How to Financially Structure Your Ecommerce Business With Matt Putra

Guillaume: Hello everyone. Guillaume Le Tual here, host of the Ecommerce Wizards Podcast where I feature leaders in e-commerce and business. If you’re an e-commerce store owner or if you’re involved in the finances of an e-commerce store, this episode is for you. Today’s guest Matt is a CFO, Chief Financial Officer specialized in e-commerce. So he has all kinds of techniques, optimization tricks that he can teach you to improve your company’s finance to make the entrepreneur more wealthy, more successful and just make the situation more pleasant to be in by optimizing cash flow, cash conversion cycles, by improving how we structure our financial deals, and so on. This is a very interesting episode if you’re in the finance or entrepreneurship space for an e-commerce store.

Today’s guest is Matt Putra. He’s the founder and a Fractional CFO of EightX CZ. So he’s a Chief Financial Officer for hire that you can have working with your company part time to improve your company’s situation. So today we have a very interesting topic, Financing Structure for Ecommerce Store Owners. So if you’re looking to improve the finances of the company, learn some techniques from the ideal structure, and so on, this episode is for you. So Matt, thanks for being here today.

Matt: Thanks for having me.

Guillaume: Well, my pleasure. So you’re an expert in e-commerce and you’re a CFO, an expert in finance and e-commerce. Tell us a little bit about yourself very briefly and then we jump into the main topic.

Matt: I was the CFO for a number of years for a private equity group, we did about $500 million in projects and that’s where I learned obviously to run finance, audit tax and everything about planning. Now we work with 20 clients around the world, US, UK, Canada, Austria, Australia, and we help them run and scale their businesses with more cash and less stress.

Guillaume: Pretty awesome. I like that. Great value proposition right there. Alright, so for our main topic, Ideal Financial Structure For E-commerce Store Owner, I’ll let you lead.

Matt: When you think of financing your e-commerce business, there’s so many options; Shopify, Clearco, Wayflyer. What is the best way to put all these things together? What’s the best way to manage risk to have better cash flow and just to have the capital that you need available? So I want to cover a few things. Most of you know you’re going to have inventory, you might have accounts receivable, you might have prepaid expenses, and then you have your accounts payable, you have credit cards, you have wages payable, sales tax payable. So when you take those assets, inventory AR, you deduct those liabilities and the credit cards, that number is called your working capital. Your working capital, you’ll find that it has a relatively stable balance over the course of time. For a company doing let’s say $5 million a year your working capital ideally would be around $500,000 to $700,000 out every month. It’s going to be in and around that number fluctuating a little bit.

Now, the way you finance that, is what I like you to do, is to finance about 80% of that number, the base number, the average over a 12 month time period. Finance 80% of that number with a term loan. Now, why? You could finance that with Shopify capital or Clearco. But the trouble is that when you do that you have to pay those back so quickly that you’re sucking cash out of the business that you could otherwise put back into growth. And what you’re trying to do is match the timeframe of the loan with the timeframe of the asset that you’re using it for. So if I look at your working capital, current assets minus current liabilities, because it’s a stable number, what I want you to do is get a long term loan, you don’t want to pay the loan back in six months because that number stays on your balance sheet all year round. So the best case is to get a three to five year loan for 80% of that working capital balance. You’ll have very low payments, you’ll have a good chunk of money coming in the door and the interest rates are quite good. Now what you give up, of course, are personal guarantees and some of those types of things. But when your business has been doing seven figures a few years in a row these kinds of loans are risky although all loans are at risk but they’re not that risky, your businesses are not going to just dry up overnight for most people anyway.

So that’s the ideal, to finance the working capital which we call the working capital base. Finance about 80% of that as the term loan and the balance 20% should be funded by operations. What if your credit score isn’t good or you had losses last year or things of that nature, what can you do? We’ll still go and look for a term loan. One great person in this space is called Seller’s Funding, they will give you 12 to 18 month term loans. Now, it’s not as long as you’d like but it’s still a longer term loan. And the reason I want a longer term loan is just to manage the payment outflow. If you were to take your working capital base and finance that with Shopify you can imagine what having to pay back 500 grand in six months feels like. It’s really not nice. If you finance it with Sellers Funding you pay $500k back over 18 months which is infinitely better for cash flow, which means you’re creating a whole bunch of extra cash that you can put back into the growth of your company instead of just paying off the lender. Now, that’s your working capital base. Okay, option one is a five year term. Option two, is somebody like Sellers Funding who can do 18 months or so.

