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ClearCo, Wayflyer, AMPLA, Settle... Understand your Options with Guidance from a Chief Credit Officer

The Profit Forecast: Episode #7

Mike Luebbers, CCO at Novel Capital

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Transcript:

Ben Tregoe: [00:00:00] Mike. It's great seeing you again. 

Mike Luebbers: Good to see you, Ben. 

Ben Tregoe: I'm excited for today. We, I thought we had a really good conversation about what we've been calling highly underwritten or you've been calling, but I've adopted highly underwritten debt products for D TOC. and then in contrast to what we're calling you know, kind of FinTech type debt product.

Ben Tregoe: So what, in your mind would be highly underwritten and what in your mind would 

Mike Luebbers: be FinTech? Yeah, I think highly underwritten as being your, for lack of a better word, traditional loan types. So anything that a bank is offering, right? A bank term loan, a bank, you know, line of credit bank. There's a subset of banks that, that focus on VC backed companies.

Mike Luebbers: So I used to work at one called bridge bank, but at the Silicon valley bank is the big player in this space. So the they'll that's, another highly underwritten, but they're underwriting a little bit differently. They're underwriting to as much who your VC is as, as they are the company themselves.

Mike Luebbers: So broadly we call that venture debt. There's some nuances but, broadly I'd call venture debt highly underwritten then there's asset based lending, which is a very. Fashion lending, but it's very in depth. And that's those are companies that could be banks or non-bank, but are they're, really focused on the inventory that they're lending against.

Mike Luebbers: And, there are a ton of controls. We talked about it last time and it's in, in the blog post. And then lastly, I would put a mezzanine that into that highly underwritten. And again, we talked about it. those are you know, maybe a private equity firm that's investing in behind bank debt. And usually looking at a company that's got a ton of positive cash flow.

Mike Luebbers: So they're, underwriting to you know, just the predictability and the comfort that, that cash flow is gonna continue. So that's what I would call highly underwritten. okay. 

Ben Tregoe: And so then contrasting that what would be a FinTech, you know, enabled lender or loan product? 

Mike Luebbers: Yeah, so I, so there are a couple categories that have evolved, but if I start with just what I think by what I mean by proactive or programmatic those are, you know, processes that are a lot less onerous, a lot less in depth.

Mike Luebbers: More standardized. So, you know, regardless of the company going through it they're, looking at the same, you know criteria. And then also the, output, the loan structures that are offered are, a lot more standardized. So you can kind of read between the lines there that, you know, programmatic is, gonna tend to be a little bit earlier stage.

Mike Luebbers: And that's why we think it's probably a good fit for a lot of D to C eCommerce. they're gonna get looked at the same way. They're gonna get looked at hopefully more quickly. But there's not gonna be a lot of nuance to the, end structure. It's gonna be a little bit more of a standardized loan product and we can dig into it more, but there's a whole kind of risk reward aspect that, that kind of factors into that.

Mike Luebbers: In general that's, where I would put programmatic and FinTech makes a lot of sense there because, and we'll get into, the details, but you know, it's all about scale and how do they automate processes and decisioning and things like that. So that's, why Fintech's kind of fall into that programmatic T.

Ben Tregoe: Okay. So some common, what would be the common names in the FinTech? Programmatic? I mean, not Clearco Wayly 

Mike Luebbers: settle and yeah, exactly. You've got those. You've got on. And we'll get into this in more detail, but on the revenue based financing side, you've got pipe and cap, chase, and lighter capital where it used to be and novel capital where I, am now.

Mike Luebbers: So a lot of players in that space, I think you named a few of the others settle Wayly those are folks that are focused a little bit more specifically on, on eCommerce. But yeah, a lot of different names in that space and more coming every day, similarly. 

Ben Tregoe: And then where would you put the sort of new credit card?

Ben Tregoe: like a Brax ramp, you know, those 

Mike Luebbers: kinds of, yeah. So those are a little bit interesting. I mean, you know, credit cards by themselves aren't, super novel, but there are a lot of providers and Brax is one of the [00:05:00] big ones that are kind of bundling that with other kind of productivity tools or, you know, banking plus credit cards plus spend management, or so there's a, there, there seems to be more kind of bundling and, that's where these.

Mike Luebbers: Quick decisioning, you know, FinTech or, playing. Rex is an interesting one and some of the other kind of credit cards are interesting in that a lot of 'em are kind of sizing their credit limits to how much cash you have. So some of those I think are probably better suited for companies that have some, VC backing as opposed to a boot strap.

