How is your finance stack?

We all love to talk about our tech or marketing stacks, but the financial side gets less attention.

Heck, you might not even know for sure what your finance stack is! 

My guest today is an eComm legend, Bill D'Alessandro. Bill is the founder and CEO of Elements Brands. He's built or acquired 8 brands and sold 7. 

Before his time in eComm, he spent 5 years in the investment banking and private equity world. 

Talking about ad creativity or the latest case studies on scaling with Facebook ads is more of a dopamine hit than talking about finance. BUT, knowing what levers to pull, what to do, and what NOT to do as it relates to your finance stack can instantly add $100s or thousands to your bank account. 

Here are the 4 components of your finance stack that Bill and I dive into today. Trust me, this interview is fast-paced, interesting and guaranteed to put more cash in your bank account.

1. Banking
2. Credit Cards
3. Working Capital
4. Debt

You don't need to be a CFO or a CPA to get value here. You just need the 80/20 of how to optimize your finances. Here's a look at what we cover in this episode:

• Why it's not always best to maximize assets and reduce liabilities; for example, accounts receivable are an asset, but they're also NOT cash in your bank.
• When it's "OK" to use Debt and when you shouldn't.
• What's essential and what's not when it comes to a bank?
• How 2 simple shifts in credit card usage can add $10s or $100s of thousands in your pocket…money you will NOT receive a 1099 for.
• Why working capital is the blood of your business. 
• A few simple tips for accounts payable - when you do this right, this is the cheapest form of "debt" you can use
• Why Merchant Cash Advances so commonly start a death spiral and what to do if you're in this trap.

Show Notes:

• Elements Brands
• Natural Dog Company
• Mercury
• Highbeam
• American Express Business Gold
• Capital One Spark Business Cash
• Ramp 
• SBA 7(a) Loan
• Amazon Lending with Marcus
• Melio 
• Plastiq
• Optimize Your Financial Stack with Bill D'Alessandro
• Bill D’Alessandro - Twitter 
• Acquisition Anonymous

Transcript:

Brett:

Hey, Brett Curry here. It's time for another Spicy Curry Hot Take. the part of the show when I get just a little bit spicy. Now this tip is for you and it's for me, but here's the deal. We've got to stop saying about important financing things. I've got an accountant for that, right? It's time to start optimizing our finance stack. It's a lot more interesting sometimes to talk about our tech stack or our marketing stack or new ad creative or a new way to scale on Facebook or on YouTube that feels like the juice that drives our business. But hey, we got to remember we're doing all of this to drive a financial outcome. And while you don't need to be a CPA and you should still use a CPA, and while you don't have to be a part-time, CFO, you do need to understand finance and you need to know what shifts you need to make because optimizing your finance stack is the difference between you making a lot of money or a little money or potentially going broke.

And all three of those scenarios can happen even if you're rapidly scaling and growing. So just a couple of things we talk about and I bring on my boy Bill D'Alessandro. He's a legend in the e-commerce space. He's acquired eight brands, sold, seven, been tremendously successful, used to be an investment banker and in the PE world. And so he knows this stuff and he explains this in an easy to understand way in a way that's kind of fun. And I think you'll get fired up about optimizing your finance stack. But here's things we talk about. We talk about bank account, we talk about credit cards, we talk about working capital, and we talk about debt. And just a few shifts, a few changes here can really unlock a lot more money that will go into your bank account and it can also help you avoid some tremendously painful pitfalls. So here's the deal. We've got to optimize our finance stack.

Well, hello and welcome to another edition of the e-Commerce Evolution podcast. I'm your host, Brett Curry, CEO of OMG Commerce. And today we are talking about optimizing your finance stack. This is not a topic that we really dive into a whole lot on the show, but I think it's extremely important because really none of the rest of the stuff matters that we talk about CRO and running great ads and great creatives and all the fun marketing stuff, consumer psychology, all that. None of it matters if you're not making money and if you're not being smart about the way your business operates. And so my guest, I go way back with my guests. We've known each other for years and years now. We've worked together OMG partnered with one of his brands. I've got to hear him speak on stage. We've shared stages before and this dude is just really, really smart when it comes to all things, but especially finance. And so my guest today is Mr. Bill D'Alessandro, CEO of Elements Brands. Bill, how you doing man? Welcome to the show and how's it going? I'm so

Bill:

Glad to here, Brett. I think it's been, would've been on the pod once before, but I think it's been a couple years.

