The DTC Founders guide to Using Debt as a Growth Tool
This episode of Scalability School explores how DTC founders can leverage debt as a strategic growth tool rather than a dangerous crutch. Zach, Brad, and Andrew walk through the math every media buyer should understand before scaling (EPCs, conversion rates, AOVs, margins), highlight why inventory-backed debt can be the smartest use of capital, and break down how to model financials in a way that impresses lenders. The episode blends media buying fundamentals (math, margins, bundling strategy) with financial strategy (when and how to use debt, what lenders look for, and how to avoid financial “fuckups”).
Key Takeaways:
The math (CPCs, CVRs, AOVs) you need to know before spending a single dollar on Facebook ads
Understanding the hidden costs that will erode your true margins and must be worked into your modeling
The importance of negotiating everything to improve margins before raising prices?
How building out this team offshore can be one of the highest-ROI scaling moves for your brand
The one thing that convinced Hollow’s founders that debt was a better option than raising equity
How to you convince lenders to fund a young, $1M brand (and the data they really want to see).
The big reason robust financial models essential even for early-stage brands
Are you using debt this way? 3 of the most dangerous ways brands misuse debt
The #1 rule when working with lenders
This episode is sponsored by Wayflyer, a smarter way to use debt for growth. To learn more about them and how they may be able to help your brand grow head here to learn more.
To connect with Andrew Foxwell send an email Andrew@foxwelldigital.com
To connect with Brad Ploch send him a DM.
To connect with Zach Stuck send him a DM
Learn More about the Foxwell Founders Community head here to learn more.
Full Transcript
(00:00) You always have to start with the math, which is I'm going to try and sell a product online and I'm going to use Facebook ads. I can assume two things. When EPCs will likely be around $2, potentially could be up to five as of recently. Depending on what category you're in, if you're in health and wellness, you might see some pretty high spikes.
(00:16) And then you have a rough ballpark of conversion rate, 3% to 6%, 7%. And you use those two metrics to determine what your cost per acquisition is going to be. So in this example I just used, the reason that founders ads work a lot of the time is because it's the founder talking about the problem that they solve for themselves. And it's a meaningful thing.
(00:33) And it's really hard to make a founder ad that works. If you just went on Alibaba and knock something off, I'm sure there's plenty of dropshippers that are printing money and they don't actually do anything novel or they're stealing somebody else's IP, probably mine. Taking on debt, it's just like anything else, right? When you do in your business that if it's a short term fix and there's not a plan of how that will be avoided, then it's a band-aid and that's going to be something that you're going to lean on and it's not a good thing. It's like you need a plan for how you aren't going to necessarily need this short term stuff. Between the two of
(01:01) us and then hiring these kind of fractional CFOs, we were able to build something that was definitely more robust than what a brand at only a million dollars in revenue had done. And I kind of knew that I needed to impress them to the point that I knew exactly what I was doing, which is why I was asking for more money, maybe than a brand should at only a million dollars in revenue.
(01:23) And now let's take a listen to the Scalability School podcast. [MUSIC] Lots of good stuff that we've got going today. Talking about using debt to grow on this episode. Super stoked to talk about it as always. Very excited. Zach and Brad, what's going on, guys? I think I say live in the dream like e
(01:47) very other episode. I was going to say, just keep that going. Just keep that going. Just keep that going. Let's just throw that in GPT and get a couple of... Let's put beefs at the front of the show and talk about Zach's tweet about the playbook that everybody needs to follow. Yeah. Who are we flaming today? Do you want me to read it back to you? Or do you just want to rip? We can just start by me just seeing things on Twitter that are ex-Homestike clients that are just being obnoxious.
(02:04) And then that usually prompts me to fire off a, I don't know, 10,000 character to eat at like seven in the morning the second I wake up, which is what I did today. So yeah, I was just talking about the fundamentals of D2C, which I feel like are fairly straightforward. A lot of people talk about a lot, but that's what I tweeted about this morning. You know, it's really interesting.
(02:21) I don't remember where... I feel like this idea of founder ads keeps coming up and people keep talking about it. And literally your first point in this tweet is like, "Here's the playbook. Sell a product that solves a problem." And the reason that founders ads work a lot of the time is because it's the founder talking about the problem that they solve for themselves. And it's a meaningful thing.
(02:40) And it's really hard to make a founder ad that works if you just went on Alibaba and knocked something off. Those work. Don't get me wrong. I'm sure there's plenty of dropshippers that are printing money and they don't actually do anything novel or they're stealing somebody else's IP, probably mine. I just... Yeah, I don't know.
(02:58) I think a lot about that because it's been a recurring theme I've seen. I just think that the easiest win that you have in this whole D2C ecom thing is just solving a problem and just making it abundantly clear what problem you solve and how you've done that. If you're just trying to sell whatever.
