exploring SBA Loans and Their Limitations
51:07 Closing Thoughts
Jon Blair (00:00)
Yo, yo, what's happening everyone? Welcome back to another episode of the Free to Grow CFO podcast where we dive deep into conversations about scaling a DTC brand with a profit focused mindset. 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. And today I'm here with my pal, Melissa Cafagna like lasagna. She runs capital partnerships at Settle and also calls herself
Melissa (00:25)
Yes.
Jon Blair (00:30)
the financing fairy godmother depending on what social media channels you find her on. Melissa, you have been a fan of my content for quite some time and I appreciate that and it was great to finally meet not too long ago. And now to have you on the show, how are you doing today?
Melissa (00:40)
long time.
I am doing well, kind of just coming off the high of a wonderful break for Thanksgiving. So good to be around loved ones. And I feel well rested. So I'm so excited that we planned this on this day. I feel like so much gratitude. So thank you for asking. And I definitely don't run Capital Partnerships, but I like to think I sometimes run the show. No, but I totally don't. And yeah, is it okay if I introduce myself right now?
Jon Blair (01:17)
100%.
Melissa (01:18)
Awesome. So I get.
asked this question a lot, like how did I end up at Settle? I actually went to school for accounting and did the whole public accounting thing, pivoted to working at a modeling agency in LA and was there for quite some time doing accounting and kind of just had this quarter life crisis where I'm like, what am I doing with my life? And decided to pivot into sales after doing this amazing sabbatical in Europe, which that's like a whole can of worms that can be talked about another
but I sometimes feel like I've lived like four different lives, just with like the craziness that I've been through when it comes to like my career and like my personal life. But then I finally decided like I'm gonna go all in on sales, but I also wanted to stay close to FinTech just because it just felt like a, because they still definitely had like this, I would say like joy around like accounting and finance and helping businesses, specifically small businesses, but it definitely made sense with my
my background to pivot to fintech and worked at a couple tech companies related to like Ecom businesses, Amazon businesses, and then ended up at Settle, which I love the team there. We're an awesome bunch and we have the best manager, shout out to Chris. So yeah, that's basically how I ended up there. And now basically helping founders with capital and inventory software.
which has been a delight. We're solving some real problems. Like, who doesn't need money? Who doesn't need to try to optimize their inventory? It's such a nightmare for so many brands. So yeah.
Jon Blair (02:53)
Hahaha
I love it. So a couple things, the joy around accounting and finance. That brings a huge smile to my face because I always joke one of the core values at Free to Grow CFO is passion. whenever I talk about this with the team, I'm always like, guys, we're crushing this one because the deep conversations that five to six people will have on how to reconcile a Shopify merchant account and the arguments we'll get into to make sure it's done right.
is just about the most passionate, nerdy, joyful accounting and finance conversation we could be having. so if you listen to the show at all, you know we're nerds about that around here. so I'm looking forward to chatting because as Melissa mentioned, Settle actually has its hands in a few different areas in the eComm and CPG world. in particular, Settle has for quite some time now offered
Melissa (03:33)
I love it.
Yeah.
Jon Blair (04:01)
It's kind of like debt financing products. And we have several mutual clients with Melissa and the Settle team. And what we want to talk about today is just how to navigate debt options for a scaling eComm brand. There's, unfortunately, to be quite honest with you, there's a lot of misinformation out there in the marketplace about the different debt options and whether they're good or bad or how much they cost, what...
Melissa (04:13)
Yes.
Yep.
Jon Blair (04:27)
lender protections or liabilities you have as the borrower. I actually think that out of all of the topics that we encounter as CFOs at Free to Grow, the navigating debt options is actually the one where we see the most misunderstanding, misconceptions, misinformation. And we spend a lot of time educating brands on like what the different options really are, why they're different, what it means in terms of
Melissa (04:46)
Interesting.
Jon Blair (04:57)
what it means in terms of liability. And so today, we're gonna break a bunch of this down. There are, yeah, demystify with your financing fairy godmother, Melissa Cafagna So, all right, so to get started, we're not gonna get through it all, unfortunately. We might have to have you back. But let's talk about some of the, just outline what some of the different debt structures
Melissa (05:03)
Yes, let's demystify.
Happy too.
Jon Blair (05:27)
are that are out there, right? Why don't you go and just riff just the ones that come to mind. What are some of the different options I'll add any that that you don't put on the list and then we'll start talking about them further.
Melissa (05:32)
Sure.
Amazing.
Obviously, one of the first ones that come to mind are MCAs, just because I speak to lot of emerging brand founders who maybe it's their first or second time looking for capital, debt capital specifically. And so a lot of times these MCAs are pouring a ton of money into marketing and advertising. So oftentimes it'll be maybe like...
Jon Blair (05:44)
Mmm.
Mm.
Melissa (06:01)
Or it's just the ease of it, right? Like for a Shopify capital, for example. And so definitely, I feel like for a lot of folks, that's going to be one of their number one options just because they're getting targeted. Whereas a lot of totally, yes.
Jon Blair (06:15)
We see that constantly. I mean, almost every brand that we encounter
on the CFO side when they are either using MCAs or recently used MCAs. And by the way, for those of you that don't know the terminology, merchant cash advances, right? And we'll get into this in more detail in a second, but like super common. Why? Because basically because of Shopify Capital, ClearBank, or now rebranded as ClearCo and Wayflyer, which have those three have focused
Melissa (06:25)
Correct. Yes. Correct.
Yeah.
Yes.
Jon Blair (06:46)
on eComm as part of their, a big part of their go-to-market. And one of the reasons, at least from, in my opinion, one of the reasons they focus on eComm is because the transparency of, well, because of the daily receipt of cash, right, from merchant accounts, you know, hence merchant cash advances. They're actually just pulling forward future cash flows that you're gonna receive from the credit card processors, right, and they're lending you kind of like in bulk.
Melissa (07:00)
Correct.
Exactly.