Mike Luebbers: but you know, one of the things we alluded to there's just so much innovation in this space and, things are constantly evolving. So what may be true today, you know, could be totally different, whether bras offers, you know, an expanded suite or, you know, another credit card provider integrated credit card provider jumps in 

Ben Tregoe: well.

Ben Tregoe: So what is driving that innovation that you just alluded? Yeah, I 

Mike Luebbers: think there's, a few kind of major trends underlying, I mean, first off, you know, in this space the, this, you know, what we're, you know, focused on here. E-commerce but you know, if you take a step beyond that and just consider the, kind of small and medium sized business space.

Mike Luebbers: That's always been an absolutely huge, market, but it's been tough for traditional lenders to make sense of just because there's so much diversity in the types of businesses and what they're selling and who they're selling to. And it's been really hard for, those traditional players to both underwrite, but also just source those deals in any kind of meaningful scale.

Mike Luebbers: But there's. There's I think kind of three different you know, items going on or, shifts in the landscape. One is just a continued move towards online economy. So there's just way more, you know, providers in the e-commerce spot, as well as, you know, people on sort of the business productivity, you know, SAS online kind of tools.

Mike Luebbers: So just that, that activity on the line online space is putting even more pressure on lenders to figure it out. And then two, there is, you know, alongside that there are just more and more standardized data providers within the market. So, you know, you think of like Stripe and, square, you think about PayPal and Shopify.

Mike Luebbers: And now you look to think about on the ads spend side there's, Google and Facebook. So there's, there just tend to be these bigger kind of data platforms and more and more people you know, linking into those or, able more and more FinTech able to link into that data. So that's a huge, prerequisite to, Hey, if I wanna underwrite and scale, it means I've gotta get access to all this data as, as quickly as possible on as soon in the underwriting process.

Mike Luebbers: As possible. And then sort of related to that, you know, there's just more and more money going into machine learning models and you know, artificial intelligence. So I'm an old fashioned credit guy. These are all things that are meant to make me obsolete. And, even in my current role, you know, that's one of my roles is figuring out how do I make myself obsolete?

Mike Luebbers: So, you know, a human being could have only processed so many pieces of data. Anyway. Now you've got, you know, these models that can, you know, go across multiple different data streams, multiple different platforms and pull it all together. And. You know, in theory, you know, make better credit decisions. So the fact that all three of those things are kind of getting critical mass right now is why I think you're seeing the, FinTech explosion on, the lending front and, in particular, towards subscription based and, eCommerce companies.

Mike Luebbers: how much 

Ben Tregoe: does source of funds factor into this? I mean, you know, from a, if you're getting money from a bank, right? Their source of funds is deposits. Yeah. Incredibly low cost of capital. The flip side is that they're highly regulated because this government has stepped in and said, you know, depositors have protections.

Ben Tregoe: Yeah. If you're, you know, one of these programmatic lenders, your source of funds, Probably a credit fund. I would imagine, you know, somebody sitting in New York or, you know, LA or wherever billions of dollars and they're basically lenders to lenders. Right. So how, much does that, is that always happened or is that relatively new also to the landscape?

Ben Tregoe: Well, 

Mike Luebbers: I mean, [00:10:00] I'll be honest. I mean it's, you know, I've. I've jumped into it in the last four or five years. Right. So I'm sure there were aspects of it that, predate that. But yeah, I think that side, just that the willingness for capital sources to focus on this sector has certainly proliferated, but I think it speaks to a couple things.

Mike Luebbers: I mean, one those, tend to be one step away from, you know, the underwriting engine. So they're looking. Outcomes, they're looking for seasoning. So when they're, you know, thinking about providing debt facilities to any one of these companies, novel or lighter or settle or anybody else they're looking for that, sort of those proof points.

Mike Luebbers: So I think my guess is there's probably two aspects of that. One is. You know, they're still waiting a little bit longer to see if some of these innovative technologies are gonna make sense from a credit outcome. And two they're probably gonna charge. They are gonna charge more obviously than what a bank's, you know, cost of funds are.

Mike Luebbers: So that, there, whatever side of the equation you wanna look at, right? I mean, there's probably a perceived risk. And so these, FinTech providers tend to be priced higher than a bank, but it's also driven by the fact that they're paying a higher cost of funds. So I think it's, I think it's fundamentally about the risk, but, you know, obviously the higher the, higher your cost of funds the, higher you've gotta charge in order for it to make economic sounds.