(03:16) If we were just a hollow socks, just selling cotton socks, what problem do I solve? I don't know. They look cool. It's just really hard to win in 2025 when you're just trying to be another one of a thousand brands selling the same old shit. So that to me is the fundamental start there. Boom. Solve a problem. Make sure the product solves a problem. Make sure you can talk about solving the problem.
(03:33) And then I go through a bunch of stuff, which I mean, if we want to riff through this, we can. But this is basically me just coming off of seeing people complaining and basically saying that they deserve things to happen and performance to happen. And when nothing changes about their business and they don't listen to smart people who are giving them advice, that's been proven time and time again.
(03:51) Well, why don't we? Why don't we have highlights of the of this? Like, why don't we hit some of the pieces that people have engaged on that you feel like are the parts that people really wanted to get into? I mean, obviously, too many people don't know the numbers that obviously goes into today's episode talking about using debt to grow totally starting with the math of just like how you're going to like sell your product.
(04:13) You always have to start with the math, which is I'm going to try and sell a product online and I'm going to use Facebook ads. I can assume two things when the PCs will likely be around $2 potentially could be up to five. As of like recently, depending on what category you're in, if you're like in health and wellness, you might see some pretty high spikes. And then you have a rough ballpark of conversion rate, 3 to 6, 7%.
(04:31) And you use those two metrics to determine what your cost per acquisition is going to be. So in this example, I just used your goal should be to have 100 plus AOV if you're selling a one-time purchase product, unless you're selling subscription or a product that has a high return customer rate.
(04:47) And on that, you can probably expect a $50 new customer CPA in 2025 with a $2 CPC and a 4% conversion rate. So that's how we back into all that math. And I'm like, you just have to start by understanding that because there's so many brands that start or they're a few million dollars in revenue and they're like, why can't I scale? Well, your math just doesn't work. You're selling a product or even selling a bundle of products and it's like 60 bucks.
(05:10) But to get a CPA that would work for a $60 AOV is just too hard to do. So starting with that math and understanding what's realistic there, I think is really important. The landed margin of 60 plus percent is so important. People do not think about that also. It's like, okay, I think about my cost of delivery, maybe you're ordering product or not even cost delivery.
(05:28) You're thinking about your COGS, cost of goods sold. And you're thinking about, oh, this is what my product is going to cost from China or I can order more and get my COGS down. What you're not taking into consideration is your pick-pack fees, your shipping to the customer.
(05:46) If you're shipping out of the country, if you're trying to scale to maybe Canada or somewhere else, EU, Australia, what is that impact going to be? I think the other thing too is people will do things on their website, turn products into bundles, but then not think about what their fulfillment team, their 3PL is going to now charge them to do a bundle because now there's more products included.
(06:03) All of that math is important to understand before you're like, hey, I have this thing that I think can work. I think just starting there as a baseline of 60% margin left over after that product or products have landed at your customer's door should be your target. And if you're not there, you probably need to charge more for your product or bundle more things to create a bigger piece of margin for you.
(06:21) The other stuff here, I think that's really interesting is keeping your product selection simple. We've seen this time and time again. Anyone that's run an agency has worked with a brand that has way too many SKUs and then they just fall off because they just get buried with so many dead SKUs. Don't know what to do with. And that's where all their cash ends up sitting is just in dead inventory. That was one.
(06:38) What else here? Can I ask about the margin thing really quick? Maybe not ask, but just dig into it a little bit deeper. But thinking about when we had a whole offer or a whole offer episode, which I think is valuable to dig back into. But quick TLDR. If you aren't at that point, what are you doing first? Are you saying, "Okay, great.
(06:59) I have 50% margin. Am I going and am I yelling at my supplier and trying to make it cheaper? Am I asking what volume I need to get to to get to those points?" Okay, so that's one thing you could do. You can raise your prices, but are you going and looking at the market? Or are you just saying, "No, this is what I need in order for this to work.
(07:17) I just have to figure out how to position it in a way that people value it at this price?" And then three, on the point of shipping, I suppose you could always just charge shipping and test that out. But what's your order of operations working through that? Yeah, it's initially starting with just all of the moving pieces that goes into the cost before I even talk about changing the price. Changing the price comes last.
(07:33) So it's like negotiating with manufacturers, negotiating with 3PLs, negotiating with your FedEx or whoever you're shipping with. We just moved from US Postal Service, which was traditionally the lowest cost of shipping for one of our brands, to Amazon. Like, I don't know. This is a new thing that they wrote down. It's like Amazon Prime shipping.
(07:51) They'll come to our warehouse, pick up big Amazon truck and pick up every order that used to be US Postal Service. We're saving $1.50 per order delivered at the customer store. That over volume can add up to be real dollars. So yeah, all of those things can be negotiated. That's the thing I keep sending this meme of this random guy that just says, "Everything can be negotiated." Just keep putting it in Slack.
