Business and entrepreneurship is an adventure full of ups and downs. There will be times where, as an entrepreneur, you will have to find funding solutions for your business. Jessica Bates discusses the world of finance, debt, and funding in today’s episode with Elliot Begoun. Jessica is a Director of Business Development at Dwight Funding. This company focuses on its mission to change the lending industry. Listen in as Jessica talks about how business owners can manage their finances as they scale.

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The Right Funding Solutions For Your Business With Jessica Bates

Joining me is my friend, Jessica Bates. I go to Jessica for all things debt financing. I do it for numerous reasons. She’s super cool and she is knowledgeable. She’s able to share that knowledge in a way that doesn’t seem nearly as frightening or fraught with all of the financial talk that many others interject in that conversation. Now more than at any other time before, understanding all the choices that you have before you as a founder to finance your business and growth is critical. That’s what we want to tackle. Nothing is off the table. The hard questions are totally cool. Jessica is going to give you the straight skinny, the good, the bad, and the ugly, the things that you have to be aware of. We’ll talk about ABL, factoring, PO, and venture debt. We’ll talk about anything else that we feel like. With that, I’m going to let Jessica introduce herself. Thanks so much for joining and doing this and being a part of it. Please tell us a little bit about you.

Thanks, Elliot, for having me and for that super warm intro. To introduce myself, my name is Jessica Bates. I’m with Dwight Funding. We provide working capital solutions specifically to growing consumer product brands. As such, we spend a lot of time in this space. We know this space very well. Elliot knows and I’m sure many of the people reading know that it’s a big industry, but a small community in this growth stage consumer space. I do my best to understand the various aspects of finance and debt so that I can do the best to be consultative to businesses that are growing and looking for some funding solution, whether it’s debt or equity. Even going further under the umbrella of debt, helping them find the right debt solution for their business as they scale. I’ll stop there initially and we’ll take it from there.

We’re going to jump into the fun stuff. Let me start with a simple question and it’s probably not simple. Why do people say that debt is less expensive in the long run than equity? We freak out when they have to start paying interest and paying principal.  

There are a number of reasons. In equity, you are giving away a piece of your business. What may seem like a small piece now, if milestones are hit and the business builds the way that the founder expects and wants it to. Whenever there is a liquidity event or an exit, that small percentage could end up being a very large percentage of your business down the road or when that liquidity event happens. That’s one reason. Another reason, I’m going to give you an example to explain this next reason. If the company needs to raise in this environment of COVID. Maybe they have felt or experienced some challenges during this pandemic period. If they will raise now, they may not get the valuation that they would have pre-COVID. They may not get the valuation that they could have down the road after the dust is a bit more settled. Depending on what the debt product is, a debt option can give you 2 to 12 months extra runway. Rather than taking a lower valuation earlier, if you know there are some milestones that can increase the company’s value in the very near term, debt could be an easy way to help you extend your cash runway, hit those milestones and get a larger valuation in that 3, 6, 12 months. It will ultimately help you keep a larger portion of your business. When a liquidity event happens or exit happens, what might seem like a small percentage now could turn into a big result for the founder when that happens.

Let me add to that, and I’m going to use oversimplified math in this for everybody. Let’s say you need $100,000 to buy you a few months to run some inventory and to get some things going. Your two choices are debt at a 12% interest rate or equity. If you choose equity and let’s say at the end of the run, that $100,000, you traded away exit the equivalent of 1% of your business. You’ve had a great run, a successful business, and you’re exiting for $100 million. That’s $100,000 worth of capital you brought into your business cost you roughly $1 million. If you had serviced the debt and pay the interest on it within that year, it would have cost you $12,000. That’s why. That’s a gross simplification of the math, but good enough for a show. Let’s talk a little bit more in terms of when is the right time for brands to start having this discussion? The people who are going to be reading this are at all stages. They’re going to be some that are pre-revenue and they’re going to be some that are now starting maybe series A, or maybe post series A. When do brands start thinking about debt? Not just debt through Dwight Funding but debt in general.