Now, what about the seasonal spikes in your assets? A lot of us need to pay for inventory six months at a time. So you’ll have a big spike and then you’ll start to draw it down as you normalize. How do we finance the spikes? All those are great opportunities to use Shopify, Clearco, Wayflyer, and PayPal Capital which is actually one of the really great ones. If PayPal Capital offers a new account, take that one. It has a very low interest rate and great payment terms compared to some of those other ones. But because the spikes only last for a short time you can match them with a shorter term financing. So if you have a massive inventory buy four months of inventory, it’s coming on the boat, you can grab Wayflyer and you’ll pay Wayflyer back over six months but by the time that six months is done you will have also gone back to your normalized working capital base. So you see how I’m matching the timeline of my need with the timeline of my capital. And in that way, you have your longer term loan, you have a small Wayflyer piece, or your Clearco or Shopify, or whatever, and you’re matching the timelines with the timeline of the debt. When you do that you optimize your risk as well. Here’s why. If you finance your whole working capital base with Shopify, let’s say, just to pay the whole thing back in six months, you haven’t sold all the inventory by the end of six months. So what does it mean? You’re sucking money out of growth, you’re sucking money that you could otherwise hire more help.

Guillaume: And out of that six months you might actually have three months of inventory on the water before they arrive.

Matt: Exactly. So you’re paying stuff down when you’re not even selling them. You’re taking money out of R&D, CRO, SEO, stuff that Guillaume could do with design. You’re taking money out of core growth functions of the business when you don’t match the timeframes. Why is it at risk? Well, when you suck money out of growth, you haven’t sold it? Well, if you can’t keep growing because you don’t have the money, what does that do to your business? I’ve seen businesses get into a cycle where they have to keep pulling money out of growth and their new customers drop and their repeat customers, you’re not filling the repeat customer bucket as fast as it’s churning. So it’s a slow kind of downward movement. So one of my first things that I do with any company is review their financing structure and the first thing that I want to do is match the timeline of the working capital with the timeline of the financing and it just unlocks cash, unlocks growth. The other thing is just qualitative. Six months pay back is so stressful, you take the money and you’re like, ‘I have to reserve all of it because I have to pay it all back in six months’. So you don’t really end up using it properly and it’s just hard to sleep when you know the clock is ticking.

What if you use Shopify for the short term bump? It’s fine, you’re just using it for a short time. Pay it off, it’s fine, you’ve already sold a bunch of inventory and it works out. Then you have like very large spikes sometimes. Those ones you can use any of these lenders; you can use your credit card, sometimes you can use your line of credit, you can use Clearco. Let’s say you have to pay a 30% deposit for something coming from across the ocean and then there’s a 70% payment before they ship. That’s a very large spike so that’s a really great one to use Shopify or Clearco because you’re going to pay real and it’s going to be here in a month, you’re going to start selling it and you’re going to start paying at the same time. So that’s a good one. Another great option for folks that have a hard time accessing credit is Kickfurther for those of us in the United States. Kickfurther have a wonderful way that they structure their financing in which the interest rates are high but you get a piece of credit that you don’t start paying until your stuff lands in your warehouse or 3PL. That’s when you kick in the payments. So their structure is really great, it’s expensive but the payment terms are really fantastic.

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Guillaume: Okay, and you mentioned the use of a line of credit, any recommendations for e-commerce merchants around that?

Matt: Everybody should have a line of credits. Line of credits, when I said with the basis, the term loan and the bumps, you can use Shopify for it. I mean, if you have a line of credit you can use the line of credit for the bumps. Here’s why. When you use a line of credit we all know you can pay for the 100 Grand to manage that bump and you don’t actually have to pay it all back until you sell what came in the bump, basically. So that’s actually a better solution than what I said before. One thing for people to know is that most banks want you to have large lines of credits and lower term loans, there’s a very specific reason for that. If you have a line of credit with a bank and they notice there’s a problem in the business with the economy, they can begin to restrict your use of the line of credit. If they give you a term loan, you have the money and as long as you don’t violate the terms of your agreement they can’t do anything about it. But if it’s a line of credit and, let’s say, for some reason your business has a loss or the economy has a problem, the bank can restrict your line of credit. And let’s say you had a 400 grand line and you made a loss they could say, okay, you do not have access to this anymore, we’re going to turn this into a term loan and then they take away that liquidity. So when your bank suggests financing your whole line of credit with a term loan, hell no, I want this much in the term loan. Or as they say, if your bank decides to finance it off on line of credit, tell them no. Sorry, I said it the wrong way. So don’t do everything with a line of credit. The banks do it because they make more money and they can restrict your access to funds. So don’t do it.

Guillaume: Yeah, line of credit is sort of a blessing to grow the company because sometimes you need that. It allows you to smoothen the growth, but like you said, it is a risk to manage because they can cut it any time. It’s not money in your pocket, they could revoke or reduce the amount that you have any time, like, ‘We’re cutting half a million out of it’, and you will be like, ‘Oh!

Matt: Exactly. It’s called the demand loan for that reason, at any time and for almost any reason the bank can just restrict it. It’s called the demand loan. Most banks don’t do this but technically they’re allowed to demand it back.