(08:12) It's in the partnerships channel and whitelisting channel. It's in the ops channel. It's in the product channel. It's in everywhere. It's in any agency that we hire, I'm like, "Go negotiate." So I think if you're not doing those things, you got to be a little bit more of a hard ass and go do that first. Then it's pricing. Then it's seeing what's possible. Yeah, that's where I started.
(08:28) That's where I think you have to start. But there's so many little things that people are like, "My 3PL charges $3 per order." That's what they say. Go ask them to do $2.50. They're right. Everything is negotiable. Say, "Hey, this is where my volume is at now. If we can get it down to $2.
(08:45) 50, I think I can get my volume to here," which means more dollars in your pocket at the end of the day. But if I'm stuck by losing $0.50 per order, that might just be the little bit of nugget that I need to go push a little bit harder. Yeah, I think it's an important point because you're not trying to be a shit partner by asking for better-- Totally.
(08:57) You're not trying to be a dick. You're just trying to get better margins so you can run a business that will support their business. Right. And again, this will go into the episode, but building models of what could be if you get better margin across all of your partners is what's going to help at the end of the day. So that was a big one.
(09:15) And then the offshore talent for building creative teams out, I think that we've learned a ton. Easy Street and our portfolio now of like, we're just going to hire creative strategists, designers, editors. This took me years of Brad just absolutely hammering me and saying, "You're an idiot. Why aren't you doing this?" But finally, it's set in this year.
(09:33) But now we have a team of creative team members on each brand between creative strategists, editors, designers. And that total cost is, we're talking maybe $25,000 a month to have seven amazing, incredible people. Might not even be 25. So that was a big one that a lot of people ask questions about was like, "How do you go about doing that? How do you think about it?" And my answer, which is one that I normally hate, is go look at big creative agencies and go poach their people off of LinkedIn. Don't do that to Homestead. But if they're a big creative
(10:02) agency that has 500 employees and a bunch of people in the Philippines or Central America, that's a good starting point. All super good tips. I think we're just talking about negotiating with influencers. So yeah, I agree a lot can be negotiated. I think that's a huge point. And I think knowing the numbers is a good one.
(10:19) And per usual, you put something out on X, dude, the crowd absolutely loves it. Sitting at 10.5K views, not even 12 hours in. Yeah, it's pretty soft. I put out a lot of stuff, absolute fricking crickets from the Foxwell machine. Nobody cares at all. But I did get a text yesterday from a guy I hadn't spoken to in a long time who was driving down the 405 in LA listening to our podcast in his cyber truck.
(10:51) So shout out to you listener, you know who you are. Thank you. Our numbers continue to climb into the high tens. So super stoked to have all of you checking things out and listening. And we can definitely beef on some stuff as the show goes on as well. But let's get into talking about the debt and how you used debt or how you use debt to grow, right using debt and inventory financing as a tool for smart, scalable growth.
(11:14) So I'm just going to start off by asking why did Hollow choose to use debt when you guys started this? Yeah, so the story of Hollow is basically we kicked off the brand actually six years ago, it started as a slightly different name, it's called Follow Hollow. They don't talk about this part very frequently, but I'll kind of tell the whole story now.
(11:38) Started as rank of Follow Hollow, my co-founder Brian is an inventor through and through he's an entrepreneur, but an inventor at the end of the day, and he had this idea to do these socks. And so it kicked off as an actual Kickstarter. I think we did a few hundred thousand in revenue, I can't remember exactly, but there were like 150, I can't remember what it was. But we started with that.
(11:56) And that kind of is really where there was a little bit of product market fit originally. And then he was in charge of running the brand for the first year. And then a few years into Homestead, I made the decision to say, "Hey, I actually really want to put a ton of attention on the brand side versus just being on the agency side." That's when I took over and that's when I rebranded it to just Hollow.
(12:13) I kind of got rid of some of the coloring of the product and just really simplified it down to just being a few skus and just black and gray. And in that first year, between Brian and I think we put in like 50 grand to buy inventory. And on that 50 grand of the inventory, that was about $300,000 of products, retail price.
(12:32) And that first, this was like a three month period of time. We went to market. I've talked about this a million times. We tried a bunch of different cohorts. We found this hunting angle and these static ads and it ripped. And we sold all $300,000 worth of product in like 90 days. We zeroed 100K in revenue in the first 30 days.
(12:50) From there, it was kind of up to us to say, "Okay, we did $300,000 of revenue in a short period of time. We sold everything. We were profitable during that period of time." And it was like, "Okay, we put in 50 and we got back out like 110 or something like that, or 120." We're like, "Okay, how many socks can we buy for 120 grand now?" And that was really it. That was all that we really knew what to do. It was just like, "Okay, put all the money back in, let's go buy some more socks.