It’s important to start thinking about financing in general pre-revenue. If you start thinking about the various forms of financing and how you obtain that financing, it helps discipline the business finances, the business bookkeeping, and all that stuff on the way. You know you’re going to have to prepare to eventually show someone those books in order to get that capital. You should start thinking about it always. You should always try to think about, “If I had to get some capital now, would my books be in order? Would I be able to tell a good story about the business?” In terms of when they should start thinking about debt in general, it’s anytime that there’s a real cash need. Debt is not a one size fits all product, just like financing is. Let’s say under the financing umbrella, you can do equity or do debt. If there’s a growth capital need, you need dollars to spend on marketing to build your brand and headcount.

Those are the things that are going to return a long-term ROI on the business. Those are the things that you should be willing to give up a little bit more the business for. Think of equity for purposes like that. If there are more short-term funding needs, whether it’s because you need to purchase or you need help on production to fulfill a PO or a Purchase Order. If you have spent a bunch of money on inventory and you need some cash in the meantime to smooth out your cashflow in order to manage your operational spend or if you need to extend your runway a little bit. Those are times that debt is a good solution where you’re paying a little more interest. You’re paying interest upfront, but it’s a shorter-term need. Elliot, we were talking about understanding what your cash crunched need is and relying on advisors around you to figure out what the right product for that need is. Anytime there’s a short-term working capital funding need, debt is a good solution.

You made two critical points here that I want to re-emphasize. The first is your capital strategy should be as important as your revenue and growth strategy. As you build your go-to-market strategy, you need to be building your long-term capital strategy. If you don’t, it’s like building an amazing race car and then forgetting to think about the fuel that you need to put in it to get it down the track. As you build your go-to-market, know the capital that’s going to be necessary to fuel that growth. The second thing is the different use cases for debt versus equity. Equity should be a growth in building activities. It should be the things that have a force multiplier effect on the business. For every dollar of equity that you bring into the business, you should have at least a path for exit in revenue in the near term. It should be a creative revenue. Debt is to finance the working of the business, the working capital needs.

One of the things that I say often is that growth is the most voracious consumer of capital. The faster your growth is, the faster your trajectory is, the more pressure that puts on your cash needs. Many brands are seeing that firsthand. They’re having strong eCommerce growth and their sales in brick-and-mortar on their core items are huge, but they’re struggling because they did not foresee it from a cash perspective. They didn’t have that built into their business to absorb that type of incrementality when it comes to receivables and inventory needs. It’s important to understand all the levers and I’m glad you made that point. Let’s talk about the different types, shapes and sizes of debt that comes in. Let’s tackle first the one that’s probably least discussed as an option, which is venture debt. Can you explain a little bit about how venture debt works? We’ll work our way from there down some of the menu items on the debt item.

I think of venture debt as a quasi-equity debt solution. The reason I say that is because venture debt usually takes warrants from the business. There is an equity component to it. It’s a lot less than what a full price equity round will be, but it does still take some ownership in the business. Venture debt is a good solution for a business that has raised capital from a venture fund or a growth equity fund and wants to extend their runway. Think anywhere from 6 to 12 months, venture debt can be a good solution for that. It makes sense that a venture-debt group would want to take warrants in the business because they are taking a little bit of equity risk by lending to the business when the cash position is low and the company is not profitable and burning cash day-to-day.

They are underwriting the business very much relying upon who your equity providers are and the ability to raise again. They’re taking a bit more of equity risk. It’s a little bit riskier. The general structure of a venture debt product is in the form of a term one. You’ll get one lump sum upfront. It may not amortize for the year or the first six months, but you’ll be paying some interest on it or at a minimum accumulating interest on it. It’s something we’re thinking about whether or not that’s the right product. If it’s not that long-term need that you need to plug your losses, it is going towards that growth capital spend or gross spend that’s causing that burn in the business, but also allowing the business to grow quicker for a couple of reasons. One is if you are amortizing debt when the company is not cashflowing, you’re using what equity you have left to pay off your debt as a consideration. Further, as I mentioned, you’ll be giving away a piece of the business as well. It’s not going to be as much as a price round from an equity group, and this ultimately can help you push off a raise to hit some more milestones in hopes to get a larger evaluation 6 or 12 months on the road. It may very well be worth it for you, but those are some things that are worth considering when thinking about venture debt.