Mike Luebbers: Right. And I think related to that, you know, as you get more maturity, then the sources of capital will continue to diversify. Your cost of funds will come down. But you know, as you see these kind of innovative players, I think that's the challenge that they have is can they line up sufficient capital at a reasonable cost of funds?

Mike Luebbers: Right? I. 

Ben Tregoe: So let's, turn to the underwriting process. I think the last time we spoke you did an awesome job. It's also in the blog post outlining the underwriting process, how to navigate it, how to prepare for it, the pitfalls, the things you can do to put yourself in the best possible position.

Ben Tregoe: What's the underwriting process like for 

Mike Luebbers: programmatic? Yeah. Well I've, handed at it a bit here in. You know, there it's it. A lot of it relies on these data sources. So that's, you know, from the standpoint of a, an eCommerce provider or any sort of bootstrapped, you know, startup that's probably attractive because a lot of it, instead of, you know, a traditional bank asking you for your audited financials and your five year plan, they're the, FinTech are just linking into all of your historical data and using that to kind of predict where the company is going.

Mike Luebbers: So from the customer's perspective, the prospect, the, you know the, company's perspective, it can look like it's a really fast prospect process because there's not as much lift it's just like here. Gimme, the credentials to your banking data. Gimme the credentials to your accounting data.

Mike Luebbers: You're Shopified data, you know, all of your different data feeds and, we'll figure it out. So that, you know, a lot, of the fintechs and that's how they compete with, the traditional lenders is it's speed to close. Right? So from that perspective, it's the underwriting process is, a lot simpler, you know, having said that.

Mike Luebbers: A lot of these a lot of these companies, the fundamentals of how they underwrite a company are still the same, you know, they're gonna have their kind of initial internal hurdles that any company has to meet in order to be considered for a loan. And then once they clear those hurdles, now it's about, you know, let's, what's the right prize.

Mike Luebbers: What's the right credit limit. What's the right term. And then to the extent that data can't answer all the questions. There's kind of a last phase, the due diligence phase where there's still, you know, it's still old fashioned talking on a phone. You know, there's some fintechs who can totally eliminate that.

Mike Luebbers: But there's probably the, a little bit of a risk gap there. Right. They, there's probably a higher chance that they missed something because it was totally data driven. And so then that factors into. The second half of the equation. Okay. You've underwritten this company now, what do you offer them?

Mike Luebbers: And if you kind of don't feel like you've fully captured the risk, your way is to mitigate that as a lender are to either give a more conservative amount, a more conservative term or more aggressive pricing or, a higher price. So that's, really the trade [00:15:00] off for, any bootstrap. D TOC is you know, I'm gonna probably get a quicker close.

Mike Luebbers: I'm probably gonna know more, more quickly, you know what, the offer is, but, you know, the amount's probably gonna be a little bit lower and the price is gonna be a little bit higher relative to a, highly underwritten deal. And I mean that what we're were, well, we that's, probably not that big of a deal to a company because they probably, they may not have, you know, qualified for the highly underwritten debt to begin with.

Mike Luebbers: The, smaller 

Ben Tregoe: dollar amount it, you know, is makes a lot of sense. Totally straightforward. Okay. I have less money at risk. A shorter term, like, okay. I get paid back sooner. It's not at risk for as long. How does the higher rate mitigate their risk? As a lender thinks about it. Well, 

Mike Luebbers: you're, you know, if you like the, example I would use would be your merchant cash advances.

Mike Luebbers: So again, this is on the blog and, on your website in the field guide, but, you know, merchant cash advances are one of the really early kind of that instrument. So they, it's not even technically debt. It's just, Hey, I'll give you this amount. And then I'm gonna plug directly into your revenue streams and.

Mike Luebbers: Daily until I get paid back. But you can imagine those are so quick. I mean you can get a facility within probably hours of applying there's a little bit. I mean, my assumption I've never worked for one of those companies, but my assumption is that there it's a little bit of a spray and prey approach.

Mike Luebbers: So you have to charge enough so that, you know the, companies where. They actually do really well and pay you back really quick. They get paid back enough in those, on those situations to make up for the higher loss potential on, some of the deals where they, get it wrong. So it's, simply about, it's not individual.

Ben Tregoe: It's not like, I mean, I think that sometimes can be confusing to people. It's the fact that everybody's rates have to be high so that the entire portfolio generates enough money. So that at the expected loss rates, they can still make money. 