(13:08) " And that 120 grand got us enough socks to push into that next year and push through summer. And it was about like mid summer where we decided to say, "Okay, this is working. We think this can work, but we need to put in a little more cash." And that's when I think we injected a little bit more cash into the business, maybe like 50 to 100 grand between Brian and I. So now we're at like, I don't know, $1 million invested in.
(13:32) And with that $1 million, we're able to buy enough socks to do just over $1 million worth of revenue at this point. And that's exactly what we did. We did $1 million in that first year. It was like $1.1 million. We sold every sock that we basically had. I think we were down to literally like 10 units left. And that was true product market fit.
(13:50) We're like, "Okay, we did $1 million in our first official 12 months with this business, even though technically there were previous years." But with Holo, the brand, and we want to push up. And now it's like, "Okay, we need more money. We need to figure something out." So debt was really the only option that we had unless we wanted to go the equity route.
(14:09) And Brian and I were both pretty convinced that this thing could be much bigger than where it was with just a million dollar business. We didn't really know how to value it at that point. We were like, "Is it worth a million dollars? Is it worth $10 million? How do we value this? We weren't sure." So debt was our only option. And that's what started this whole trajectory of like, "We want to grow this business. We need to buy more socks.
(14:26) We can go equity. We can go debt." And we wanted to stick with keeping owning it. And so we went debt. And that's what teed up all of this. Was it purely based on like, "I literally just need to have more in stock because I can only buy X amount right now. That's going to last me two months at our current growth rate. So I could do that and I could do this way slower.
(14:45) Or I could get debt because I know my whatever the financial term is cash on cash return, something like that. Return on invested capital or another who will be paying off faster." Yeah, I mean, I think the honest part of this is like I was running Homestead still during this time. And we were working with brands like Hexclad.
(15:03) And Hexclad grew, I think that same year that we did our first million Hexclad grew by like 50 million, 100 million. I don't remember. It was the first year they grew by 50 and then the next one they grew by 100. So I'm like pushing buttons and ad accounts working with our team, seeing brands grow 100 million and we grew a million. I'm like, "Okay, I know I can do this shit. I think I have the playbook figured out. We have a little bit of track record.
(15:21) " But I wasn't sitting on a ton of cash. Brian wasn't sitting on a ton of cash that he wanted to invest in yet because it was still a little risky because it was still new. And so we were like, "Okay, yeah, the return on capital wasn't enough for us to push up as fast as what I really wanted to grow at.
(15:35) " That was really it was we wanted to grow faster than what we could even do on our own. And the two options that we had was go bring in investors or go get debt. So you're sitting down, you're looking at this, you're thinking about this.
(15:52) One thing that I think you always do really well is talk to a bunch of different people in a lot of different places and get their opinion. When did this shift and what was it that shifted in you that you saw debt as an investment tool? Because clearly there was this delineation that happened. Totally. Yeah, I think it was the fact that we could put a dollar into the Facebook machine and see like three to four dollars out pretty automatically without having a ton of other resources. Because you had confidence in your marketing abilities.
(16:14) Correct. Yeah. And I think that the debt as a tool became just it was new knowledge to me, to be honest. It's not like I had all this pre-existing knowledge. I was running an agency before that. It's basically just cashflow business. I had no knowledge of the debt side of it. But what I did know is that we had clients like Hexglad that would get debt.
(16:31) They were working with JP Morgan at the time and they were using debt to grow their business because they had a proven model that basically backed out to say if I put a dollar in, I can get three to four or five dollars out and we're just going to do that over and over again and we can pay this money back to this bank.
(16:48) So I think it was confidence that came from a lot of the work that we're doing for our clients at the time and me having confidence that we actually cracked a funnel for this brand that I think could be much bigger. So you go through this, you have this mindset shift. You're talking to them. Okay, now we're going to do debt. You're talking to potential lenders and whatever.
(17:04) How do you convince lenders that you... I mean, you're a young business. Million in revenue, right? How do you convince them that you're worth lending to? This episode is brought to you by Brad's company, Work Marketing. If you need a D2C marketing agency, let me tell you Homestead is great, but work marketing is also fantastic.
(17:34) And let me tell you, you aren't going to find friendlier people out there in the e-commerce space. So we decided to do these little ads for each other's companies. So hopefully you find it interesting, but seriously, great team at work marketing, very smart. Brad and Jordan are incredibly dialed in. I just gave them a lead. I already made this brand that I gave them.
(17:53) I don't even know, double revenue that they had in the previous month or something. So it's very exciting to be connected with Brad. And if you need a great agency, there's really no one better. Zach, if you want an agency that cares about your business much more than they care about their own website, I just tried to load workmarketing.com and it was broken.
(18:10) So they're definitely going to give more of a shit about your business than their own. So I highly recommend Brad and the team over at work. They've been incredible. We've referred a lot of business over to them as well. Really, really good as far as like cracking funnels and figuring out like rapid g
(18:31) rowth for brands. So I recommend these guys. How do you convince lenders that you... I mean, you're a young business. Million in revenue, right? So how do you convince them that you're worth lending to? Totally. So this is where I do have to say, I have to give the disclaimer of I had Homestead. So we had this track record of helping brands grow for years already at this point. We took a couple of clients from like, we had one case study.