Brett:

It's been a while. It's been at least once, possibly twice. This could be round three, but yet it has been a hot minute. But we still run into each other at you Darien stuff and Steve Chu's events in Miami, which is where I heard this presentation that we're about to kind of dissect a little bit on the pod today. But you've been busy, man. Lemme just read this bio here. Acquired eight brands, sold seven, borrowed 15 million, sold 125 million, and then prior to all that, spent five years in investment banking and private equity. That's a world I've gotten to know a little bit over the last couple of years for a few different reasons we've been investing and things like that. But yeah, man, what a fun path you've been on. And this has kind of spanned what the last 13 years or so

Bill:

Fun's one word for it. Yeah. Yeah, it's been

Brett:

Trial by fire, the ins and outs, the pain, the agony, the triumph of victory, all that. Well,

Bill:

Everyone listening is in e-commerce, so they know what I mean. Especially as we were recording this on Tuesday before Black Friday. Yeah, we

Brett:

Were recording the Tuesday before Black Friday. I was amazed. You were like, no, I got time. And I'm like, I got time. Let's do it.

Bill:

Let's do it. Yeah, man, we're locked and loaded. It's either going to fly or it ain't at this point.

Brett:

Absolutely. At this point, if you're still pulling stuff together, you're in trouble. Your plan's better been in place for a couple of months, likely now. Now we're just ready for game time.

Bill:

Yeah, so my journey has really been, I got an e-commerce in 2010. Before that I had worked in investment banking, private equity, have a finance degree. I was like your typical finance nerd, maybe not so typical because here I am and I got an e-commerce in 2010 and between 2010 and now 2023, the last 13 years, just kind of the summary is started one brand and then kind of came up with the idea of what is now called an e-commerce aggregator way back in 2010, which has

Brett:

Become kind of trendy. But when you started it, it was not trendy.

Bill:

No, I was, to my knowledge, I'm one of the first, if not the first, to kind of do this business model. We did our first act, I started the first brand in 2010, did our first acquisition in 2012, and then we did seven total acquisitions. So we had eight brands in the portfolio by 2018 just in time for kind of covid to hit in 2020, which was a good time to be an e-comm, right? So luckily,

Brett:

Yeah,

Bill:

Had bought kind of before all the aggregator money came into the space in 2018, 2019. So we kind of built the portfolio before that Covid happens, aggregator money comes in, all of the multiples explode. Everybody listening probably lived through this, right? Multiples for even terrible e-comm businesses were quite high in 20 20, 20 21. And at the same time, we had this one brand in our portfolio natural dog company that was doing really well. And so we made the decision in 2021 to sell all the other seven and to go all in on natural dogs. So we spent the back half of 2021 and the first half of 2022 liquidating the whole rest of the portfolio, which in retrospect has turned out to be a great decision because by mid 2022, the markets were kind of in shambles. And I think the now Raio filed for bankruptcy a week ago as we reported

Brett:

It. Yeah, it just happened. Yeah. Valuations are down, investments are drying up in a lot of cases. So you sold for time

Bill:

It. Yeah. So I don't think we top ticked it, but we definitely sold on the down slope, not at the bottom. Yes. So we were very glad to have done that. And so since 2022 have been focused 100% on growing natural dog company,

Brett:

Super exciting man and love watching you operate. Of course, love your investment mindset and love what you're doing in Natural Dog Company. We OMG partnered with you guys for a while. So we got an inside look at that brand, awesome product, awesome business. So keep crushing it there and I'm excited to see how that goes. Let's dive in. Let's dive into finance. And again, if this isn't right, then nothing else matters. If the fundamentals of the business are not sound, you will not be able to scale, you will not be able to get a good exit. It will all be for naught. And so I want to talk first about mindset. What are some of the mindset shifts that brand owners need to make as it relates to finance?

Bill:

So there's one big one, and I want to say this at the top. You owning a business and saying, oh, I'm not a finance guy.

It's like you owning an e-commerce business and saying, oh, I'm not a marketing guy. You don't get to say that, right? You are running a business, you don't get to abdicate the finance part. Finance and accounting is the language of business. It is required reading. It is required execution. You don't get to not do it. You don't get to go, oh, I have an accountant. The finance stuff is covered. You need to be savvy as the CEO about the levers and the metrics that move your business. And if you're not, you're going to have a bad time.

