Bill D'AlessandroEcommerce, Investing, Entrepreneurship

Optimize Your Financial Stack

I meet with SO MANY entrepreneurs who have optimized their ad accounts to the hilt, but have never spent time optimizing their businesses finances.

If you are running an ecommerce business and have not spent time dialing in your business credit cards, bank accounts, vendor terms, cash conversion cycle, and lines of credit – I am confident your business is leaking tens or hundreds of thousands of dollars of cash. Cash that could be in your pocket. Let’s fix that.

I get it – finance is complicated and you probably don’t have a business degree. And frankly, your banks and lenders know that and are using the knowledge gap to take advantage of you. That stops now.

What Qualifies Me to Help You?

I’ve been in ecommerce for over a decade and run one of the original ecommerce holding companies, Elements Brands. We’ve done 6 acquisitions and hundreds of millions in revenue. But before all that, I worked in private equity and investment banking, and graduated with a finance degree from Wake Forest University, a top 20 ranked business school.

All that is to say – finance is my wheelhouse, and I love doing it. Just like you’re probably open to hiring a Facebook ads expert to help you optimize your ad account, shouldn’t you get some help from a financial expert to optimize your business’s financial stack? I’m not exaggerating when I say I’ve helped several entrepreneurs save over $100,000 a year.

How to make or save an extra $100,000 / year

We’re going to do it by optimizing what I call your “financial stack”. Here are some real examples:

  • Credit Cards: I earned about $200,000 PLUS over 5,000,000 points last year just by optimizing my credit card spend. I didn’t spend any extra money – I got cash back and points on money I was spending anyway, just by flowing it through the right mix of cards. Do you have a system to optimize your business credit cards?
  • Bank Accounts: do you know which banks pay the most interest on deposits? Are you paying wire fees?
  • Debt: How much debt do you have outstanding, and do you understand the true interest rates on it? Have you considered refinancing? Do you know who to call and how to negotiate lower interest rates and less collateral?
  • Vendor Terms: Are you getting the very best terms from your vendors? How long can you wait to pay? Do you know how to get vendors comfortable with extending longer terms?
  • Acquisition Financing: want to learn how to borrow money to do an acquisition? How do you get banks comfortable lending and navigate the underwriting process?
  • Financial Distress: if you get into trouble, you have far more options and leverage than most people realize. I can guide you through renegotiations with your lenders to restructure your debt, often reducing amounts owed and creating payment plans that give you breathing room.

If that sounds like something that’s applicable to your business too, fill out the form below to schedule your free discovery call. Below the form, I’ll show you a concrete example of how I can help you unpack complex financial concepts and make more money.

    OK let’s dive in. I’m going to show you one of the most common ways sophisticated financial companies take advantage of entrepreneurs – the fixed fee loan.

    Fixed Fee Loans: How They REALLY Work

    Fixed fee loans are also known as “merchant cash advances”. You know the ones – “a 6 month loan of $100,000, with a fixed fee of 9% – you pay back $109,000 total in equal installments over the next 6 months.” You probably receive almost daily outreach from lenders like Wayflier, 8Fig, ClearCo, OnDeck and others offering these “business friendly” loans.

    Seems like a good deal right? Borrowing at 9% is cheaper than a credit card and all you have to do is click a button! I’m here to tell you that these types of loans should be your absolute last resort, because the entire business model of these lenders is to rely on the fact that entrepreneurs don’t know how to do interest rate math.

    “Hey!? I know how to do math!”

    Are you sure? It’s ok – don’t beat yourself up. Unless you went to business school, you probably aren’t familiar with how time and rates interplay – it’s not intuitive. Let me show you.

    What’s the true APR of the example $100,000 loan with a 9% fee and 6 monthly installment payments?

    “9% right?”

    Nope.

    Well – maybe you just double it since it’s only a half year loan, so it’s 18%?

    WRONG.

    In fact, embedded in your “6 month loan” are actually six “mini-loans” – one for 1 month, one for 2 months, etc. Each of these mini-loans has a 9% fee, regardless of their length. Let’s see what that does to the cost of capital calculation…

    Calculating True Cost of Capital

    For our example loan, the total amount you must pay back is $109,000 and you pay one-sixth of that amount per month = $18,166.66.

    The easiest way to see what’s going on is to break that $18,166.66 down and say “how much of that was principal, and how much was interest?” Well – you’ve paid back one-sixth of principal and one-sixth of the fee each month, so thats $16,666.66 of principal and $1,500 of fee. What’s the effective interest rate for this payment? To answer that question, you need to know how long you had the money.

    You’ve only had the first $16,666.66 of principal for one month, not a full year – but you paid a full year of interest on it in the form of that $1,500 fee (“just” 9%). That means the real/true APR on that first mini-loan was a whopping 108% (9% times 12 months). Yes that’s right. You just borrowed $16,666.66 for one month at ONE HUNDRED AND EIGHT PERCENT INTEREST. 108%!

    You can do the math for each of the remaining 5 “mini-loans” and see that the “best” it gets is the last payment, where you had the $16,666.66 for the full 6 months and paid a 9% fee, for an effective interest rate of “just” 18% on that last one-sixth of principal.

    So to understand the true cost of capital of the entire loan, you average out the effective interest rate on each of the 6 mini-loans. You then realize that, on a blended basis – that “9% fixed fee loan” has a TRUE EFFECTIVE INTEREST RATE OF 44.1% :face_vomiting:

    If you don’t believe me, use my free Google Sheet True APR Calculator to see for yourself. You’ll need to copy it into your own Google Drive to make edits.

    The Curse of Fixed Fee Loans

    This is the curse of fixed fee loans – the faster you pay them back, the higher the effective rate because you’ve essentially “pre-paid” all the interest upfront, regardless of how long you keep the principal. You can imagine how much worse this gets with daily repayment loans like PayPal Working Capital or Shopify Capital that take a percentage of daily sales – you’ve only had the principal in that first repayment for a DAY, but you paid the entire fee on it.

    This dynamic is the OPPOSITE of the way you’ve been conditioned to understand borrowing your entire life. With a normal loan, the faster you pay it off the cheaper it gets (because it accrues less interest). With a fixed fee loan you pay all the interest upfront, so paying it back sooner just increases the effective APR.

    In truth – the above is why so many of these merchant financing companies pop up and raise millions of dollars in venture capital. It’s also why they pay armies of salespeople to call and email you incessantly, and drop huge advertising dollars sponsoring everything in and around the DTC universe. Because issuing these loans is incredibly lucrative. It really pisses me off because despite being marketed as business-friendly, “just click a button” products, these loans are in fact borderline predatory.

    I have seen so many businesses end up in trouble because they have stacks and stacks of these loans, and take a new one out as each one becomes due. It’s a brutal, extremely high interest rate treadmill.

    Let Me Help You

    If you learned something new in the above few paragraphs, I’m here to tell you there’s an equal level of sophistication and depth in every single financial product your business uses. Credit cards, bank accounts, lines of credit, term loans, vendor terms, acquisition loans, and so much more. If you don’t deeply understand how these products work and how to negotiate with your banks and lenders, you are almost certainly leaving money on the table or paying too much.

    If you think you have opportunity to better optimize these items and more in your businesses financial stack, I’d love to help you do it. Fill out the form below and we’ll get a free discovery call scheduled!

      Bill D'Alessandro