Jenny had a question about venture debt. “Are there typically any major revenue floors for it? Do you have to be at a certain size?”

Not necessarily. I have seen some, and quite frankly, I’ve seen this a bit more in tech than I have in food and beverage, and even thinking food tech. The reason that there may not be a huge revenue threshold is because it’s reliant on who invested in you and when. The reason I say I’ve seen it in tech is it’s a bit more likely for a tech company to get pre-revenue funding than it is for a food and beverage business. At least from a known fund that’s going to put a pretty substantial amount of money in there. It can be pre-revenue. With that said, that’s a little less likely in the food and beverage space. I would say it’s going to be after series A, sometimes even series B, but depending on who’s participating in that series A, series B. If you have a large name venture capital fund or growth fund behind you, it’s very likely that you could qualify for that venture debt.

This is where being a critical consumer is so key. This is where leaning into trusted advisors, attorneys, and people in this space, because there’s a lot of venture debt out there and not all venture debt is created equal. Be very clear in terms of what it is that you’re doing or agreeing to. We’ll get to some more of that going forward. The next funding financing mechanism. Let’s talk about factoring. That’s something that many brands try to do, factor their receivables. Maybe give those reading a bit of an explanation of the mechanics of that.

Factoring can be a good solution for an earlier brand that may not qualify yet in asset-based lending revolving line of credit. It’s available for businesses that would qualify for that as well, but may not be the product of choice at that stage. When I say a factor, that is the lending company, they’re your factor. A factoring line will purchase your invoices from you, invoice by invoice. When the company is first starting and maybe you get one big order and you fulfill that order, and then you have a big invoice for that one order. A factor could be a good way to get paid on that order when you sell the product first for 30, 60, or 90-day terms. There are a few considerations with factoring that are worth considering. Some pros, some cons. One of the benefits is getting paid quicker. The second one at that stage when it’s an earlier business, they do the collections for you. This can be positive and negative. A factor do so many collections that sometimes a collection approach may not always be as friendly.

That’s a matter of finding the right partner as well, but it’s important to know that there’s another layer between you and your customer because your customer essentially becomes their customer when you’re selling them your invoice. They’re going to be doing the collection efforts for you, which can sometimes be a little more aggressive than what you would have done yourself. Simultaneously, it tends to be a bit more expensive that what a revolving line of credit would be. There are levels of this. Some banks do factoring and they may not be all that expensive. There are some factors that will do a one-off invoice here or a couple of invoices there that are going to be a little more expensive just because there is a back office that’s doing all these collection efforts and keeping up with all the invoices and all that stuff. Also, they’re lending smaller amounts at a time. To get over internal cost hurdles, it tends to be a little more expensive.

Two things there too and like in all things around everything that you do as a founder, but particularly around the capital. Choosing your partner wisely that represents your core values is critical. The second thing is when you’re borrowing or when you’re using debt, you have to understand the cost of that debt to the debt issuer. When you take less debt, it’s more expensive per dollar of debt than when you take more debt. It’s the mechanisms. They still have all the same processing costs, all the same back of the house costs, all of those kinds of things, but they’re spreading that over fewer dollars. It’s no different than the difference when you do a production run and you run the minimum versus running a full run and the production plant. You’re going to have a lower cost per unit when you run at scale. It’s the same thing. I want to make those two points. One of the other things around factoring is if you use people who are in this space who know this, they’re going to understand the dilution of the average invoice better than you are. They’re going to be able to say, “This invoice you gave me that was for $3,000, you’re only going to collect $2,400 of it because of deductions and MCBs and so forth.” Understanding and having that conversation is key.