Brett:

It's so good. And I would kind of relate to that statement though, especially when I was early in my business, I didn't want to do accounting stuff. I like numbers, I like money, I like business, but I didn't want to get into the accounting stuff. But you quickly realized this is the life of the business. And if you can't speak the language you don't know when s of poor, you're going to get in trouble. It's like a professional athlete saying, I don't really get hung up on how the body works. I'm not really interested in health. Really, that's you are going to be shortchange, you're going to make mistakes if you don't get into some of those key things. And so love that. Yeah, let's get away from the, I have an accountant for that. You should have an accountant, right? For sure. But you need to think strategically about finance. You need to know what leverageable you need to optimize your finance stack. And so that's what we're going to kind of dive into here. Any other mindset shifts that you've noticed that are worth mentioning?

Bill:

And the other thing is it's not that hard just because you don't have an MBA. What we're going to try to do in this podcast is give you 30 minutes of the 80 20 places to start. You don't need to get an MBA. You need to understand enough to pilot your business and understand the output from your accountant. And that's what we're going to try to do here today.

Brett:

Yeah, no need to become a CPA or a managerial accountant. That's not the point. We need to understand the strategy behind finance what we're doing, and we want to make you more money. It's money in your pocket. It's not some of the other vanity metrics that we talk about. And so let's talk about some of the mistakes you see people make, bill, and this will probably set us up a little bit here as we get into optimizing the finance stack, but what mistakes are most common?

Bill:

Well, maybe even, let's just start, what the heck do I mean when I say optimize your finance stack, right? Let's do that. So what is that, right? It's very easy for us to think what's our digital marketing stack? Maybe it's Canva and it's Facebook ads and it's Shopify and it's Klaviyo, and you kind of like the tools that make this all work. When I think about the things that make the financial plumbing of your business work, it's basically four things. It's banking, it's credit cards, it's working capital and it's debt. These are kind of the four big buckets. So when we go through, let's talk about optimizing each of these four things to just get the plumbing working well, and they all talk to each other, they're all connected. Your bank, your credit card, your working capital and your debt, they're all connected. These are typically balance sheet type items. Income statement tells you how much money you made yesterday. Balance sheet tells you all of the assets and liabilities of your

Brett:

Business. And why is it important to understand the balance sheet? And I will admit, I've been a p and l guy for a long time, know how to read a p and l, love the p and l, but I think a lot of people just kind of avoid the balance sheet that's real, just accounting, nerdy stuff. But why is it important that we understand our balance sheet?

Bill:

The balance sheet is where all the money is made, and it does take a very simple thing, which is that if you're not paying attention to your balance sheet, you're not paying attention to your inventory level, you're not paying attention to how much inventory you have. You think about your income statement where, oh, I sold one. I sold something for 10 bucks. It cost me two bucks to make it. I made eight bucks. But that's not actually what happened because that two bucks is fake what's called accrual. It's a non-cash expense. You didn't actually buy that one unit. You bought 10,000 units three months ago and one just went out the door. So you actually took in the full $10 today, but you're going to have to buy another 10,000 units in a couple months. And if you are not aware of how much cash you have on the balance sheet, how much inventory you have on the balance sheet when you're going need to reorder, you can very easily go, oh, I'm growing really, really fast.

My income statement looks really, really good. But then suddenly you find yourself out of money and you can't buy more inventory. Raise your hand if you've had this experience in e-commerce. Everybody. Why is my income statement look great, but my bank balance is not going up. And it is generally because of a failure to understand and plan for changes in your balance. Sheet accounts, inventory is the big one, but accounts receivable, if you sell something to a retailer, you're going to recognize that 10 bucks of revenue. But instead of getting 10 bucks today like you would from a dotcom customer, you're going to get zero bucks today and then 60 days later you're going to get 10 bucks. So that accounts receivable is a use of cash also. So not understanding the balance sheet is a great way to go broke. It's a great way to need a merchant cash advance loan at the last minute, which is also a great way to go broke,

Brett:

Which we'll get into that a little bit when we talk about debt. That's not the method of debt that you want. And so I really like the fact that we're going to kind of break down the 80 20 of these areas. And so let's talk banking and credit cards first. So what advice would you give to someone? What do they need to understand to optimize the banking situation?

Bill:

So this is very easy. We'll just cut to the chase things that don't matter. National brand and number of branch locations, things that do matter, great software, no fees and interest rate. So I'll give you guys two choices for banking. They're both good for different reasons. mercury.com is fantastic, is a modern bank. It's built for digital businesses, great for SaaS, great for e-comm. They have no wire fees, no a CH fees, great software, great app. They have 5 million bucks of FDIC insurance because they spread your money around multiple different banks on the backend. You will really enjoy banking with Merck. They will also give you four and a half to 5% interest on your money, which means if you're sitting on a million bucks, then you are not getting 5% interest from Bank of America or whoever you're banking with. That's 50 grand a year of just free money.