(18:53) We took a brand from 50K a month to 2 million a month in like 90 days. And so we had some of these and then some of the bigger ones like Hexclaude at this point was a client. And so when I'm talking to these like lenders, I'm also sharing those stories.
(19:09) I'm saying, "Hey, we're pushing buttons for these other businesses and we've seen what it takes to grow and grow profitably." So I have that experience, but now we're going to obviously try to apply it to this one. But yeah, I mean, in the start of like in 2023, we had emissions to keep pushing, hitting the gas. I'm like, "I want to grow by like 10X." Because that was just a ridiculous, anxious goal.
(19:26) I'm like, "We did a million, why can't we do 10?" And that's when we started to have to have these conversations. So I mean, I talked to everybody under the sun at that point. If you go scroll back to 2023, you'll see me tweeting about like, "Who should I talk to? What about Settle? What about WayFlyer? What about Clearco who no longer exists? What about normal banks? What are lender credits? Can I use them? How does all this stuff work?" I mean, I really didn't have the background outside of knowing that I needed to prove to these
(19:49) lenders that I had a model that was proven and that they could trust me with that model. Sure. Yeah. I mean, really, it started by me just having a ton of these conversations. And the one lender that really stood out to us was WayFlyer. They were the one that kind of came to us. And I met with a lot of their leadership team.
(20:06) I have to give a shout out to like Patty Cohen over at WayFlyer. I mean, the dude basically came to us and said, "This is what you need to give me to prove to me that we should fund you." And a lot of that was just modeling. It was modeling cashflow. It was modeling profits. It was modeling revenue. It was modeling the whole financial ecosystem.
(20:23) By doing that exercise, that also helped you be more intimately involved in understanding your own financing with the business or like revenue growth and everything. Right? A hundred percent. Because we had to prove to them, like, "This is why we're worth it. This is what we can do." Totally.
(20:42) And as an agency founder, owner, I was good at sales always, but it's different when you're convincing someone to give you hundreds of thousands of dollars or millions of dollars at some point, money to hopefully pay them back and pay them back the interest. Right? So I needed to know how those financial tools worked. Right? So learning how to read a P&L properly, learning what a balance sheet was different than a P&L, learning how to build like a 13-week cashflow statement in a year cashflow statement, and just knowing how all of those moving pieces worked was the most important part of it. Even though we were a million dollar business, we had models built that were as robust as a 30, 40, 50
(21:13) million dollar business because they were so in the detail and I was so in the day-to-day of knowing dollars and dollars out that was happening. That's what was absolutely required of them to be so confident to say, "Sure, we'll give you some money and see what happens.
(21:28) " When you're a business at like the million dollar size, like you're talking about how robust these models are. Like, how did you get... How did you even get to that point? Like, how did you make them that strong? Because at a million dollars, like, volatility is an insane thing. Your ad account could get shut down tomorrow and your model is completely broken, especially at that size.
(21:47) So, like, how did you even get to the point of knowing what you needed from a financial models perspective? I ended up hiring a couple fractional CFOs in the early days and spending like a decent amount of money on that. And then we brought in an early young like finance employee, Jacob, who has been a godsend to us and just an absolute killer. But he came in in the fall of 23, right, as we were really trying to get, you know, put these models together. And he helped me do a lot of this stuff, to be honest.
(22:10) He had a background in banking. He kind of understood a lot of these things. I understood the D2C model, but he understood like the financial model. So, between the two of us and then hiring these kind of fractional CFOs, we were able to build something that was definitely more robust than what a brand at only a million dollars in revenue had done.
(22:27) And I kind of knew that I needed to impress them to the point that I knew exactly what I was doing, which is why I was asking for more money maybe than a brand should at only a million dollars in revenue. So you get this set up, you're, you know, getting... You got the funding, you see how it allows you to scale. You're utilizing it properly.
(22:45) I mean, obviously one of the things with Wayflyer is they get you the funding quickly, which is a huge value drop, right? Speed is a big part of it. We'll talk about that. But so now it's like 20... You're forecasting for 2024 and you go to them and you say, "Totally." We're going to grow. How do you... Yeah. There's a story here about yarn buying. Yeah. Totally. So, I mean, the biggest thing about 2023 for us was we forecasted $9 million in revenue and we hit it on the head. Like hit it on the head. We did $9 million and $10,000 in revenue that year.
(23:15) Month over month was pretty consistent. We built out this model of how much we could grow and how much we could spend and how we would use that money. I think that's the most important thing is making sure that when you're working with getting debt is knowing exactly what you're going to use those dollars for. And for us, we didn't need it for ad spend.