Elliot, to that point and to your point about finding the right partner, it’s incredibly important to work with a lender that understands the food and beverage space. Speaking of dilution, unless you’re in this space, you don’t understand it and you don’t expect it. You want a lender to expect that to happen and for it to happen that way versus a lender that doesn’t realize this is going to happen and sees that first payment come in that’s only 70% or 80% of what the invoice was, and then freak out. The last thing you want is your lender getting nervous.

That’s your job as a founder, you get nervous. Founders get nervous. Lenders shouldn’t.

It’s important to have a group that understands the nuances of the space you’re in.

Let’s talk about factoring’s close cousin and that is PO financing.

I like talking about PO financing or purchase order financing because I feel like it’s a little known secret, specifically for earlier stage brands. I talked to many companies all the time and it always amazes me when companies come to me for asset-based lending, which is lending on AR and lending on inventory, and the real need is actually purchased order lending. There is a difference because purchase order lending comes before the inventory happens and it comes before the AR happens.

Any time a business has a purchase order from a large customer, whether it’s a food and beverages distributor or an individual retailer, most of the retailers and all of the distributors now have great credit quality. A purchase order lender is going to see this purchase order from a UNFI or let’s say Whole Foods. Maybe Whole Foods is giving it to you direct. They’re going to say, “We’re happy to help you produce this. We will pay for your production.” Whole Foods will then pay them and they will pay the balance once whatever is owed to them is paid down. They’ll pay the balance back to the company, but it puts businesses in a position that they don’t have to say no to those big orders.

The last thing you want to do when you’re scaling is get an order from a UNFI, Kroger, or whatever and have to say no because you don’t have the cash to produce it. Purchase order lending is a good option for younger brands. As a brand begins to scale and they’re of the size that an asset-based lender might want to jump in and provide them a more fulsome product, even if they’re not a purchase order lender, if you have the right partner, they may step up and help here and there on purchase orders as well. It’s a good starting point when you get that first new order and you need help on the production side.

Another question here was what are the differences in percentage points on average between PO and invoice factoring?

Something to consider about purchase order lending is there’s an added level of risk. Bringing this back to like finance 101. The more risk there is, the larger return the investor or a lender is going to want to receive because of that risk that they’re taking. When you’re talking about purchase order lending, there’s an added level of production risk. What happens if they pay that co-packer or that co-man to do this production run and something goes wrong? The product doesn’t come out the way it was supposed to, and UNFI doesn’t accept that product. They’re out of that money. That’s going to be a bit more expensive. In terms of points, there’s such a large range between various lenders and their particular products. I will say getting purchase order lending, you should expect to pay a premium and quite frankly, taking on that risk, that lender probably rightfully should expect a little bit more return for that. Whereas lending on the invoice for a product that’s already been sold final sale to UNFI, they are going to pay because they already got their product. It might be less some discounts, some spoilage, some flooding, all that stuff, but they’re going to pay. It’s a little less risky for the lender. Therefore, they’re going to require less of a return.

One of the things that is important when you look at debt financing options is that it’s not always the lowest cost option that wins the day. It has to do a lot with not only the partnership and all the stuff that we’ve talked about, but also the flexibility and the ability to transact the business the way you want to. For example, PO financing gives you the money sooner because now you have that money in advance depending on your order lead time, maybe 3 to 4 weeks earlier than you would have if you did it only as invoice financing. You can use that to build your inventory or to finance some of that inventory. A lot of it has to do with the way you’re going to use money. That’s why it’s so key in general to have a real capital strategy, not just the typical, “I’m going to get on the hamster wheel and go out and raise capital.” Why am I raising capital? What am I using it for? How is it fueling my business? What gives me the most inherent flexibility and so forth?

To that point, opportunity costs. What if you do say no to that order? What are you losing on in the future? Are you losing the opportunity for a bigger purchase order going forward, or more doors, or an entire region, or a nationwide distribution? What are you losing if you have to say no to that? If you’re talking about a couple of points difference in a product, it’s likely immaterial the actual dollar amount that couple of points equates to, just to have that money a little bit earlier and not have to say no to that order that could lead to more orders.

Denise has a question here and that is, “Do they also take into consideration with PO lending if the PO might get canceled?”