You're leaving on the table by banking with Bank of America and not banking with one of these two banks. So use Mercury or a newer bank called High Beam. High Beam is super cool because they're, especially for e-comm brands. So the partnership with Shopify where you get your money same day, like when Shopify disperses it, instead of it crediting your account two or three days later, you get it same day. They also have a built in true interest line of credit, which is just, I love them for this Highly ethical people. It's not this merchant Cash advance charge you a fixed fee of 10% upfront, but which is really a 50% a PR with high beam when they tell you it's a 14% a PR or whatever. That's really what it's, and it's built in to the high beam banking product where you can just click it and borrow.

You can just transfer right over from your line of credit to your high Beam account. They also offer you 4% interest. They also have, I think two and a half million dollars of FDIC insurance newer than Mercury, but good software designed for e-comm, use one of these two. There's no fees. I think it's basically a toss up. I think Mercury, their software is a little nicer. High beam wins on the instant Shopify payouts and the built-in line of credit, but they both offer no fees. They both offer good interest. Pick one of those two and ditch Bank of America

Brett:

Reducing fees, increasing interest that we are earning. Ease of use the logo, the brand, doesn't matter. Brand's, locations. When was the last time you want to do a bank who caress? So think about banking in a different way. Let's talk credit cards and credit cards. I think this is probably an exciting area for some people, and it does seem to me, I don't hear as many merchants or other agency owners talking about banks as much as I do credit cards. I think there's a little more education here on optimizing for credit card points, but what's the 80 20 of credit cards?

Bill:

Okay, so 80 20 of credit cards. Of course you can read a zillion articles about this. Here is the 80 20. If you don't want to be like a major credit card points nerd, here's what you do. I assume if you're listening to this, you are an e-commerce. So the minimum viable e-commerce credit card stack is get an American Express business gold because it earns four x points or 4% a k, a 4% on all advertising spend up to $150,000 a year. That includes Facebook ads, that includes Google Ads, that includes Amazon ads. Also, if you're running Amazon ads, do not let Amazon debit your seller account for the ads. Choose the setting where they charge your credit card so you can get points or cashback. So get an Amex business gold. And the interesting thing about this is you can have more than one.

You can have up to 10 Amex Business Gold, which people don't know. The reason you need up to 10 is because the four X only applies on the first 150 KA year of spend. But if you get 10, and of course you rotate the spend through them, right? Every month you can earn four x on the first 1.5 million of spend every year. So four x on 1.5 million is 6 million Amex points, which will fly you around the world 20 times in first class suites, or you can convert it into cash. And 6 million credit card points is approximately 60 grand in cash.

Brett:

That's awesome. So Amex Business Gold, I do know a lot of business owners that use that. So that's the first piece of your credit card stack. What's next?

Bill:

So put ads on your MX Business Gold and then go get a Capital One Spark Business cash, which is 2% cash back on everything and put everything else on that. So this is your 80 20 ads on as many MX Business Gold as you can get. And everything else on a Capital One Spark business, you get 2% cashback. It also supports employee cards. So you can give your employees Spark cards as well. So Amex for ads, all types of ads, capital One, spark business for everything else, and employee cards, boom, you're done.

Brett:

And we used the Capital One Spark card for years and years. We just recently switched to ramp, which is essentially the same as actually started by some people that I think defected from Capital One if I understood correctly. But same concept, 2% cash back on everything. And man, that adds up, right? You're spending this money anyway. You have these expenses on a monthly basis anyway, load it up on a card, get that free. It's essentially free money, right? Free.

Bill:

I talked to a business owner this morning who was putting everything on debit cards. I spoke to him for 15 minutes total miss, and it made him a hundred grand. So hopefully someone is listening and just made a hundred grand.

Brett:

And I think sometimes we have aversions to credit cards, whatever, because of credit cards are bad from a consumer standpoint and all these things. But this is a tool. This is a tool that you should be using. And if you're not using it and using it, well then you are leaving money to the tune of tens of thousands, hundreds of thousands of dollars on the table every year. So optimize your credit cards. Awesome. Anything else on banking and credit cards?

Bill:

Nope. I mean you can optimize them to the hilt even a little bit more, but this is 98% good. Do these things and move on to other things.

Brett:

Do these things and you'll be happy. And so feel good about that. Let's talk working capital. Next. This is the next component of optimizing your finance stack. So talk about what is working capital and then how do we start to optimize?