Mike Luebbers: Yeah, that's right. That's right. I'm gonna get 

Ben Tregoe: Ben at, you know, at 28%, but Mike, you know, he's getting it at 8%.

Ben Tregoe: Right. It's no, it's like Ben and Mike have to be basically the same 

Mike Luebbers: cause that's right. Yeah. Yeah. I mean, if you compare it to a bank, you know, where a bank's making maybe five or 6% on a, at the portfolio level. It's like, they can't really afford to have any miss. Right. So, you know, because one deal that goes bad and they can't collect back their principle, it wipes out the profits from a big chunk of their portfolio.

Mike Luebbers: So it really does go back to the, key of, you know, I, if I'm highly underwritten, it means I'm, turning over every rock possible to make sure. , you know, I, there's very, low risk of, losing money on that indivi, any individual deal because your margins are so thin. Whereas on the other side, they're building in a lot of pricing and cushion to make up for the fact that they're going really fast from an underwriting perspective, but yeah, you're right.

Mike Luebbers: Individual versus portfolio returns. That's an important distinction. 

Ben Tregoe: I, think that's confusing sometimes to people, or it's not obvious, you know, cuz you'll hear people compare rates, you know? So they'll be like, oh this is like a 20%. Like I have a credit card that's lower than that. Or you know this, rate is a 15% and I can do, you know, my mortgage is at three and a half or whatever.

Ben Tregoe: Yeah. And I think if it's, often not clear to people. You know it's the source of capital. It's the level of underwriting. It's the security, it's the, whole package, which then determines it. And, you know, I think that also then leads to like you also as a DDC business particularly in your earlier stages, you don't qualify for a lot.

Ben Tregoe: These other products. So, you know, it doesn't matter that the bank loan that your buddy got is 5%, cuz you're never gonna get one. So 

Mike Luebbers: yeah, I mean, that's really the, important part, but I think one of the things you're hinting at there is important to call out, which is a lot of these new products, you know, revenue based financing and, merchant cash advances.

Mike Luebbers: And you know, I'm sure there are lots of companies out there who, you know, Their own unique brand, but anything where you're getting paid back as a percentage of your revenues, which, you know that's, you know, the last two companies I've worked for that's, what [00:20:00] we focus on. Those, it creates a challenge for, the entrepreneur, which is getting to that apples to apples comparison.

Mike Luebbers: So if you're looking at one, that's a traditional term loan, and let's say that interest rate is or a credit card and it's 20%. and then you look at an MCA and it says, well, you can get a hundred thousand and you only have to pay me back 110,000. It's tempting. And, you know for, that entrepreneur to say, oh, that's only a 10% interest rate, you know, $10,000 fee, but I'm getting a hundred thousand and that's not really accurate because the, rate at which you repay is dependent on.

Mike Luebbers: Where your revenue is and how much of the, you know, how much of that revenue they take as their daily repayment. So you do need to do some modeling because you could, in, in that example, the a hundred thousand, they could set the repayment rate such that you pay it back in three months. Well, now you've paid 10,000 bucks on three month money, not 12 month right now, it's, you know, easy math.

Mike Luebbers: Now it's a 40%. Implied rate. Right? So that, that is what happens with, MCA a lot of times. And then RBF is similar in, how it's structured but, RBF typically has a much longer planned payback, which is, you know, could be anywhere up to three, four years. Right. But conceptually, that's an important distinction that you need to, take into consideration if you're comparing two different facilities, particularly if you're comparing.

Mike Luebbers: A timeline with a stated interest rate versus a revenue based loan. That's just a flat fee based on a percentage. Yeah, 

Ben Tregoe: I'm gonna jump ahead a little. But because I think that this gets to another key thing, when people they get caught in comparing the wrong things or not prioritizing how to think about these products for their own business.

Ben Tregoe: And what we've noticed is that Everybody likes to talk about rate as the first thing, you know, like, oh yeah, it's my effective rate is this. Or the rate is, you know, whatever. And what we counsel is it's really the matching of your, the cash to the cash needs of your business. That should be your primary consideration.

Ben Tregoe: And then rate, you know, is end a bunch of other things a after that. But there's no point getting. Rate, if you don't get enough money or a great, you know rate, if you're paying it back super quick or whatever it might be. 

Mike Luebbers: Yeah, I think that last one tends to be the bigger sticking point. It's the re it's the reti tying of the repayment of the loan with the, incremental cash flow that's being generated by the proceeds of that loan.