If the PO gets canceled, they still have to get paid back. If they’ve already put the money into production, they still have to get paid back. First and foremost, they’re going to do their diligence on the front end to make sure this is a pretty solid purchase order. Even if it doesn’t come through that particular purchase, they are going to want to get paid back. It will have to be through future sales or if the funds are available in the company now through those, but they are going to want to get paid back.

Going back to factoring, here’s another question and that is addressing deductions. How do you address a deduction of UNFI with a factoring partner?

My group isn’t a factor. My group is in asset-based lenders. I’m switching a little bit, but I’ll explain how. We lend a percentage on a consolidated amount of AR. The way that we account for it is we account for that percentage on the company’s net AR. When we’re evaluating the business, we’re going to look back and say, “What is this company’s typical dilution?” If we’re giving them a percentage on the AR, it’s going to be net of that dilution. It is going to be similar with invoice-only lender. This is where it’s important to work with a company that understands the food and beverage space. If a factor says, “I am going to lend you 85% against your invoice,” and then they’re waiting to get payment, but they only receive 80% back because of 20% dilution, they’re going to freak out. They’re going to start knocking on your door for that additional 5% plus their fees. It’s going to be a hassle for you. You might get away with it once, but the reward won’t be worth the headache that it causes. It’s better to work with a group that understands that dilution is a fact of a growth-stage business in this space. Anticipate it and lend on a number that’s net of that dilution number.

Two things here. One is because it’s interesting that from a lender perspective, they use the word dilution, but from a brand and founder perspective, we tend to call it deductions. It’s the same thing. I want to make sure everyone’s clear on that. I agree. That’s why you want to work with a factor or with a lender in general that understands the space. In addition, I have known factors to go to their brands and saying, “Your dilution/deductions are way above the industry norm, and here are some best practices.” It becomes valuable assistance in helping to reduce and manage deductions because they have visibility if they’re in that space and they’re doing hundreds of companies that are selling to that same distributor in the same categories that have that benefit. Let’s get to asset-based lending and asset-based revolving credit. Let’s talk about that solution first in general, and then I want to get into a little bit more specifics on how it works and transacts. That would be very educational for those reading.

I would say that the best use case for an asset-based lending revolving line of credit is to smooth out your cashflows. Smooth out the cash in your bank account. We all know this is a capital-intensive business. You are constantly buying inventory. You’re constantly manufacturing. You are selling to distributors and retailers that aren’t going to pay for 30, 60, or 90 days. What do you do? How do you pay for your operations in the meantime? An asset-based lending revolving line of credit solves for that problem. There’s X percent that’s getting lent on your AR, and X percent that’s getting lent on what inventory you have on hand. What that prevents is let’s put it in the form of an inventory purchase. If you purchase $100,000 in inventory. That money is out the door and that inventory is now sitting in your warehouse waiting to get sold. You’re now $100,000 out on your bank account.

An asset-based lending line will say, “You have this inventory on hand. We’re going to give you a percentage of cash upfront for that inventory that you hold. That way, you can still manage your operations.” The same exact thing with the AR. You get a larger percentage on the AR. The reason being is that once you’ve already sold that inventory and you’re waiting to get paid, it’s a little less risky to lend on, so you can get a bigger percentage. When that inventory then converts into accounts receivable because it’s been sold, you still haven’t recovered that $100,000 that you spent on the inventory initially. You’re still waiting to get paid. An asset-based lending revolving line of credit can take you from that inventory all the way to when it turns into AR and supplement that cash that you’ve lost along the way so that your operational spend is never challenged. Your cash in the bank is smoothed out.

One of the things that I always tried to preach is the importance of understanding your cashflow at a detailed level. Doing the work yourself of at least a monthly if not weekly or daily cashflow. One of the things you’ll find if you do that with regularity is that there are going to be periods in any term or at any year where you’re going to have what I call cash cliffs. You’re going to have situations where you’re going to have an “Oh shit” moment and recognize, “I won’t have enough money in the bank here to float the business,” even if the business is doing well. One of the great purposes of having an asset-based lending revolving line of credit, you smooth out those cliffs. You don’t have those “Oh shit” moments. That is vital for a business and it’s vital for a good capital strategy. Let’s talk specifically how the mechanics of that work. Let’s say that I’m working with you, Jessica, and I’m onboarding. Tell me how it works soup to nuts so I understand the actual process.