Bill:

Okay, so what is working capital? This sounds very scary if you're not an accountant. Every business has working capital. My friend Brent Beshore describes working capital as the blood of the business. It is the money that you need to keep the business alive. What does that mean in practice? It means how much inventory do you have, how much accounts receivable do you have? Those are assets, right? Accounts receivables an asset. It's money that you are owed. Inventory is an asset. You paid money for it, right? It's worth money. Accounts payable is also working capital. So that is money you owe someone else. So here's the weird thing about working capital. You might think, well, assets are good, liabilities are bad. So inventory and accounts receivable are good, accounts payable is bad sort of. But the other way around is that the more your asset accounts go up, your inventory and your accounts receivable need less cash you have on your balance sheet because increases in asset accounts are uses of cash.

And an easy way to illustrate that is if I buy something from you and you give me net 60 terms that is a hundred bucks or whatever that you don't have, you have a hundred bucks of accounts receivable, but you don't have a hundred bucks of cash, and now someone else walks through the door and you sell them a hundred bucks of stuff, now you have 200 bucks of accounts receivable, right? And that's 200 bucks of cash you don't have. So the higher your accounts receivable goes, the less cash that's cash. That's not yet on your balance sheet. And the weird thing is by the time I pay you the a hundred bucks, someone else has come along who you've also given net 62. So it's basically, it's like a Python, right? Yes, the cash comes out the other end of the python, but you've probably made more sales in the meantime that have refilled the Python. So the perpetual, the cash that is in the Python is cash that you don't have. And yes, you can turn the accounts receivable into cash if you stop giving people, if you stop selling, but that's not what's going to happen, right? You've always got sales running through the accounts receivable pipeline. So it's always a use of cash. So the short answer there is don't give people terms, get cash upfront, which will improve the amount of cash you have in your bank account.

Brett:

And practically speaking, how do we go about doing that? Now, I run an agency, it's actually quite easy for us. We've done this from the beginning where we start a project, we're requiring cash upfront. We don't really do extended terms on stuff, so we're pretty good about that. But if I own an e-commerce company, how am I getting cash upfront and not allowing any net 15, 30, 60, whatever.

Bill:

Well, the beautiful part about e-comm is it's almost all a cash up upfront business. Yeah, exactly. Through Shopify. It gets harder when you start selling to retailers because they're always going to want net 30, net 60, net 90, et cetera. The way you prevent that, now if you're dealing with Walmart, they're going to get net 90 deal

Brett:

With it. They're going to get what they get

Bill:

For sure. But if you're dealing with Brett Curry's pet store in my case and Brett Curry's pet store says, I want net 30, your response should be, I'm sorry, we don't do that because first of all, you don't want to chase Brett Curry's pet store down for $400 when they don't pay. So what you will tell Brett Curry's pet store is we don't offer terms, but I would be glad to take your credit card. And you might go, well wait, but then I'll pay a credit card fee. Yes, you will, but you will not be chasing Brett Curry's pet store down for $400 because a lot of these small retailers will default. And what's your default rate? I bet it's about 3%. And then you also won't have to do all the collections, you won't have all the accounts receivable, and you'll probably, and you'll just pay the credit card fee instead and the credit card fee, you can then tell your customer, you can go, we'll take your credit card gladly, and that's functionally net 45 for you because you have some time until your statement closes and then you have 30 days to pay the statement.

So you've functionally gotten net 45, we'd be glad to take your credit card. So that's the best advice for keeping AR down,

Brett:

And I think explaining it that way makes all the difference. We're basically by accepting your credit card and we're taking the hit on the fees, we're giving you 45 day terms in effect and kind of explaining that. And that's often all anybody needs, and without a doubt eating that 3% fee, that's going to be your write-offs for delinquencies or whatever, but then getting cash on hand sooner, not chasing people down. It just makes a ton of sense. So reduce your accounts receivable. That is a good thing. Even though that is an asset, it means that cash is not in the bank.

Bill:

It means cash is higher. If you've reduced accounts receivable, cash is higher. So there are tiers of assets. I like having accounts receivable. I really like having cash. That's better. Let's talk about the liability side. So accounts payable, a lot of people are very afraid of debt accounts payable though the more you owe other people, that's just money. You didn't have to pay them yet. So that's money that stayed in your business. So more accounts receivable, as long as you're on time, more accounts payable is better because you have borrowed money from your suppliers functionally and you have borrowed it at 0% interest because your suppliers do not charge you interest on the net 30 or net 60 that they give you. What is very, very hard when you're running an e-comm business is every supplier will start a young e-comm business on the worst terms ever, which are 50% when you place the order and 50% when it ships, which is devastating because you've got to lay out half the order three months before you get it, and then you've got to lay out the other half of the order before you get it, and then you've got to try to sell it and turn it into cash.