Mike Luebbers: So that's, a big concept and it's there's a lot that goes into that, but the simple. The example is if you take out a hundred thousand dollars loan and it's to buy inventory and that inventory takes you a month to sell that's, great. But then what do you do the next month?

Mike Luebbers: When you need to buy another a hundred thousand, you've now taken out maybe a term loan for a hundred thousand bucks, but it's not a working capital product. So there's a difference there. And the, and. The, problem is if you have, if you take out you know, a short term MCA and you're planning to spend it on, let's say ad spend, and you think that's gonna generate an extra, you know, 20 K and monthly sales.

Mike Luebbers: Okay. Well, what's the incremental cash flow that you're gonna get off of the 20,000 and how long's it gonna take you, you know, to, to generate those, kind of increased monthly average. And there could be, a very realistic scenario where you're paying back that loan in three months, but the incremental cash flow you were expecting to generate off of that, that funds takes you like six months or set another way in the time it takes you to pay back that loan.

Mike Luebbers: You're you know, if it costs you 10,000 bucks on that a hundred thousand dollars loan to use our earlier example. What if in those three months you only generated 6,000 bucks in incremental cash flow, bottom line, incremental cash flow, that loan wasn't the right fit. You, know, not only did it net you negative 4k, but if you model that out, you actually find out that you couldn't, you wouldn't even be able to deploy at a hundred thousand the way you initially wanted to towards that.

Mike Luebbers: Because each month you're paying back a third of that plus, you know the, fee over the [00:25:00] top. So it is a common issue where, you know, somebody looks at the dollar amount first and says, okay, I needed a hundred K to spend on ad spend over the next three months. Great. This is a hundred thousand dollars loan, but they didn't focus on how the repayment structure of that loan was.

Mike Luebbers: And, when you lay that out and map that. Sometimes they don't overlap the right way. Yeah. I mean that's, really, the key is, you know, are you gonna be able to have the money and deploy the funds in a way that's gonna generate excess cash flow in the timeframe that you have to repay that loan in excess of the cost of that?

Mike Luebbers: Yeah. 

Ben Tregoe: Need a good model. 

Mike Luebbers: Yeah, you need a model. You need a model. I mean 

Ben Tregoe: To, 

Ben Tregoe: put a fine point on that, you know, some of these MCA, depending on your usage of it the repayment percentage goes up. So if you're, you know, up at like the 80 plus percent on your credit utilization you're, paying back as much as 40% on revenues.

Ben Tregoe: And I think 

Mike Luebbers: that's on top line. Yeah. On top line. And maybe you're selling S that only brings you, you know, 50 cents on the dollar. 

Ben Tregoe: Right. So you've like the impact on your cash generation in those following months is, dramatic. And that you can see business, you know, companies that get themselves into this like dead trap where.

Ben Tregoe: They take the money. They use it, like you said, they're not getting paid back FA you know, they don't generate incre incremental cash, fast enough to match the, payment. And then they've got another short fall. And so then they gotta borrow again and it just keeps going right. Is, I mean, obviously a good model and discipline will help you avoid that situation.

Ben Tregoe: But if for, you know, the founders that are in that situation, like. any tips for get out 

Mike Luebbers: well, I mean the, and I don't mean to pick on MCA because there are some, you know, scenarios be because it is a quick, it is a quick process. There's certainly, I'm sure are scenarios where that, math, you know, works, but If it's, tough.

Mike Luebbers: I mean you're, right. It's the, best way to avoid that is to, model it first and, not jump in because I think what ends up happening, unfortunately not, only is, you know, do they get it? And they realize, oh, this wasn't the best, you know, best capital source. But if they also have a hiccup in their operations, now they've precluded themselves from getting any, you know, interest from any other kind of lender.

Mike Luebbers: The, kind of middle ground scenario is, like I said, the, like an RBF compared to an MCA when I was at lighter. And now at novel, you will see a lot of companies that come in and, they're asking you to take out or refinance their existing MCA that. And that, that, that could be a, that could be a viable path if, you're still growing and, you know you're, operating trends are more or less stable or improving because an RBF is really just a longer term payback.

Mike Luebbers: So, you know you, get a, longer sort of use sound of the, so that's, the hopeful scenario, but yeah, no it, can turn into a spiral pretty, pretty quick. And so I think the, you know, unless you can get some friends and family money or some other injection to kind of do the same, take out that MCA and kind of break off that cycle.