(23:32) We didn't need it for marketing dollars or team. At this point, there was only three people on the team. We were very, very small. It was me and two other people. And so, yeah. I mean, it was mostly about saying, "Hey, we're going to go do $9 million when we went and did it." And that alone, I think, is building that trust with a lender is everything.
(23:49) If you do what you say you're going to do, they're going to be more willing to give you more money in the future. One of my mentors, his name is Rick. He's always told me this statement. He's like, "Banks are... You're going to want money from banks to a certain degree where then the thing switches where banks are going to want to give you money when you don't even need it.
(24:06) " So I didn't say that perfectly, but basically the phrase is like, "You need to try to convince them to a point until your business is big enough and strong enough and profitable and you've proven the amount. And then they're going to want to give you too much money that you don't even need to utilize anymore." In the early days, it's the complete opposite. You got to pitch them and you got to prove to it. You got to build that trust.
(24:22) So yeah, I think the big thing for us is the way that Holo works is we buy our raw materials ourselves. We import our raw materials of this alpaki yarn directly from Peru in the cash immersion cycle on that dollar spent is horrible. We buy our yarn six months before we can sell it. So we need money for raw materials before we can even manufacture the product, before we can even turn it into socks, before we can get it at a warehouse, before we can even list it for sale. And that was the main use of this money.
(24:50) And we were very clear about how much money we needed to buy in yarns. We could make socks in the US and so we could sell them in Q4. And so we proved that out. I mean, that was our 2023 goal. We did it exactly. And then going back to them in 24 and saying, "Hey, we want to do 20 million now. We want a little over double.
(25:06) " We knew what we needed to show them. We know we needed to show them these robust models about demand forecasting for yarn buying. Here's exactly how we're going to buy it. Here's the terms that we've negotiated and gotten better with our yarn buying. Here's how we've negotiated terms with our manufacturer and how we've got a little bit more cashflow there and how that's going to help us be able to pay you back faster.
(25:25) Hey, we've gotten better credit card lending options and better payment terms with them, which means we're going to have more free cashflow to pay you back faster. All these things were basically the story to tell the lender how we were going to pay them back and how they could trust us even more with more money. So yeah, Wayflier basically came to the table as one of the better options.
(25:42) And because they, like you said, are fast and when you're in a high growth business, you need money yesterday, we're able to get deals done quickly and get funded. So yeah, that's really what I have to say there. That got us to that next stage.
(25:59) Yeah, we had our, and again, one more person, I just have to give a shout out to, is like Brian McDermott. He became our new account manager and him and Jacob were just battling it out, making sure that all of our stuff was fully robust and so that they felt comfortable funding us. But they came through again. And without that debt, we definitely wouldn't have been able to as a bootstrap business go from one to nine to 20.
(26:18) I think a lot of times with Wayflier or with anybody else, it's like you guys, there's a lesson in the fact the way that you utilized and got creative with them and structured repayment terms and caps. And can you talk about that a little bit in terms of just, you said, this is what we can do or were they more like, we basically- We looked at your numbers, we know this is what you can do.
(26:42) Yeah, I mean, it was a little bit of both. I mean, they're obviously always going to optimize for what's best for them. But because we started to really understand our financials so well and our cash flow so well, we came back to them and said, "Hey, this is what you proposed to us, but we're going to come back to you and we want flat fees.
(26:59) This is how we're going to pay you back as flat numbers and we're going to structure it in a monthly payback. It's going to get you the same number that you want at the end of the day and it's going to work for both of us." And they were definitely flexible there and willing to work with us.
(27:12) And I think that that's truly why we ended up working with them and continue to work with them. Some of these other lenders are very, very strict. They're like, "Here's the payback schedule. Here's how it works. You pay us back every week. It's a percentage of revenue we rip straight out of Shopify." Everyone is a little bit different, but they were always willing to try to find the sweet spot because we had proven now to them, now a
(27:36) lmost at two years of our relationship with them, what worked best for us and how we could pay them back. So how did you... You kind of are aligning talking about, "Okay, here's the inventory and the revenue cycles that we have." How is it a lump sum they're giving you? Is it money that's coming in regularly? How are you working all of this together with them? Or is it an agreement for a long period of time? Or how does that work? Yeah.
(28:00) I mean, the technical term I think that we had with WaveFlyer that year was like a letter of intent, which is tied to a line of credit, essentially, set up. So we had so many funds accessible planned for the year. And based on our models, we knew when we needed to draw down on that. And they were going to keep those funds ready for us. So it's like we took it all in one shot. It's definitely strategic.
(28:17) So for their own sanity, it's not like we were taking a bunch of money down all at once and hopefully we'd pay them back. It was all based around the cash flow needs of the business. So I do think that that was beneficial too. I think that also made us more cautious with the dollars as well. It made us more strategic with how we were going to spend every dollar that we borrowed for them.