If you can move from half down, half at ship, even to all at ship, that's great. If you can then move from all at ship to half at ship, half net 30, then maybe all net 30, then maybe half net 30, half net 60 every six to 12 months, go back to your supplier and stretch them. This will keep more cash in your business.

Brett:

And that's the key, right? You're probably going to have to start at whatever terms you're given. Maybe you can negotiate at the outset, but be on time on your payments, and then every six to 12 months you're going back and you're asking for more, for more favorable terms. Because yeah, this is cash in your business and this is the cheapest debt that you could have.

Bill:

Because a lot of times people get into trouble on debt where they need to buy inventory, and so they got to go borrow from a bank or something, just borrow from your supplier, say, Hey, supplier, can I pay you later? That's what accounts payable is. It's 0% loans from your supplier. Now don't be late on them because that's a great way to wreck your whole business because they own you, they're your supplier, they'll stop shipping you, but it's free financing. You should really take advantage of it.

Brett:

And what's been your experience there, bill? Have you found that most suppliers are willing to work with you? And if so, how long does that take and what's been your experience?

Bill:

Yeah, so I think by the time you've been in business with a supplier for a year, you should be able to have a reasonable conversation about net 30. Or even a lot of times they'll want something down because they have to take risk to buy the raw materials. So maybe they'll say 30% down, 70%, net 30 or something like that. So basically this is you're paying the 30% upfront, so if you bail on them, at least they're not out the raw materials and then they're trusting you. This 30% is trust. They're basically going to take all their profit on trust net 30. So getting to that is pretty good. I have found it is a reach to get beyond net 30 with most suppliers. If you have been with someone for a very long time, you may be able to push 'em into net 60. Net 60 is about the best you're going to get. But if you can get net 30 even to a hundred percent net 30, that is a big win.

Brett:

No doubt, no doubt. So we want to keep accounts receivable low, as low as possible. We want to try to keep accounts payable a little higher as long as you're paying on time. What else do we need to be thinking about then as it pertains to working capital?

Bill:

So I mean that's the thing that will get you is your inventory, right? A growing e-commerce business sucks cash, right? Because will all that time happen is a business owner will have half a million bucks in their bank account at the beginning of the year. They'll double year over year, right? They'll crush it and they'll go, my income statement says I made a million dollars this year. Why is there still half a million dollars in my bank account? And the reason for that is there is an incremental million dollars on the shelf at your three pl, that's what happened. You're carrying more inventory because if you have to carry, say 20% of revenue as inventory, well if revenue doubles, the dollar value of 20% of revenue is now double as well. So that was more inventory that you had to hold. And so that's where all of your cash is going. So the key challenge in growing an e-commerce business is trying to finance the growth in your asset accounts, the inventory and the accounts receivable, because as you get bigger, those accounts usually get bigger too. So having either generating enough free cashflow or bringing enough external debt and equity capital into the business to finance the growth in your asset accounts is kind of the key balancing act.

Brett:

Awesome. So that's probably a good transition then to start talking about debt because we're going to use debt often, right? To finance inventory. And I guess one quick note on debt, because again, a lot of times we hear debt as a negative and it's a dirty word when it comes to your personal finances and stuff, but debt is often key to most businesses, and the right debt is going to be the cheapest partner you ever have in business and things like that. When is it okay? When is it a good time to use debt in your business and when is it not a good time to use debt in your business?

Bill:

So let's, the thing about good and bad debt, everybody kind of knows, oh, a mortgage is good debt, but oh, a car loan or credit card debt is bad debt. Well, why is that? A mortgage loan is good debt because it's associated with an asset account. The asset being the home credit card debt is bad debt because it's not associated with an asset, it is associated with expenses. You had too many expenses and so you ran up credit card debt, right? Functionally the same principle applies in a business. Good debt is usually attached to an asset inventory, accounts receivable, right? Bad debt is usually attached to a loss on the income statement. So the time that it is okay to use debt is to time shift cashflow. So what do I mean by time shifting? Cashflow? I have to lay out cash for inventory now, but I know that it's going to come back in exactly three months.