Any non-bank asset-based lender, which is what Dwight Funding is, if you’re not getting that asset-based lending line from a bank, which for growth-stage business is tough. It also may not necessarily be the right solutions because it’s not as flexible as a non-bank lender would be. All of us non-bank lenders used what’s called a lockbox. There is an account in an asset-based lender’s name. The way that it works is that let’s say you have $100,000 of AR. The typical advance rate for AR against AR is 80% to 85%. More frequently than not, 85%. If you have $100,000 in AR and asset-based lender X is lending you 85%, we’re going to give you $85,000 upfront. As you wait to collect on those receivables. When those receivables are collected, they flow into asset-based lender Xs bank account, which is the lockbox. What happens then is that 85% of the $100,000 that was collected is used to paying your balance down to zero and the additional 15% flows through to your business.

That’s how it happens technically. In practice, the idea is that you then have sold another $100,000 in a product. You have an $85,000 balance. You’ve collected $100,000 in receivables, and you have another $100,000 in receivables or more that you can then borrow 85% on again. As long as you have the AR to support 85% or the $85,000 in borrowing, we can then take all the funds that were collected in that lockbox and flow them through to the business. The idea is that whatever AR you have or whatever inventory is being stored, you’re getting that cash upfront. As long as you have the asset level needed to cover whatever your advanced rate is, then you can maintain that balance. All the funds that flow into the lockbox, your flow right through to the company. As that $100,000 turns into $200,000, you can now borrow 85% of $200,000. It’s good for scaling brands because as top-line growth, your assets obviously grow as well. Your AR is to be larger. You’re going to need more inventory and you’re going to automatically have more availability because that 85% remains consistent, but your assets grow. The 85% number brings a larger dollar amount to the business for borrowing capabilities.

How often is this trued up? Is it truly transaction by transaction, month by month review? Do you look at it with your founders in their teams, quarterly, monthly? How do you assess that?

Most groups require that it’s done monthly. Most clients want it done weekly because that lockbox is collecting all the incoming receipts. For that lockbox to hold all those receipts until you free up those funds again and recalibrate, that’s a long time. Most of our clients want to do it weekly so that the funds flow more frequently from the lockbox to the business.

Not just for Dwight Funding but looking at ABL in general, the range in terms of come knocking on my door when you have what in these kinds of assets and receivables?

It’s going to vary depending on the asset-based lender you’re talking to. If it’s a bank asset-based lender, you’re going to want to be certainly more mature than when a non-bank lender would want. I would say you’re going to want to be north of $1 million in annual sales if not $2 million to $3 million in annual sales. An asset-based lender typically wants to see proof of concept. Also, they definitely want to see some history, proof of concept, which tends to be around $1 million to $2 million in annual sales range. They also want to see tightened up financials and tightened up books. Going back to what Elliot and I were saying about not quoting these thoughts and these good thoughts about getting financing on the back burner. Make sure you’re always keeping your finances top of mind and buttoned up because that will be a requirement.

I’m going to ask you one more question specifically on this, and then I want to switch to one other topic. Also, there’s another question here. How long do you typically have a relationship with one of your clients or one of your brands?

Asset-based lenders tend to have terms anywhere typically like 2 to 3 years, even from 1 to 3, but more frequently than not, 2 to 3. It depends on the asset-based lender. We tend to have relationships with our clients until 1 of 2 things happened. One is there’s an acquisition, which is awesome and a great success story and always fun to be a part of. Two, the business becomes such a steady-state that the flexibility is no longer needed. In which case, at that time, bank lending makes more sense because a lot of the non-bank lending benefits are the flexibility, less covenance, things like that. A covenant is a measurement of the business and there are various measurements.