(28:37) And yeah, I think that that's how we ended up working it out was it would come in tranches as needed, but a predetermined amount that they would be able to fund us over the course of a year. I mean, the biggest takeaways, I guess, of working with that and working with WaveFlyer specifically is just starting with just transparency and being very honest of where you're at with your brand.
(28:55) I think over-promising, over-committing, making shit up is never going to get you the long-term results that you want. And you're also going to end up having this financial stress, which if there's ever been any stress on my life, financial stress is the worst stress. Product problems, things get lost at sea, whatever.
(29:14) Facebook ads go to shit during a week. Those are all okay. Financial stress is the biggest stressor. So I think just starting with transparency, finding them everything that they ask for, I think is the most straightforward piece is just not being afraid to be like, "Hey, here's my business. Here's how I'm thinking about it.
(29:32) " Making sure that their underwriters have truly everything that they need to feel like they can fund you. And then just letting them know your goals and how you're going to back into it. I think the biggest two things that they look for is what is your ability to pay back funds and how are you going to pay them back truly based on a financial model? And two, why do you need it? I think a lot of people think, "I need money to grow.
(29:56) " Well, what is that going to be used for? Is that going to be used for 3PL fees or is that going to be used for buying actual product that's going to let you grow the business and increase returning customer rate, which is more profitable for you than just continuing to sell the same thing? So I think being strategic about what you're using that money for and having that very clearly laid out for them is huge. But yeah, I think that's the first one. The models is everything else.
(30:14) Having financial models that actually make sense that tell the story of how you're going to use those dollars from a 12 month P&L to an inventory forecast, to inventory forecast that backs into your purchasing scheduling. Giving them truly your full roadmap of, "Here's how I run the business. Here's how I make financial decisions. Here's how I'm going to do it.
(30:34) " Plus then a 12 month cash flow forecast. To them, then they have everything in their hands to make a decision and say, "Should I fund them or not?" Because you're giving them all of your decision making 12 months in advance. And again, you can be wrong. There's degrees where they'll work with you and try to find flexibility.
(30:52) But the more thought through you can do this and the more you can actually use previous data or previous history to try and show them how you've made those decisions, that's everything. And then the last bit, and this is more a tip for funding with really anybody, but specifically what we found with Wayflyers, get that funny locked in that next round before you need it.
(31:10) When things are good, get them the statements, get them the documents, get them everything and tell them where you're headed and where you want to go. Obviously, there can be downturns. There can be hard moments in a business. So having all that prepared so that you can have the money ready to rock when you need it is just super important. And that's where people on my team have done a really good job and I have to give them kudos to because they've played proactively versus reactively when we need debt.
(31:28) I think all that stuff is super helpful. I appreciate you going through the tips and everything. I feel like let's be transparent. Debt is one of the main reasons why it's a main driver of bankruptcy with the ETC brands, right? It's expensive, can be expensive. Who shouldn't take it? Where does it not make sense? I mean, I think you've laid it out to the point of if somebody's really clear with what they're trying to do, they're really clear with how they're going to use it, that makes sense. But I think maybe it's just the opposite. There's not
(32:05) a clear vision. They don't have good financials. They don't have a proven track record. Where are situations where you've seen debt be taken on and you know that's not the right call? I think it's the inverse of what I said, so we can just start with that. So when you don't have those things, I wouldn't be comfortable doing it.
(32:23) If I didn't feel like I had all the tools ready to present to them, I wouldn't have even felt comfortable having money. What would I do with it? If I don't know what I'm exactly going to do with it, when I'm going to spend it, where it's going to go. Knowing that I owe it back to somebody, just inherently that is a pressure that you hold, or at least I do internally.
(32:42) Having that whole plan is the most important piece. So if you don't have that, probably shouldn't take on debt. The other area that we've seen brands, like sadly through some clients through Homestead or just other brands just in the ecosystem, even some of the brands that we bought in the portfolio historically, I mean, they took on debt to run Facebook ads, things like that.
(33:01) It's like, you're taking on money, you're going to pay 10% to 20% APR interest on it. And you're going to try and turn a dollar into more dollars, but you're not doing really the math on how much return you need to make off of the dollar you're investing into something that isn't guaranteed. The guaranteed thing about us is if we buy yarn to make stocks, we're getting yarn.
(33:21) I know I'm getting yarn and I'm getting what I'm paying for. If I go use it for something that has a higher risk potential, I don't know that I'm going to get back what I've planned. So to me, that's where I think using debt for things like inventory is a great use. It's an asset, at least it can be turned into something.
(33:39) Using it for inventory that are risky, so maybe new products I would be cautious to use it for. Taking big swings like, "Hey, our business isn't working really well. Maybe if we go take this big swing with this influencer or partner, new product launch," probably wouldn't use debt to go do that. I would definitely try to self fund that because it could go to zero.