Jon Blair (07:15)
ahead of time, right? And so that's MCAs. What are some of the other common debt structures that you see D T C brands encountering out there?
Melissa (07:21)
Yep.
Sure, definitely like line of credits, SBAs loans as well, ABLs, asset-based loans. I would say those are like primarily the ones that I personally see. I've seen some pretty wild debt stacks, we call them, where some folks have maybe like five or six different merchant cash advances that they're working with to stay afloat.
Jon Blair (07:29)
Mmm.
Melissa (07:53)
or a business that just has like one line of credit and that's it. So we like see so many different kinds of debt stacks or maybe you have credit cards. Like there's a myriad of ways to kind of make this work for your business. And that's why you need to talk to guys like Jon and Jeff because they're gonna like advise you on the best way to figure out what that debt stack's gonna be. Because it's like, do you wanna buy inventory with a credit card? I see brands do it.
Jon Blair (07:53)
Yeah.
Mm-hmm.
Melissa (08:21)
Sometimes it makes sense. I remember talking to this one founder who's very emerging still. But let's say she was like a one to five million in sales. But she was still buying inventory on credit cards and doing no interest credit cards. And she was getting really creative with it, which I love. But at a certain point, you need something a little bit more sophisticated once you get to certain levels for your business. So I think it really just depends. And I think it's great to have the advisement because if not, I'm going to say this like three times, feel like choosing the wrong debt partner could mean the failure of your business. so I think understanding who you're going to partner with, whether it's a short-term thing or a long-term thing, seek help, seek advisement. Yeah.
Jon Blair (09:00)
Yeah.
Yeah, well, yeah,
no, mean, I think obviously we're gonna unpack a lot here with this, but let's say it this way. I think first off, I have a lot of empathy for brand founders, right? Scaling an eComm brand is just about the hardest thing you could choose to do in the business world. And it's capital intensive. Why is it capital intensive? What does that mean? That means it takes a lot of capital. And what is one of the primary reasons?
Melissa (09:18)
Yeah.
Totally. No joke. Yeah, totally.
Jon Blair (09:40)
inventory, have to carry inventory. Service businesses generally are not capital intensive because they don't carry inventory, right? And so because of that, you have two major sources. You've started a capital intensive business, so you have generally two major sources. We'll say three major sources of capital. There's your vendors, that's accounts payable and trade payables. There's equity investors, right? And then there's debt lenders, there's debt providers.
Melissa (09:41)
Absolutely.
Jon Blair (10:09)
There's technically a fourth, is profitability and retained earnings, right? But those are kind of your sources of capital. Why do most founders not want to just sell a bunch of equity? Because the cost of equity is expensive. It's expensive to you as the founder to sell part of your business, right? And retained earnings, you may have tight retained earnings and seasons of scaling because you're focusing on growth. So there may not be a ton there, right?
Melissa (10:14)
Yep.
Absolutely.
Yep.
Jon Blair (10:35)
And
then when you're starting, especially when you're emerging and you're in the first several years of your brand, you probably don't have really incredible payment terms with your vendor. So your vendor payables are not like a significant enough capital source. So that leads us to what debt, right? And hence why we're having this discussion and why it's so pervasive with DTC brands to have to understand how to choose the right debt. So here's what we're gonna dive into. We've laid out common forms of debt, MCAs.
Melissa (10:43)
Exactly.
Totally.
Jon Blair (11:04)
lines of credit, ABLs, are somewhat related, SBA loans, and I kind of added term loans, which can roll up under one of those categories. But here's what you need to consider. You shouldn't pick a debt partner just because they say, we'll offer you the money that you need. It needs to be tied to your strategy, and you need to understand why you're going to use that provider. And you need to consider things like, what are the underwriting requirements?
Melissa (11:11)
Yes.
Yeah.
Yes.
Jon Blair (11:33)
What are the lender protections and what are your liabilities? Is the borrower, what does it cost the capital? And then what is the capital flexibility and the capital amount? It's not just one of those things. It's all of these things that you have to take into account. So let's start with MCAs. From your perspective, what are some of the most common reasons why people take on MCAs? And when considering strategy underwriting,
Melissa (11:44)
Yep. Yes.
Jon Blair (12:02)
lender protections, cost of capital, all those things. Where do you see MCAs being good and or bad?
Melissa (12:03)
Yes.
Yeah, great question. Honestly, think founders like going back to the empathy thing, they have so much on their plate. And the last thing they want to do is go through like a really lengthy underwriting process to get more money when they have a vendor that they're probably late on paying already and they need to get that inventory into their 3PL. So they just need money fast. needs to be easy. And so I like I get that.
Jon Blair (12:22)
for sure.
Melissa (12:38)
And so I think with the MCAs, it really is the easiest form of capital you could probably get. So I think that's why I have a lot of empathy for these founders, because it's like, have so many competing priorities, and you at the end of the day have to weigh, like, you sometimes when we make the decisions that we do, it's just like, do I want to pay more for doing the thing that's easier? Sometimes, yeah, that makes sense, you know? And so, but...
Jon Blair (12:53)
Yeah.
Melissa (13:07)
really, I think, understanding how this debt is going to impact your bottom line, which enough people don't talk about. Your cash flow, ultimately, as well, is really important. On that topic, what do you consider are the scenarios in which you've seen MCA debt work? Because we can't say that it doesn't. We know that it's very expensive. But can you like?
Think of a scenario where you've seen that successfully executed.
Jon Blair (13:38)
Yeah, you know what's funny is I used to just have this blanket opinion which is like MCAs are always bad. I will say 95 % of the time the way that I see them being used, they are bad and there's a better source of capital. But I have become a believer in the 5 % that I've seen where it's a good idea, which is if one, if it's truly a short term need and it's truly like to bridge you from one place to another, right?
Melissa (13:50)
Yeah. Yeah. Absolutely.
Yes.