Guillaume: Yeah, you also have to check the terms of your loan, including the 3-5 years loan if they can recall it or not and if there’s a bank that did that before, it’s not like it’s going to be advertised on the internet, but sometimes you can sort of know. There were a few commercial banks in the US and Canada that have that dark past. If you do your research on this, I won’t say names but I’ll say the name of one that does not do that, it’s very good. In Canada, the BDC, the Development Bank of Canada, never calls back loans. They are there to support you. They are a tiny bit higher but not that much, it’s a point or two. But they’re there for you and they’re not going to ever put your business in trouble by calling it back.

Matt: Exactly. And in fact, you’ll find that a lot of the big banks will work with the BDC for Canada or SBA for the US. When a big bank has a client with trouble, sometimes they’ll ask BDC to take over the loan, and you’ll just move over to BDC. Just because BDC knows how to help people through that stuff.

Guillaume: I don’t know about that but I know they often share the loan. If BDC comes in then the banker says, ‘Okay, I’ll take half’, because they don’t want more than half of the risk but they do want to lend you money because they make money. So they need customers just like you do. You need customers and they just happen to lend money through funding customers. Very good info.

Matt: Thank you. I follow my own advice, too. Just this year we were all looking at 2023 like this might be a tough year. And things weren’t tough but before things got tough I went to my bank and said, ‘Hey, can I have a term loan for this amount of money for our own working capital, for our own some of our growth initiatives?’ So I have a term loan, I have a line of credit, and I have some credit cards. I’ve laid them all in the amounts that I think are appropriate for myself. And the most important part about that was, I did it long before I needed any money and what I want to say to the listeners is that if you don’t need money today, great. This is when you should go get some money.

Guillaume: Absolutely, because you have to show strong financial posture and that you’re a low risk person or business that can be lent. If you wait until you need money they will not give it to you or they’ll give you a higher interest and it’s going to cost you more, it’s just like taking it in advance and just sitting on it or putting it in a safe place in the meantime.

Matt: I may never even use this term loan that I got and I might just pay it off next year when the economy recovers and everything’s gravy. And the cost to me would have been a year’s worth of interest which is insurance. In my view if anything happens with the economy our business is covered, we have probably 16 months of operating expenses, and it’s just insurance. I always do that every year but in the year where the economy looks tough then having 12-16 months of operating expenses is a competitive advantage. I can still take risks in a tough year because I have the reserve.

Guillaume: I agree. It has to be seen like a tool just like buying insurance or buying any other tool. Just like having a tool in my toolkit, I have access to X amount of capital that I can deploy, I can start a new project. Like this year, AI is on a range now, like Chat GPT, Open AI, etc, etc, it’s exploding everywhere. Well, if you don’t have any dry powder, sometimes they call it reserve cash, you cannot do anything.

Matt: Yeah, 100%. And the sleeping at night factor is huge. It is like I really don’t have to worry much about a shock to the economy because I have the reserve. I can sleep like a baby.

Guillaume: Yeah, I agree with that. Excellent advice. Anything else that you’d like to share with the e-commerce store owners about their finances?

Matt: Yeah, I would say one of the things people can do when you approach lenders is to look smart and we don’t always have to know what we’re doing but we just need to appear like we know what we’re doing. One key way to do that is to have what’s called the data room. So what you’re going to do is create a Google Drive folder and you’re going to have four or five folders, corporate, financials, AP/AR inventory, and like sales, that’s it. And in each folder you’re going to put relevant documents. So in the corporate folder you’re going to have your certificate of incorporation or your founding constatation documents, share registers, corporate articles, etc. In financials you’ll have two prior years of your accountant financials, and you’ll have interim statements from this year, AP/AR inventory. Just have your inventory report, AR/AP, and then sales and marketing is where you can put things like a deck or some relevant statistics about how your company functions. Do we have a really high retention rate or a great AOV to CAC? So you can put some of those things in there.

And when a lender says, ‘Hey, can I have your info?’ and you go, ‘Yeah, no problem’. And five seconds after the call you sent them a link to your data room and you just look like you know what you’re doing. And when you look like you know what you’re doing, you give the investor or the funder confidence and when you give them confidence they see it as an easy way to make a commission. And all these people work on commission. So if they know that they can take your company to their credit committee and it’s an easy pass through, they’ll give you the time. Giving them confidence is the whole thing, and when you give them confidence you can negotiate for less interest as well. So that’s the last thing I’d say about that.

Guillaume: Awesome, Matt. Thank you very much for being here today. If somebody wants to get in touch with you, what’s the best way?

Matt: You can check out my website, www.eightx.co, LinkedIn, look up Matt Putra, I’m on LinkedIn all the time. You’re welcome to pop a message, ask me some questions, whatever you like. I often respond to people’s questions or comments on my stuff.

Guillaume: Awesome. Thank you Matt.

Matt: Thank you Guillaume.