That's a time shift. I have an outlay now and an inflow in three months. I just need to bridge that gap. That's what debt is for. What debt is not for is to fix a business model problem. Lemme describe a business model problem. I never have enough cash to buy inventory ever. I would say that your margins are too low. Your business is not generating enough cash to pay for its own inventory. Now, if you're growing six x year over year, your margins, you can't have that good margins to pay for that growth in inventory. But if you're growing less than 50% a year and you can't pay for inventory out of cashflow, you have a business model problem, not a time shifting problem.

Brett:

Got it. So you're growing less than 50% a year and you're not able to pay for inventory, then likely your margins are not

Bill:

Right. Your margins are probably too low. Rule of thumb, if you're growing more than 50% a year, it's possible that your margins are fine and you still are going to need some debt capital to pay for your inventory growing so

Brett:

Fast. Yeah, makes sense. Makes sense. So what are your favorite types of debt? How are we optimizing our debt element of the finance stack?

Bill:

So maybe let's work from bottom to top. So we already talked about accounts payable terms with your vendors. That's the best debt there is. It's free, it's the best. So that's the first place you should look to try to borrow is try to borrow from your vendors. And the way you borrow is by paying them later, which is functionally the same as borrowing. The next best thing would be an SBA seven A loan. The SBA program that we have in the United States here is pretty unique globally. It will be personally guaranteed debt, but it's going to be, I think they're running about 10% interest right now on an SBA loan. So it's about five points above treasuries. It's a 10 year loan, which means the pay down of the principle is very, very slow. So you can cover the payments very easily because there's not a lot of principle in each payment because it's spread over 10 years. So an SBA loan is some of the best debt that you will ever get. The only downsides, there's two of 'em. One, the personal guarantee two is the freaking paperwork. It's just going to take you three months to put it in place. But you can get an SBA seven, a line of credit at any major bank. Any bank will do SBA and you'll be able to draw on that at 10%. So

Brett:

Yeah, I was just looking at this recently for $1.25 million SBA loan, monthly payments are going to be like 16 K, 16 to 18 K, right when you factor in interest and stuff. And so that's pretty easy to absorb. And so yeah, it's good financing, but that personal guarantee, you better be sure, but they're always trade-offs. Okay, so we got accounts payable, free debt, SBA pretty low interest debt, reasonable, pretty

Bill:

Reasonable, a little bit more expensive than SBI probably in the low teens right now will be like a standard line of credit from any of your local banks or credit unions, high beam, their debt product. I would put in this bucket a standard line of credit where it's going to charge you true interest based on the money you have outstanding. If you borrow a whole bunch of money today, pay it all back tomorrow, you'll pay only one day of interest. So you won't pay 15% on that money. You'll pay 15% divided by 365 days is some tiny fraction of a fraction percent, right? So you borrow a million bucks at 15%, you pay it back tomorrow, you'll pay them back like 1,000,100 bucks from small amount of interest. We're going to get into different types of debt where it doesn't work that way in the future. But then I would look at a local banker, credit union line of credit. I would look at High Beam or on Amazon, they are partnered with a lender called Marcus. And so if you qualify for an Amazon Marcus loan, this is a good kind of Amazon loan with lower true interest. So that's the line of credit. And

Brett:

So with the line of credit then what are you trying to optimize? Are you trying to pay that off in 30 or 60 days? I know it probably depends on the way the interest is structured,

Bill:

But yeah, back to time shifting. So a line of credit is basically a big credit card you can draw on and pay it back whenever you want. It has a limit just like a credit card. So when you're time shifting cashflow, you say, okay, I need to draw a hundred thousand dollars on my line of credit based on the sales of the inventory, the asset that I'm using this a hundred thousand dollars to buy, I think it will sell through in three months and then I will be able to pay it down. They're not going to make you pay it down. They will let you keep revolving it to a point. But you as a business owner should have the discipline to say, I'm drawing a hundred grand now. I'm going to sell through this inventory in three to four months. In three to four months, this is going to be paid to zero with the cash that comes through the business and now that's it. Now that line of credit is a super flexible tool for you. That's great. Right Now you've time shifted that cashflow, but what you don't want is at the end of three to four months, you've only paid down half of it and you don't have any more cash. Now you see that you have a business model problem, your margins are not good enough.

Brett:

Totally makes sense. So line of credit, what's next?

Bill:

A credit card, believe it or not, and I haven't even gotten to the worst thing in the world, which the merchant cash advance even better than that is a credit card. Just use your Capital One spark or whatever it is and use a service called lio or plastic, which will basically charge you a 3% fee and put it on your credit card. Your typical business credit card is going to be like 24% interest or something. If you revolve a balance and everybody gas at home revolve a balance on your credit card, yes, it's expensive, it's 24%, it's not great. This is danger will Robinson don't do this a lot, but it's 24, it's roughly 20 low to mid 20% money, something on your credit card, which brings us to the horseman of the apocalypse of debt, which is the merchant cash advance loan, which is the worst type of debt that is out there.