Jon Blair (14:08)
And then the second thing is if you don't need the maturity or the payback to line up with your inventory levels. And so let me dig a little bit deeper to explain this a little bit more. The reason why if you just need the capital for a few weeks or a few months and you don't really see the need coming up again anytime soon, it might be okay to go to the MCA, which by the way, annual effective rate 25 to 50%.
Melissa (14:19)
Yeah, break that down a little bit. Yeah.
Yeah.
Jon Blair (14:38)
annualized
effective rate like that's actually how much these things cost. The cheapest I've ever seen it is 20. And that's because it took a long time to pay that back. But they're very expensive, but you might want to go that route because all you do is click a button and maybe answer a couple of questions and you get the capital. So there's like no underwriting. It doesn't take much time. It's unsecured. It is, in my opinion, it's not fully unsecured because they do have rights to the percentage of revenue or collections that they take from you. So
Melissa (14:48)
Correct.
Literally.
None.
correct.
Jon Blair (15:08)
Yeah, do they not, they're not filing a UCC one, which is a blanket all asset lien on the business, but they do have rights to your cash inflows. So it's not totally unsecured, even though they call it unsecured. But if you only need it once, maybe twice, and you don't see this recurring need, it may just be easier because if you go look at SBA loans, lines of credit, ABLs, other term loans, not always, but oftentimes the level of effort and your cost of
Melissa (15:19)
Totally, yep.
Jon Blair (15:38)
getting that thing underwritten, providing all the documents and the analysis, and then even paying upfront fees for getting those loans closed. If you're not using it regularly, those fees and that effort of getting the loan approved, that actually might make your annual effective rate against the capital you actually borrowed possibly really, really high, right? And so actually the MCA may be just a little more expensive, but just easier. Here's the problem.
Melissa (15:45)
Yep.
Yeah.
Jon Blair (16:06)
I rarely see brands only need debt just once and then never need it again. And why is that? It's because as you're growing and almost every eComm brand is seasonal, right? So there's peaks and valleys to sales, which means there's peaks and valleys to inventory. That means your working capital expands and contracts, right? As the business, as your sales seasonally go higher and go lower. And as you're growing,
Melissa (16:11)
Yeah.
Jon Blair (16:34)
to meet the next sales growth goal, you always have to buy more inventory than you did the last time. And so because working capital is expanding and contracting based on seasonality, but then it also overall is expanding because you're growing and inventory is growing, unless you're getting more capital coverage from retained earnings, equity investors, or your vendors, you need more and more debt as you continue to scale.
Melissa (16:41)
Right.
Jon Blair (17:02)
to finance your inventory as you're growing. So rarely do I ever see this one time need for MCAs actually play out. And that's why it's so uncommon. But I will say this. They will try to convince you that you can, what do they call it? What do they call, they have this term, that you can top up. Meaning like you can take another draw once you've gotten down to a certain percentage, right, of like paid back of the MCA.
Melissa (17:10)
Right, absolutely.
Mm-hmm.
Correct.
Jon Blair (17:32)
But if you're just gonna let it, that's called a revolve. If you're let it revolve like that, just get a line of credit that can actually revolve. You know what I mean? Because it's gonna way cheaper and way more flexible.
Melissa (17:37)
Right.
100%. And at that point, it is worth going to doing the due diligence that you need to do. And I think with the seasonality that these businesses have, use that slower season to apply for debt. Because that'll be the time where you can get yourself set up, and you will no longer have to worry about this.
Jon Blair (17:47)
Totally.
I'll make another comment on that as well, is if you the right bookkeeping and CFO partner, like Free to Grow CFO, we can do a lot of the heavy diligence information for you. Like when we've worked with Settle on the few mutual clients we have, the data that you guys need
Melissa (18:15)
Right?
Jon Blair (18:21)
we're the ones pulling it, right? And we're actually even the ones looking at it before we send it to Settle and making sure it does it make sense. Is there anything we need to explain to the lender that we know they're gonna have a question about, right? And so it can get a lot easier. The underwriting is a lot easier when your bookkeeping is clean and on an accrual basis, meaning you have a clean balance sheet. And when you have a fractional CFO,
Melissa (18:31)
Yes.
Totally. Yes.
Jon Blair (18:48)
who can help interpret it to, it can help be the interpreter between the lender and the brand. Cause oftentimes, well actually this is a great question for you, Melissa. I know this for a fact cause I know I'm friends with a lot of, you know, not just people at Settle, but other lenders. There's this, there can be this barrier between the lender and the founder where like the lender needs something and the founder without a CFO doesn't fully understand how to get the lender what they need.
Melissa (18:54)
Yes.
Totally.
Yes.
Jon Blair (19:17)
Do you
see that and what are some examples that you see?
Melissa (19:20)
That's a good question. I would say Settle is a bit of an outlier because we're like very education first. So we try to be like mini CFO for you as far as just explaining this. But a lot of lenders do not work this way because they don't have the business or financial acumen. And like for the folks that work at Settle, for example, they have been doing working capital for a long time. So they know what they're doing.
Jon Blair (19:37)
for sure.
Melissa (19:48)
But that's like a really good question. would say that from the stories that I've heard at other lenders, I would say it's more of like a transactional partnership where it's just like, I need to do and say whatever I need to get you across the line to close on this capital. And less like partnership where I'm like, what questions can I answer to make sure you feel comfortable with this? How do we differ from the other partners that you're looking at?
How are we better? How are we worse? Right? And being able to advise there. But I do think if you do not have a partnership oriented lender that you're talking to at like the beginning of that like sales cycle, let's say, you need to speak to somebody who can walk you through that process because, and again, shameless plug, Jeff and Jon at Free to Grow, because I was going to say like...
Jon Blair (20:18)
for sure.
Hahaha.
Melissa (20:44)
This is the reality, right? A lot of lenders, just they're not always looking out for what's in the best interest for you in the business, right? And like they have quotas, they need to make sure business is good on their end. Makes sense, right? You always have competing priorities, but at the end of the day, like I have heard of like absolute horror stories where, for example, there are a lot of lenders that they don't even look at your balance sheet. That means they're making an underwriting decision based on half of your business.