(33:57) So I think it's using it for things that don't have the risk in itself is usually when debt is more appropriately useful. It is a risk through and through. That is the point of it. True. Yeah. And that's why they charge interest. That's part of the business is they take on the risk of you and you take on the risk of having to pay someone back. But that's how I think about it. Yeah. It's very cool.
(34:14) It's clearly a relationship. It's something that has allowed you to scale. I know there's plenty of other examples of mutual friends too that Wayflyers helps scale. So utilizing this tool, utilizing debt as a tool and a strategic lever. So it's cool to go through it.
(34:33) I think we should transition into a new segment of the show called Financial Thought Cups, where we talk about things that we've seen that are messed up in finances. One of my personal favorites is when people get a credit line from Meta, I'm always like, "You're NGMI. You're not going to." It just makes me nervous. I don't know how you guys feel.
(34:51) But when I see that happening and them not being able to pay via the credit card, that makes me a little nervous. One of the first times I was ever exposed to a Meta credit line was when I got access to an ad account that owed Meta a million dollars. And they didn't pay it. And they still haven't paid it. And there was no intention to pay it. And this was years ago.
(35:09) And I was like, "Oh, I didn't know that they would let you do that." But they thought you should do that. And that was crazy. So yeah, that's my contribution to the Financial Thought Cups. I've seen... I mean, we've had clients take Shopify capital loans and I don't have a strong opinion. I don't know enough about this.
(35:26) So this episode was super interesting for me to just sit back and listen because I don't know and I don't know here. And I know that maybe Shopify capital interest rates are not the best for people. But if you need money with intent and you have plans behind it, it can still work, I'm sure. But generally the reasons they took it was, okay, they're probably under some kind of pressure. They feel like they need it.
(35:46) Understandable in the moment. But to your point, it was to pay down a credit card for a marketing spend that was never going to pay itself back or was going to take years to pay itself back. Taking on debt. It's just like anything else when you do in your business that if it's a short term fix and there's not a plan of how that will be avoided, then it's a band aid and that's going to be something that you're going to lean on and it's not a good thing.
(36:10) It's like you need a plan for how you aren't going to necessarily need this short term stuff. If you're talking about what Zach's talking about with Wayflyer, it's a long term relationship. They know his business intimately. He's repaying. It's a good thing. They're unlocking growth that he wouldn't have, which is awesome.
(36:27) But there's all these... But when you have a Shopify capital loan, it's like that I think is okay, but you have to have a plan with these small little things of how you're going to actually not be dependent on it and how you're going to build the business to the point of real growth.
(36:45) Because otherwise, that kind of stuff, if you're not smart about it, obviously the interest can kill you. It can double and triple down on you. And then next thing you know, you're taking out credit lines for metal. It's bad. And the reality is too, all this goes back to what you guys have talked about on this podcast a bunch, which is you have to know your numbers.
(37:02) You have to know the cost of landed product, the pick pack fees. It has to all be part of this equation because we've all seen it running agencies. People walk into a corner and then they don't know and they're looking only at Meta ROAS and you're like, "There's more to the story here.
(37:20) " And next thing you know, they're not making anything because they haven't known the full picture of the business. Yeah. Only contribution to financial fuckups is recently heard of a brand that has gotten pretty big that was postponing state sales tax and just got hit with a ringer there.
(37:41) So make sure you're looking into that because that can be one that can definitely punch you in the ass if you're not paying your taxes. It turns out not paying your taxes is rough. That's going to be a really difficult future for you and the state and the federal government will find you. Yes. But yeah, no, I mean, there's a million stories, right? I mean, there's a lot of these and it's sad.
(38:02) It's a bummer that a lot of these brands go through this to the point where they run into too much debt and the debt payments alone monthly, they just can't cover. And so things go under. But I think the best bet there is just having the plan, really understanding your numbers, having the plan, knowing what you're going to use the money for and following through with what you say you're going to do.
(38:20) And if you can do those things and it might require working your ass off and putting a bunch of hours in to make sure things go to plan, if you can do that and that can compound your over a year, it can really give you the extra fuel that you need to really push growth. And we at Hala would not be hitting the numbers that we're hitting and the volume that we're hitting as quickly as we were being a bootstrap company and not taking any equity rounds without debt. So it's been incredibly useful for us.
(38:43) Well, Zach, thanks for sharing the story. And if people have questions about it, they can email me, Andrew at FoxwellDigital.com. I'm happy to get you over to Zach and get connected or hit the guys up on Twitter and we can get you connected with the WayFlyer team. That's not a problem. Before we go, it's important to say that WayFlyer is sponsoring this episode, of course.
(39:02) However, we only work with the sponsors that we truly trust and know. And so that's why we've chosen to work with them on this because we think it's an important thing to unlock and we have bills to pay. So back off. So thank you for listening and we appreciate all of you and we'll look forward to the next episode. Thanks everyone.
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