It should be your absolute last resort because when most people get these, the next thing they do is go bankrupt. In my experience, especially in 2023, I have seen so many people crushed by these go by names like way flyer eight, fig Clearco, Shopify Capital, Stripe Capital, all of these ones that they pitch themselves this way, pay only a 9% fixed fee and pay back 12% of sales until it's all paid back. I have a calculator. If you go to my website, bill da.com/debt, I have a very in-depth explainer of why that 9% fee on the front end actually pencils out to

Brett:

Usually because you're like, wait, that's way better than 24% interest on my credit card

Bill:

Because it's not interest, it's a fee. There's a very specific reason. They call it a fee. The actually pencils out to between 40 and 70% true interest. Double your credit card, dude. It's double your credit card as fault. And when you think about it, if someone will loan you a hundred grand knowing almost nothing about you, of course the terms are going to be terrible. A lot of people are going to default on them. So they need to charge you enough interest to cover for all the people that are going to default on them. And that there is a very high default rate on all these loans, the Shopify capitals, because they don't really underwrite. You press a button, get a hundred grand tomorrow versus you get a hundred grand SBA loan, they're going to background check you. I mean they're going to look at three years your business financials, they're going to give you a Proctology exam, right? And because they're going to de-risk it, they can charge you less because they have a lower default rate. Now of course, it's going to take three months, but the merchant cash advance ones are brutal. It's a treadmill. I see people take one and then they've got to take another one to pay off the first one. And I've seen people buried under three and four of 'em, and each one's taking 17% of sales, they're losing 60%, 70% of their cashflow every day, just straight to debt service, and they're bankrupt and they lose their business,

Brett:

Then you've got no way. You got no way to crawl out of that, right? Increasing sales doesn't fix that. You can only increase margins to a certain degree. That's just a death spiral.

Bill:

It's a death spiral. Be very, very, very careful with those loans. And the last thing I'll say is if you are buried, if you're listening and you're buried under those loans, you can negotiate, just go to them and say, I know I owe you a hundred grand, but how about 20 grand? And we go, our separate ways you can negotiate for a payment holiday. I've helped people go to all these guys and take 50% haircuts and get 'em out of their life. Like negotiate. Just don't let them crush. If you're really screwed, they will work with you. It's not going to be fun. They will make you feel like a terrible person

Brett:

Because all their math is built around default rates. All their math is built around people defaulting. And so if you come to them with not a default, but something less than what they're going to get, then they'll probably take it.

Bill:

Yes, that is baked into their model. You don't have to feel like a bad person, like some fraction of people not paying them back is in their model.

Brett:

Yeah, totally makes sense. Bill, this has been awesome. I'm like inspired and motivated and I started really enjoying the balance sheet a couple of years ago, partially thanks to you. And so if people want to dive into this, you kind of mentioned your website, but where can they learn more from you? How can they follow you? I think you host a podcast now as

Bill:

Well. Yeah. So if you like this content, I do a lot of it on Twitter at bill DA B-I-L-L-D-A. You can also go to my website, bill da.com. If you do bill da.com/debt, I'll expand a lot on the topics that we talked about. And there's a free calculator for how to calculate a true interest rate on a merchant cash advance loan on there. And then if you want to listen to my voice more, I have a podcast called Acquisitions Anonymous, where we break down businesses that are for sale twice a week. Myself, Michael Glee, mill Snell and Heather Anderson publish twice, two businesses for sale each week. And we kind of break 'em down what questions we would ask if we were going to buy 'em.

Brett:

Super great resource. So if you're looking to buy businesses, you're planning on selling a business, which probably every entrepreneur is going to be doing one or both of those activities at some point in time, this will get you in the mind of buyers and sellers. So check out that podcast as well. Bill's been a ton of fun, man. Thank you so much for taking the time and we'll have to do this again and then not wait two or three years or whatever it's been.

Bill:

Thanks for having me, Brett. Good seeing you.

Brett:

Awesome. Absolutely. Bill D Sand, ladies and gentlemen. And hey, if you enjoyed this content, we'd love to hear about that. We'd love your review on iTunes. Share this content to somebody that you know is going to need it. And hey, I'm getting pretty active on the socials now, so follow me on LinkedIn and Instagram and elsewhere. And with that, until next time, thank you for listening.