And guess what? They may potentially over leverage you with debt. And that means that they don't necessarily care about what is in the long-term interest of your business. Now, they may be a good short-term thing, but over leveraging you, there are times where unfortunately for us, like as a lender, we have to say no, because the business simply has too much debt. And we do not, though we could give them debt because of a myriad of other reasons, like growth is great. We have to say, sorry, we can't help you.
Jon Blair (21:11)
Yeah.
Melissa (21:40)
You're over leveraged right now, but let's speak in six months. consolidate that, handle that, figure out what you have to do, because we do want to work with you. I don't know if that answered your question, but yeah. Yeah.
Jon Blair (21:43)
for sure.
No, no, mean, no, there's some great, mean, I will take it a step further and say that like
debt is, think, I think that you can hear, you know, you can hear like voices, competing voices out in the marketplace about like debt, debt is good or debt is bad, right? Leverage is good. It enhances return on equity. Debt is bad because it's risky. know, Dave Ramsey, debt is evil, right? Which I'm a huge Dave Ramsey fan personally, by the way, but like,
Melissa (22:03)
Totally. Right. Yeah.
Right.
Right.
Jon Blair (22:18)
The point I'm making is that I actually believe that debt is neither good nor bad. It's a tool, right? And it's a tool to be utilized in the right way and responsibly, just like any other business tool. And just like with any other tool in business, you can use it in the wrong way and in a way that actually creates more risk than reward. And so part of that, like Melissa was just referring to, is that you do need to be mindful of how much debt you take on because
Melissa (22:18)
Yeah.
Exactly, yeah.
Totally.
100%.
Jon Blair (22:48)
I believe that to some degree, if you're going to grow your eComm brand quickly, even if it's profitable, you just are going to need some amount of inventory financing. And it's because very few, and I'm talking about like one out of a hundred brands that I encounter have a good enough, what's called cash conversion cycle, which without getting into like all the details, basically, basically it means how for an eComm brand.
Melissa (23:00)
Totally.
Jon Blair (23:16)
how many days of your inventory are being financed by your vendors, basically, right? Most of the time, very little, very few days of inventory are being financed by your vendors. And one out of 100 eComm brands I talked to has really aggressive payment terms and it finances a lot of their inventory. And so the amount of debt they need to finance their inventory is actually very little. That's very uncommon. And so,
Melissa (23:19)
Correct. Yeah.
Yeah.
Correct.
Very,
yeah.
Jon Blair (23:42)
So just be aware of the fact that you do need to be mindful of how much debt you take on and not all debts made equal and too much can be too risky. So I wanna talk about lines of credit next here. And I wanna talk about lines of credit and ABLs because there are asset-based lines of credit and then there are lines of credit that have nothing to do with ABLs. let me.
Melissa (23:55)
Yeah, absolutely. Yeah, okay.
Yes.
Jon Blair (24:10)
kind of define this and then we'll dive in to where we see these used well and not so well advantages and drawbacks. So a line of credit, just like it sounds like, it's something that you can draw up and pay down a lot of times kind of at will, right? Within certain limits. Some limits are what's called asset based and that's where ABLs come from, where they will only let you borrow a certain percentage of your accounts receivable.
Melissa (24:17)
Let's do it.
Jon Blair (24:39)
and or your inventory value at any point in time. So ABLs are kind of like a form of line of credit where they're tying the maximum amount you can borrow to some asset based, hence asset based lines or loans as the name. Where, just what comes to mind for you of what you see as like advantages, drawbacks, where they're used well, not used well.
Melissa (24:49)
correct.
Yeah.
Yeah, great question. I mean, definitely the biggest advantage I would say is cost. And generally a lot of brands will graduate from using something like Settle or maybe a basic line of credit to an ABL so that they can access more. Because sometimes like basic like lines of credit, let's just call them that. Those don't they aren't great at actually giving businesses like proper sizing.
Right? Like it's usually something very small. And so they generally have to graduate into that. So definitely cost. on the cost, the caveat is to make sure you actually understand your true cost of capital. Because ABLs will tell you like, you know, this rate. But then there is like a facility fee and, you know, auditing fees. yeah. And so it's like, and then like calculating your true APR based off of that. Because oftentimes you'll find, well, I could just go with this other provider who
Jon Blair (25:33)
yeah.
Underwriting fee. and maintenance. Yeah
Melissa (26:01)
maybe requires a little less due diligence on an ongoing basis because ABLs do require a lot of due diligence and you know, have to make sure your books are constantly clean and then they're going to the cons. There's sometimes like present to be an issue based on that valuation that you said where it's like, hey, I'm getting an amount of financing based on how much inventory I had, but shit like what do I do when I just like sold through all my inventory? Cause Black Friday's was bananas. And so being able to adjust from that.
perspective. So I think that's where it can be limiting. And so a lot of times what I'll see is at that point founders will then kind of have to take on like a second form of debt to kind of fill in that gap until they built up their inventory. And so that that's what I've seen. Yeah.
Jon Blair (26:49)
Okay, wait, this is a, no, I saying, so I have a lot of experience with ABLs because
of being in the CPG and Ecom world for so long. This is probably a whole episode. So I'm gonna try to be brief and be fair to the different ABL lenders out there, because I am friends with a lot of them. And by the way, I wanna be clear. All of these debt types serve a purpose for the right business, the right strategy, the right season, right? And again, coming back debt or even these, yeah, all of these different debt products, they are not good, they are not bad, they are tools, but understand these, these different components of them that we're walking through so that you can use them for the right reason at the right time. That's the whole point of this conversation, okay? And so let ABL's lines of credit, let's talk, from my perspective, where I see this work well, what some of the pros and cons are, one, that you brought up, in transit inventory. On ABLs, generally speaking, inventory that is not in a warehouse domestically, in the United States, is ineligible. And so if you have an advance rate, let's say it's 60%, meaning that you can borrow up to 60 % of the cost of inventory, you cannot finance 60 % of what's on the water or a prepayment you need to make to the vendor. what like Melissa was just referring to this, can get caught in this chicken or the egg game where you have not enough inventory, you're actually very profitable, you're crushing your sales goals, you're growing super fast, I've had several brands where I've had this issue. They're killing it. But they don't have enough cash to buy the next big container or containers they need to buy and they need to make payment for those while they're in transit.
the ABL will not finance that in transit inventory unless you convince them to give you what's called an over advance. Over advances used to be really common before COVID. They're much less common today. Now, you can ask. I always say, like you miss 100 % of the shots you don't take. I always ask as a CFO, right? And they're not impossible, but they're becoming less and less prevalent and it's why.
