Fueling growth – Why today’s consumer brand should consider credit

For entrepreneurs focused on the direct-to-consumer (D2C) channel, there has never been a better time to accelerate sales growth by using credit wisely. But with a number of new entrants popping up that offer all types of creative financing solutions, it’s worth hitting pause to demystify credit financing and call out some of the common missteps when evaluating a partner.

Why fuel growth with credit?

One word, Dilution, with a capital D. The degree of dilution, especially early in a company’s life, can have massive implications. For example, take Sarah Blakely and her company, Spanx. Sarah owns 100% of Spanx and is a self-made billionaire after selling fax machines to fund her burn in the early years. Had she adopted the typical Silicon Valley equity financing strategy and relinquished ~50% of her company through a Series B, she would have captured meaningfully less of the value appreciation (to the tune of ~$500 million).

Recent acquisitions in the consumer industry have revealed an increasing number of founders who are similarly considering alternative ways of growing their business. While there are certain benefits to equity financing, Jason Del Rey outlined in Recode how a new crop of consumer companies are saying ‘no’ to traditional equity financing. Bottom line, founders are always thinking through how to finance their growth without consistently diluting their employees and early shareholders — and credit is the primary tool to do this.

New lending options for today’s brands

New and rich data sources, like cash flow and social/online data, are enabling a new class of lenders to say ‘yes’ when legacy banks say ‘no’. This is super important for D2C brands or digitally native vertical brands (DNVBs) that sell through their own channels, both online and in the physical world. This new class of brands has historically been shut out of the credit markets since they do not sell via a wholesale middleman like a retailer (e.g. Walmart) or distributor (e.g. UNFI). That wholesale relationship with a retailer/distributor creates IOUs from large creditworthy counterparties like Walmart which banks like lending on — but DNVBs and D2C-first brands often lack those IOUs early on.

To address this challenge, lenders–including CircleUp Credit Advisors––are incorporating new data sources to adjust for a lack of wholesale transaction data and evaluating the unique brands of today. Your access to capital and potential for growth shouldn’t be limited because your business is laser-focused on the end-to-end relationship with your customer––whether that’s all online or off..

Great, so I can retain more equity ownership, fund my growth marketing with cheap credit, and the rest is history? Not exactly. There are still some items to watch out for when evaluating a credit financing partner. First, be wary of “no BS” lenders who charge a flat $ fee on each installment. While transparent on the surface, this practice often translates into a very high annual percentage rate (APR) cost. The nominal $ fee amount obfuscates the high % cost (often >25% APR) when taking into account the short loan duration. Second, watch out for partners who double dip and still want a piece of your equity upside — this may sound small today but consider how much Sarah Blakely might have given away to a partner when that sacrifice wasn’t in fact necessary to fuel growth.

Lastly, as you think about which channels you will sell through over the medium-term, keep in mind that many companies are now pursuing an omnichannel strategy, complementing 1st-party website sales with traditional wholesale channels or their own physical presence. In order to scale efficiently and effectively, brands must consider and prioritize around the multitude of ways to reach their consumers.

This trend is accelerating and it’s why at CircleUp Credit Advisors, we combine a brand’s D2C sales with its wholesale channel sales to offer the best credit financing terms to entrepreneurs. Other lenders tend to be point solutions, focusing on either D2C cash flows or wholesale IOUs from retailers/distributors. We believe we’re the only online lender with this holistic approach.

At CircleUp Credit Advisors, we offer an all-encompassing product that meets the funding needs of an omnichannel sales strategy. For example, Winky Lux utilized our product to bolster its D2C channel–the brand’s first sales channel. Having already partnered with us to fuel their wholesale growth in retailers like Sephora, as their D2C sales grew exponentially, the brand further leveraged our product to catalyze this channel. The Osso Good Co. pursued a similar strategy of launching D2C first and then moving into wholesale, both supported by capital from CircleUp Credit Advisors.

Overall, it’s important to choose a financing partner wisely. Aim to understand the true % APR, not give up a piece of your company in the process, and pick a partner who can help finance numerous sales channels.

If you’re interested in learning more about CircleUp Credit, please email credit-bd@circleup.com.

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