Some will be better covenant which is hard to hit as a growing CPG brand. A bank might not make sense for that reason. Also, there’s regulation and a lot of lending parameters for a bank, whereas a non-bank lender, as the business is scaling, requires a little more flexibility and may want some out of the box solutions from their lender. A non-bank lender is a right solution. The time that the company has scaled and the company is at a steady-state. Their projections, they know they’re going to hit. They’re not worried about the EBITDA covenants. That could be a good time for bank lending where it’s less expensive, but you’re giving up the flexibility. Also, a success story. It depends on the business, depends on how early they start with us, how long they scale with us. Our clients are generally staying with us anywhere from 4 to 6 years or longer if they’d like to, but 1 of those 2 things are happening at some point along that road.

For so long enough that you guys developed a pretty meaningful relationship, it’s not a transactional one.

We are absolutely a relationship-based lender. We’re not a volume lender where we want to get as much money out as we can. We want to work with companies that we can be a part of the value add and a part of the growth story. That way, everybody around the table has a good experience.

I’ve got two more questions here in the Q&A and then I want to make sure we have time for an exploration of another topic. How does shelf life of inventory factor into inventory financing, PO financing, etc.?

It won’t factor into PO financing necessarily because they’re helping on the production end. The idea is that that’s going to immediately be sold. When you’re talking about an inventory advance, it matters a lot. The reason for that is an asset-based lender can get comfortable lending against your assets before a bank or something like that would, because there’s value in those assets. This is going to be a more good way of thinking about it, but in a worst-case scenario situation, how would that lender recover their principal if they needed to? If a lender is lending on inventory and that inventory has a short shelf life, and something happens with the business, they would want to go to your 3PL or go into your warehouse and recoup that inventory so they can sell it off in hopes to get their principal. The fear with a product that has a short shelf life or is perishable, they go to the warehouse, they go to the 3PL and it’s nearing its expiration date, if not past it. Maybe the product only lasted 3 or 4 days and that product no longer has any value for that lender to recover any funds or any principal. It matters a lot. For example, this is talking about Dwight. A milk product may be tougher to lend on than a snack product that has an eighteen-month shelf life.

You would either devalue the value of that inventory or lend on a lower percentage of it or charge a higher percentage fee or yes to all of the above. That’s how a lender would have to look at it because it’s increased risk. Another question here. Is ABL such as Dwight a good match for a firm with low sales, a good concept with much intellectual capital?

I’d have to dig in to understand what that intellectual capital is. If you’re talking about your IP in terms of brand value, the younger the business, the harder there is to establish value around that. That’s what I would say initially. There are groups that do that few and far in between, but it’s expensive and it has to be a bit more of a mature business.

I want to leave time for this, the watch-outs. The things that people have to understand what they’re agreeing to. That would include things like personal guarantees and validity guarantees. It would be signals that maybe what they’re being asked to do or getting themselves involved with could be predatory. What are some of the things that you would tell those reading? The earlier you are in your journey, the more at risk you are in terms of falling victim. It’s not even that. It’s even talking yourself into it. I heard from a founder who sold their house to finance their business. Those things are personal choices, but personal choices should be always informed choices. What would you counsel people?

I’m touching on something you mentioned when we were talking about venture debt. Not all venture debt groups are created equal. Sometimes there are milestones put into place in the form of covenants that are hefty milestones. It’s important to recognize that what makes a growing brand exciting and take-off has a lot to do with the entrepreneur and the entrepreneur mindset, believing in their business, their product, and their mission. When you are committing to a lender to hit certain milestones that seemed like they’re attainable maybe. It’s important to recognize that things happen. When you’re growing a business, things happen. Nobody had a crystal ball to COVID, and that happened. There were businesses that were affected by that by no fault of their own. I would say before committing to any forward-looking covenants that require certain revenue milestones, or even a milestone or improvements or anything like that, talk to the advisors and people around the table. Be wary of doing that at this stage. Covenants in general because they can be hindering and things happen. I am saying that from a place of somebody that looks at a lot of financials, talks to a lot of businesses, and looks at a lot of projections. I can say definitively that more times than not, projections aren’t hit. Be wary of that. Be wary of locking yourself into too much forward-looking.