Melissa (29:00)
Hmm.
Yeah, absolutely.
Jon Blair (29:14)
Lenders don't want to lend against something that's in China, right? That they can't seize or that's on a boat that they can't seize or that's on a truck that they can't seize. If it's in a warehouse, then they have a lien on that, on the goods that are at that warehouse. They can go seize them if you don't pay the loan, right? So that's, so in transit inventory is a big, big, huge problem for scaling DTC brands. And it's usually the most common reason why I see an ABL get removed from the running for growing eComm brands where I tend to see it start to work is when they've reached a size and scale and enough profitability in the business, enough retained earnings in the business that there's this capital base that they have that if they momentarily need in transit financing, they can use that capital base for the in transit piece, or they've developed enough relationship with their vendors that they've figured out how to get 30 day payment terms and that 30 days can, that floats the in transit, right? But if you're an emerging brand, which is most of the brands that we work with, surprise, like, another misconception I guess I'll throw out there is I think a lot of brands think like, by the time I hit 10 million, maybe 20 million, I'm good. I have a brand that's doing 50 million a year in revenue and they still have this problem. So it depends on multiple factors. The other thing I wanna mention, you mentioned the sizing.
Melissa (30:16)
Yep.
Mm-hmm.
Yeah.
Jon Blair (30:41)
This is where the distinction in my mind of bank versus non-bank comes into play. If you're using a bank, so you're using a Chase, a Wells Fargo, a Bank of America, the advance rate on inventory is usually 50%. And I mean, yes, can you ask for more? Can you try to negotiate more? Yes, but they're usually not going to start there. They're very rigid. Non-bank, you can get up to like 75%, maybe 80%. The standard is probably starting at 55% and you can push them to get to 60, 65. And if you're elite, you can maybe get them in the seventies or the eighties, right? But that money is more expensive than bank, they'll, non-bank ABL lender will lend you more, they'll give you a bigger line. I mean, I love, I have friends at Chase and Wells Fargo and Bank of America, but they know that, they know, cause I've told them and they know, the emerging brands we work with, a lot of them are not in that box, where they'll offer a $30 million brand a million dollar line of credit for inventory. A non-bank ABL lender may offer that same brand $3 million, right? And like a 75 % advance rate instead of a 50 % advance rate. So those are just a couple things to consider. I can tell that you've got, the fairy godmother has some comments.
Melissa (31:42)
Mm-hmm.
Which is a big difference, yeah.
Yeah. No, I like, I know
I kind of want you to dig into like what that underwriting process is like so that, you know, founders are aware like how much time is this going to take? What am I expected to do on a regular basis to make sure I'm in good standing with my ABL? Things like that.
Jon Blair (32:07)
Mmm. Yeah.
Totally.
Yes, so ABLs are probably out of all the loans that are on our list, those are the ones that have the heaviest underwriting and require the most. Maybe they're fairly similar to like SBA loans on the front end of underwriting, but where they differ is the ongoing underwriting and compliance is I think far more.
Melissa (32:36)
Mm-hmm.
Jon Blair (32:46)
substantial with an ABL than other types of loans that have heavy underwriting on the front end. And here's why again, cause it's asset based, meaning that every time the lenders max allowable limit on the line or balance on the line is directly tied to the snapshot valuation of an asset on the day that you take the draw. And then they also test it periodically. Usually they test it monthly.
it's not uncommon to see them test it weekly though. and then they'll test it more heavily, quarterly or, or a couple of times a year. So what does that mean when they're testing it weekly? that means that you have to put together what's called a borrowing base report. let's say, let's just say that it's tied to inventory valuation. Cause for an eComm brand that doesn't have AR or has very little AR inventories, usually the asset based. That means you have to prepare a report of exactly what you have on hand and the landed cost value. Now I see Melissa cracking a little smile because the word landed cost value, that's like a whole nother podcast episode. that's something that, but like, so if the, getting into all the details, tracking your landed cost and what's on hand today, every week is a lot of work. Most brands don't do it. and if you try to do it, it's usually wrong and, and it's not, it's not the brand's fault. It's just a lot of work and it's hard, right? and so you have to prepare this borrowing base and you, whoever, usually the CEO founder, you have to sign it and you're signing it, certifying saying, I am certifying. This is accurate because the bank is giving you a percentage of that value of that asset value available to draw. So you have to do that every week or every time you do a draw or at least monthly, and then usually quarterly or at least a couple of times a year they do what's called an inventory appraisal where they request all of this. They basically re underwrite the loan more or less. It's a mini version of the underwriting you went through at the beginning. And it's because they're double checking that the economics are the same in the business, that your margins are the same. They'll even oftentimes send someone physically to your warehouse to do a physical count to test, to make sure that you're borrowing against an asset that exists physically in reality. And it's not some fake made up thing.
Melissa (34:51)
Yeah, what you just went through, yep.
Yes.
Mm-hmm. yeah.
Jon Blair (35:13)
And the reason this is all required is because everything's tied to the asset base. So they have to have, they have no other data feed to confirm that the asset base that they're using to borrow or to lend against is actually real. so when is this worth it? This is worth it when the advance rate is right. The partner is right. It matches your cash conversion cycle the right way. And the ebbs and the flows of your working capital, if there's a good match there, right. Then it can be worth the effort. And if it's a lender who is truly helpful, that can quickly expand line sizes and is willing to give you over advances when you need them situationally. We had a great partner like this at Guardian Bikes. And then at some point it stopped working because they couldn't do in transit and in transit was our need for that season. Right. And so what's the point of making all this? The level of effort put in, choose the line first and foremost that the actual capital availability moves in concert with your working capital needs. Don't use one that doesn't match and that fights against your working capital needs. Then and only then decide if you want to put in the work to get that loan and maintain that loan.
Melissa (36:18)
Yeah.
Yeah, definitely.
Absolutely. And I would also say looking into kind of vertical specific ABLs is super important because nine times out of 10, they will be more understanding of what a CPG ABL cares more about cold chain logistics on your supply chain and if you're managing that better, right? Versus somebody who, maybe, I'm not sure you guys were with at Guardian, but that is not an issue. So really finding somebody who understands what your specific supply chain for your specific, I would say like eComm or market vertical is, is super big. And that's why Settle is so big on helping CPG and eComm because we know it well. We understand the problems that those founders are going through and we really believe we have a solution that actually helps with that. So I would say that in every kind of lending product that you think about, at this point, right? In the era of fintech, there is likely a vertical type that will help you much better. And so that's definitely something to consider when you are shopping around. But yeah, my gosh, Jon, as you can see, is a wealth of knowledge when it comes to different financing products. I was also learning things here. When it comes to ABLs, a lot of the things that you said I was aware of, but other things that I was not aware of just because Settle is not an ABL, but we work
Jon Blair (37:31)
Totally.
Melissa (37:54)
and do like lot of trainings into understanding how they work. so absolutely spot on and definitely a lot of due diligence. I think, yeah, it's just really the saying comes to mind is the juice worth the squeeze when it comes to this financing product. And when are you at that level of sophistication where you're kind of comfortable with, yeah, totally, right. Yeah.
Jon Blair (38:09)
Totally.
be able to manage it. Yeah. Well, and that's another reason,
like actually, I think the vertical specific thing you mentioned is like, don't underestimate the importance of that. That's actually why Free to Grow. We are vertical specific. We are bookkeeping and fractional CFO for growing eComm brands. And it's because we can provide so much more value by understanding your business model and your scaling challenges at a deep, deep level than someone who's horizontal trying to learn those lessons with you, right? And the lending partner thing from a vertical perspective is just as important.
Melissa (38:45)
Yes. Absolutely. I know. Yeah. I know. Sometimes I'll go to like these. I love all of our accounting partners, but sometimes I'll go to their pages and the amount of verticals that they serve where it's like 10 to 15 different verticals. I'm like, sure, you can have a different accountant that has like a specialty, know, or CPA that has a specialty into that specific vertical, but make sure if you are going that route that they have somebody who knows their stuff, you know, and has like that background and can advise in that. But if not, I always recommend doing the vertical specific thing for sure. based on kind of the earlier conversation that you like were talking about, talk to me about like the importance of actually using a fractional CFO versus your accounting firm when it comes to making decisions like this, because I have seen, you know, accounting firms advise on capital, but sometimes, yeah, it's like, is that really the best thing where I've even seen certain accounting firms, you know, refer to settle, but we're probably not the best solution for them based on certain things that I see. So talk me through like how I guess what's your edge in that space? Because you talked about a lot of things that I think maybe if you are a CPA and hey, I used to be an accountant, so no shame or shade here. You know, exactly. Yeah. So which I think most folks are, right? And so kind of talk me through the advantages of going with somebody who actually has that CFO background, like fractional CFO, and that is what they've been focusing on versus kind of just saying,
Jon Blair (40:13)
Hey, so did I. So I was an accountant first too, so.
Melissa (40:30)
Yeah, we provide fractional CFO services, but that's not really like their specialty.
Jon Blair (40:32)
For sure.
Yeah, it's funny because I had a post a couple weeks ago about the difference between an accountant and a CFO and I believe you were the first comment and you said, woo, this, you said this, this was spicy, Jon. So, okay, so in its simplest form, accountants are focused on the past and CFOs are focused on the future. Now, unpacking that, there's a lot underneath those two bullet points but, accountants are specialists at recording what has happened in a way that it can be interpreted by various parties, right? To make different decisions about the future. So accountants are 100 % needed from a bookkeeping standpoint. And I'll even say in terms of tax accountants, they're needed as well because tax compliance and tax savings is a huge, important thing for a growing profitable brand. But.
Melissa (41:17)
Yes, totally.
100%.
Jon Blair (41:30)
It's not the same thing as a CFO, right? A CFO may have come from an accounting background, but a CFO also may have come from an FP &A or an investment banking or a private equity background. They don't have to have come from an accounting background. Now, they need to know how to use financial statements, which are prepared by accountants, right, to make forward-looking decisions, but they don't have to actually be the preparers of said financial statements, right? And so a CFO, there are a lot of people out there, hence the post that I made a couple weeks ago, and I talk about this a lot in my content. If your CFO is really just a glorified accountant, they're not a CFO. It doesn't mean they're useless. You still need the accounting. But a CFO is a strategist who helps you build the vision you have in your head as a founder of the future you're trying to build. A CFO helps enable that, right? They use...
Melissa (42:03)
Hehehe.
Yes. Yes.
Jon Blair (42:26)
Amongst other things, they use the data that accountants record to help make those decisions. But they understand things like forecasting, scaling in an, in an eComm from the eComm vertical perspective, they understand how to scale ad spend profitably. They understand how to build teams profitably. They understand how to manage inventory and they understand again, amongst other things, how they understand
Melissa (42:44)
Yes, so important.