We’ve touched on this many times, but I seriously cannot express it enough. Find the right partner. Having the right partner by your side, and any business owner would do the same when it comes to finding your advisor, choosing the equity group you work with. The same goes for debt. Find the group that is a fit for the company’s ethos, the executive team’s personalities, the vision going forward, and find the group that is going to be with you along the way. I mentioned before, being a part of the growth story, that’s going to do that and contribute to the business’ growth, both in terms of revenue, but also in terms of network, of the way you think about things. Find the right partner. I would add there when you are looking for debt or financing in general, one of the most important questions that you can ask is, how has this debt provider behaved when a company in their portfolio didn’t do well or hit some speed bump? They had some challenges that they faced that could have affected their loan or whatever at that particular period of time. Do your diligence because, to Elliot’s point, not all debt providers are created equal.

I’ll add to that a few things. First of all, every founder who is deeply passionate and believes fully in their project should have a pessimistic, cynical, contrarian best friend. Not that you necessarily want to hang out with that person all the time nor do you believe necessarily that person is always right. It’s beneficial to have somebody who is going to try to point out the what-ifs and make sure that you’re seeing things maybe through less rose-colored glasses. The other thing that I would tell you is that this is what I see founders do far too often. They get to the point of desperation and then they’re trying to make decisions. When your business is not in the throes of that moment of desperation, when you’re not standing by the precipice of a financial cliff, a good exercise to do is to write down your noes to establish your guardrails.

“I won’t sign a personal guarantee or I won’t be in debt beyond this.” What are your noes and have those so that when you do come to that precipice, which almost every business does at some point, you have that guardrail, that reminder of what you said and set out that you wouldn’t do? What you’re choosing to do in this space is hard. Even the best of partners can’t stop you and can’t slow down your passion. What you want to do is that if you happen to struggle or fail, I hate to use the word ‘fail’ because failure is inaction, not action. If your business doesn’t survive, what you don’t want it to do is follow you around like bad luggage for the rest of your life. You want to be able to take a deep breath and regroup and move forward. I’ll leave that as the parting thoughts.

Before we sign off, I said this at the onset and I’ll say it again. Jessica is truly one of the most generous people around financing with her time. She gives you no BS, straight-shooting answers. Half the people that I send her way to talk aren’t necessarily even ready or right for Dwight, but she always takes the time to talk with them, coach them, and give them good feedback. I’m going to put her on the spot here, but how do people reach you or find you if they want to learn more about you, more about Dwight Funding, or for any of those?

Thank you, Elliot. That was very kind. I’m happy to talk to anybody. Anything I can do to contribute Dwight in general. However, we can to contribute to the ecosystem, we’re happy to. Elliot has all my information. If anybody wants to reach out to him for it, they can. If you want to reach out on LinkedIn, feel free. I am happy to make time for a conversation. I like talking. I’m happy to help in any way that I can. Feel free to find me. Ask Elliot for my information.

Thanks, everyone, for joining. Our next episode is going to be another one of our pitch sprints. It’s super cool. We’re going to be joined by three brands. Amazi, Real Coco, and Fluid Cold Brew. We’re also going to have a pretty cool panel of investors. We’ll have Nick McCoy of Whipstitch Capital, and we’ll also have the team from Echo Capital Stephen, Sabrina, and Ben. What we’ll do is each brand will have five minutes to pitch and a little Q&A, but then the cool thing happens is you get to learn what happens in the room after the founders leave. What do investors say about the pitches they witnessed? What do they wish they heard or wish they didn’t hear? What do they feel like maybe the founders missed? The hope is that it’s a great educational opportunity, not only for the three brands pitching but for all of those who witnessed either through the show or come to the live event, that interaction and what investors are looking for. Hopefully, that helps tailor future pitches and future investor conversations. With that, Jessica, thanks so much.

Important Links

• Jessica Bates on LinkedIn

• Dwight Funding

• Whipstitch Capital

• Echo Capital

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