Jon Blair (42:55)
capital structure. They understand how to think about retained earnings versus equity, outside equity capital versus debt capital and how to stack those things, going back to capital stack, to stack your capital in the most optimal way such that it meets your needs so that you have the capital you need to invest and achieve your growth goals. But at the same time, balancing that, against risk and liability to lenders and cost of capital. And so it's not optimizing for either one of those. I'm not optimizing just for capital availability or just for cost of capital or just for liability. I'm looking at all three of those things and I'm saying, how can I, as the CFO help the founder achieve their goals while keeping all of these three in balance? Right? And so CFOs are enablers.
of achieving your goals and we know how to take tools, debt being one of those tools, and how to advise the brand founder on how to use those tools to get from where they are today to where they want to go.
Melissa (44:05)
I love that. Look at that. I just want to start a business just so I could work with you guys.
Jon Blair (44:09)
man, so really quick, because I want everyone to get a chance to hear about Settle's Capital solution. what I'll do just in the interest of time is I'll give everyone a quick high flyover of SBA loans and term loans, and then we're going to go to Settle Capital. So SBA loans, I have a lot of experience with this because of being in the emerging brand world. SBA loans.
Melissa (44:17)
Yeah.
Yes, let's do it.
Jon Blair (44:37)
They seem, there's a lot of allure around them because they are lowest cost of capital because they're subsidized by the government. And it's like, man, I can get that much money for that little amount, but it's a trap if you're really trying to scale. And the reason is heavy underwriting, lots of restrictions around your cap table and other things that you could potentially trip, tons of liability and you can't really remove any of that liability. You're gonna have a PG, it's guaranteed. You actually can't negotiate that out.
A lot of stuff you can't negotiate because the government won't back it if you negotiate those things. So if you're willing to put up basically your personal net worth, it could be a great way to get a cheap source of capital. But if you're growing fast and you think you need to refi that SBA loan soon, it's probably not worth all the fees and all the underwriting because you're gonna end up replacing that capital source with a more expensive one. You can refi an SBA loan with an SBA loan.
Melissa (45:15)
Yeah.
Jon Blair (45:36)
But again, it comes with all those same restrictions and all those same liabilities. so it, I see SBA loans better for businesses that are stable and not growing super fast where you can actually keep that source of capital for a long period of time. They do have ABLs, but usually it's a term loan, meaning you're paying it back over an amortized period, usually five, seven or 10 years. And so unless that meets your needs and you're not growing super fast and you don't think you have to refi it soon.
Melissa (45:46)
Yes. Yes.
Right.
Jon Blair (46:06)
SBA loans tend to not be the greatest solution. I learned this the hard way. We got a couple of SBA loans at Guardian Bikes and we had to refile out of both of them because we were going so fast and they no longer met our needs. And where did we go after that? Non-bank ABL. And so that's a little bit about SBA loans, but settle capital. We talk about MCAs, lines of credits, ABLs, SBA loans and term loans. Where is Settle different? And how do you see the way that you structure your capital solutions as really providing an edge to brands and like actually meeting their needs.
Melissa (46:41)
Yeah, good question. Oftentimes it requires a lot of education. I speak to a lot of CFOs, fractional CFOs, accountants and founders. And it's kind of hard to wrap your head around Settle because I do think it's kind of unique in the way that it works. And the reason being is because I think it's a super valuable resource to brands where they're like, I don't know, this sounds too good to be true. It's really this simple. And I'm like, yeah.
One on the underwriting end, as far as it just not being like the super time consuming, lots of due diligence that we do, but we do enough to make sure we're going to provide you with a capital solution that is healthy for your business. So that's really important. So I would say that when talking to founders about this, I really like to kind of position us as far as like where you are with your business, where maybe you...
don't want to use MCAs anymore, right? And you're like, I can't do that anymore. It's sucking up my cashflow. I'm tired of giving a percentage of sales. But maybe you're not sophisticated or large enough yet for an ABL or a large line of credit. You don't have the sales yet for that because a lot of ABLs do have minimum revenue requirements. So that's kind of where I think Settle fits perfectly.
When it comes to cost too, we're nudged right there with much lower APRs compared to MCA and only a little bit higher compared to ABLs and lines of credit. what we honestly do is really provide a solution to founders, to CFOs who are just looking for a simple, meaningful solution to pay for inventory that makes sense for their business.
And so essentially you can kind of think of us, our founder Alec came from the company Affirm. You can kind of think of it as like a B2B buy now pay later for your inventory and ad spend. The fact that we even include ad spend shows you how like focused we are in helping eComm brands who are very focused on that as well. And the way we work is we finance your invoices to your vendors and then you pay us back later. What that allows us to do is provide you with better rates because some of our competitors, what they're doing is just advancing you money and charging you a premium for that. But we're taking a little bit more of a different approach when it comes to our risk. But what that does is allows us to provide value so that we can actually provide a cost for you that makes sense for your business and won't. I would say like...
compromise your margins too much compared to an MCA. And at the beginning of your business, that's super important to weigh that out when you're thinking about a debt solution, right? How does this actually impact my margins, my retained earnings, like Jon was talking about? So I would say if you are a business that is over MCAs, you don't want to deal with somebody taking a percentage of your sales. You don't want to deal with a daily, weekly kind of payback.
but you don't quite qualify for those larger kind of solutions like ABLs or larger lines of credit. Settle is the perfect solution for you. So I'm always happy to talk to somebody, even if Settle is not the right solution at the moment. Like I talk to founders all day about just debt in general, hence financing Fairy Godmother. I will have a conversation with you. Anybody on my team will have a conversation with you on how we can help. But last thing I wanted to say is we also rolled out our inventory management solution.
Jon Blair (50:17)
Yeah, I was gonna ask about that.
Melissa (50:18)
That also we're really looking to solve, because we understand the relationship between capital and inventory so much and how important that is to your business. But now we want to provide an additional tool to helping founders really get a good understanding of their inventory, how that's connected to AP, which we've talked about on different occasions. And we're really just looking to be a very CPG ECOM focused light ERP that really
is solving real problems for founders. so yeah, if that's something that you need to understand your land of COGS you need a one source of truth solution for your inventory, we're happy to also have that conversation as well. So yeah.
Jon Blair (51:03)
Yeah, I definitely recommend just checking it out because Settle can run your AP workflow, right? And you can just use it standalone for AP management as a solution, as an alternative to bill.com, right? But inside that, there is an IMS capabilities where you can actually purchase and track inventory at landed costs. And then if you need financing for purchasing inventory, you can do that all native in the platform as well. So you can manage your AP, your inventory and finance it all in the same place. So I highly recommend checking it out.
Melissa (51:31)
Boom.
purchasing cycle. Yeah. Yes.
Thank you, Jon.
That was beautiful. More to come, too. We're building more.
Jon Blair (51:43)
Yeah, yeah, I'm looking forward to it. so, I mean, we're gonna probably have to have another conversation on the show with you because we only got through, we didn't get through it all, but we got through a lot of really meaty stuff. And so, before we land the plane though, I always like to ask a personal question. So, in addition to being a fairy godmother on the side, what's another, what's a little known fact about Melissa that you think, people might find shocking or surprising.
Melissa (52:14)
Yeah,
I honestly, it's my go-to and it's so easy anytime I start a new company or I'm like meeting a new group of people. This always shocks folks, but I'm actually a triplet and so it kind of, yeah.
Jon Blair (52:25)
Wow, that's awesome.
Melissa (52:27)
It kind of comes with like a myriad of silly questions. Like, can read each other's minds and things like that. it's quite like the conversation booster because I got a lot of questions. I don't usually lead with it. we just did our our I don't even though I just brought it up right now. But like a lot of people, we just did our Settle offsite in Cedar Lakes. If you need somewhere to do a retreat, please go there. was phenomenal. But it a lot of people had no idea and they found out like after they've known me for like a year, like you know, or year and a half or however long it's been. They're like, wait, what? And I'm like, yeah, you know. But yeah, it's pretty wild. people are like, what's that like? And I'm like, I don't know. Like, what's it like being a single child or somebody with just like a sibling that's one year younger? You know, it's not that different, I guess. You know, but it's pretty wild. My sisters, yeah.
Jon Blair (53:11)
Yeah, yeah, for sure.
question is really for your parents.
What was that like? Not for you, right?
Melissa (53:16)
Right, I know, I know, totally.
Wild, wild, lots of love, but so much fun. yeah, was my sisters are my best friends. So we call each other womb mates. And yeah, so it's definitely a fun fact for sure. What about for you, Jon? What's I mean, does anybody ask you like what what's like a fun fact for you? Yes.
Jon Blair (53:30)
Hahaha!
Yeah, that's funny. I love having guests who actually like turn the tables on me. I mean, some
people know about this because I recently, I recently like, I guess announced this or like made it a part of my content. But 12 years ago, I was in a touring thrash metal band called Fates Demise. And I still write heavy metal music to this day. I'm actually working on a record, short one, four songs.
Melissa (53:58)
I love that.
Jon Blair (54:07)
almost done writing it and my hope, my goal is to launch it or to release it sometime in 2025. So when I'm not chasing around my three little kids and growing, Free to Grow and helping eComm Founders scale, I am writing heavy metal music and I thoroughly enjoy it.
Melissa (54:07)
That is so cool.
Amazing.
Ooh, full plate. I love that. You
know why I love that? Because I feel like sometimes folks in finance or accounting, and I get this bad rep that like, you're like right brain, da da da. But it's like everybody has a creative outlet, likely. They just sometimes don't know it. Sometimes it's as obvious as I am a musician, right? But like...
Jon Blair (54:36)
Totally.
Melissa (54:42)
Everybody has like the ability to be a creative and a logical person like in their trade maybe, but then they have like this amazing creative outlet. So I love that. Hopefully, you know, maybe when the kids get a little older, you can start maybe touring for that.
Jon Blair (54:47)
Agreed.
I have this dream that I'll somehow get a band together and we don't need to go on some really long tour, but even just like a week or something, I love playing music on stage live and so one of these days I will get a chance to do it and let my kids watch. Well, Melissa, this conversation was jam-packed full of...
Melissa (55:07)
Yeah, something. That sounds amazing. Yeah. I mean, yeah, that's the best. Yeah.
That sounds amazing. Awesome.
Good stuff.
Jon Blair (55:25)
really practical information about a topic, debt financing, that is front and center for every brand that I encounter. So I appreciate you coming on and dropping knowledge on some of these areas that quite frankly I don't think there's enough education in the marketplace about, so I appreciate your willingness to do that. Before we completely land the plane though, where can people find out more information about you and about Settle?
Melissa (55:43)
Yeah.
Yeah, you guys can find me on LinkedIn. Melissa Cafagna is my name on LinkedIn. And we'll make sure to link that so you guys can give me a follow. I love talking about CPG brands. I post about CPG brands all the time. Founders within the CPG world specifically, they're so inspirational to me. And Settle, www.settle.com. Do not settle for a lame capital solution, just kidding, all capital solution are great yeah, yeah, they are, they are. Okay, but Settle is the best, we're the best, I'm sorry. No, but yes, www.settle.com. You can also reach out to me on LinkedIn as well. You can slide in my DMs, I'm happy to just direct you in the right path, whatever you're interested in, yeah.
Jon Blair (56:21)
Yeah
Hahaha
Definitely reachout to Melissa if you have any questions about how Settle can help you guys with either AP inventory management and or inventory financing. don't forget if you want more helpful tips on scaling a profit focused DTC brand, consider following me, Jon Blair on LinkedIn. You'll see Melissa probably in some of the comments there. And if you're interested in learning more about how Free to Grow's DTC accountants and fractional CFOs can help your brand increase profit and cashflow as you scale, check us out at freetogrowcfo.com.
Jon Blair (57:10) And until next time, scale on. Thanks, Melissa.
Melissa (57:13) Bye. Thanks for having me, Jon.