Mike Luebbers: I think the safest bet is to, you know, spend the time to model it. And that's, you know, one of the challenges. It's not fun to go raise money and it's not fun to kind of compare all these different options. And so it does become pretty tempting to take the first offer or, that company who says they can turn it around with out bugging you and, you know, give you money in 24 hours.

Mike Luebbers: But my, sort of the, you know, caution to folks. okay. Would it, what was worse if you had taken like an extra couple weeks, maybe with some follow up calls with the, lender and you know, maybe having to provide more detail to get a structure that's more in line with what you need. I would argue spending a, little bit longer time to get the right call is, worth going through that?

Mike Luebbers: Yeah. The, trials and tribulations of, a death.

Ben Tregoe: So [00:30:00] we've, modeled it. We've thought about it. We've know, we know the risks. We're ready to go ahead. You know, the programmatic lender, like what should we be thinking about now and how, do we make the progress go smoothly as possible? Get the best. 

Mike Luebbers: Well, this, you know, really goes back to the first or the prior blog post.

Mike Luebbers: There's a lot of good lessons in even that highly underwritten I'd recommend reading it, even if you don't quite qualify, cuz that's not only is that hopefully the path that you're heading toward and, again, the benefit of the highly underwritten is it's gonna be way more individualized structure, way more aligned.

Mike Luebbers: And, hopefully way, better pricing. So everybody should aspire to get to that, point. But I do think there are a lot of lessons in that first post that, that apply across the board. And that's, you know, knowing your numbers you know, being prepared with backup plans, anytime you're talking to somebody like me, and I mentioned this on the last podcast.

Mike Luebbers: I'm a downside oriented guy, because, you know if I guess, right, I make my 10%, if I guess wrong, I lose all the principle right. On an individual credit. So talking to somebody who's understanding of, Hey, these are the levers that I know I can turn. And, these are the KPIs I'm watching for.

Mike Luebbers: That's, hugely important. And, but I think related to the programmatic side, you know, we talked about assessing cost of capital. I think, you know, there is something to be said for the, reputation that the, lender has in the market. You know, so understanding how long they've been doing it.

Mike Luebbers: You know, would if they're, they have a good track record in, the market from a social media standpoint and not to sell against myself, but you know, obviously there are players in. Further up you know, that like Shopify and Amazon folks like that, that are, you know, they're huge.

Mike Luebbers: So there's probably pluses and minuses there from a reputation standpoint. But I think also understanding, you know am I dealing with a lender, a FinTech that's a generalist? Or are they a specialist? Are they, you know, solely focused on eCommerce or are they, you know, are they.

Mike Luebbers: SAS based, but they'll consider the occasional eCommerce. You know, those are things to take into account, not just for the initial underwriting, but the, ongoing relationship. You know if, you if, the company kind of understands what you do better chance that they're gonna continue to wanna work with you going forward.

Mike Luebbers: So there's some benefits to, you know, having those face to face conversations with companies and hearing the questions they ask and, you know there's, some benefit to the entrepreneur. I mean it's, your opportunity to sort of interview the lender at the same point and get a sense for, are these guys fly by night or are they in it, you know, is a transactional play or is it a, relationship that they're trying to build?

Ben Tregoe: Do you think that The lender would do you think there's a difference in how they treat troubled loans or troubled borrowers in the size of the lender? You know, for example, is Shopify, Amazon, or PayPal gonna be much faster to just like cut, you off and, you know, send you, you know, to, to your feet, as opposed to the lender, that's got a hundred or 200 million.

Ben Tregoe: Portfolio, my theory being, or my hypothesis being is that Amazon is like, I don't care, Ray, I'm gonna, you know, I have like somebody else to answer to. Whereas the 200 million portfolios like, oh 

Mike Luebbers: my God, 

Ben Tregoe: I don't wanna report laws. I'll do anything I can to help these guys out and get through it. Or are they like even more sensitive to it?

Ben Tregoe: Do you have any background 

Mike Luebbers: on there? I, you know, I would be guessing on the bigger guys, cuz I haven't, worked that angle at least at the programmatic size, but I think your hunch is probably accurate. I, think if you're, if you. , you know, if your lender is someone who knows the space and is really trying to build a longstanding relationship, it's more likely that they take reputation risk more seriously, meaning if, and this is gonna happen.

Mike Luebbers: So, you know, I don't mean to like any, lender is gonna have some problem credits and you know, some of the outcomes. Are not gonna be great for the entrepreneur. And that entrepreneur is probably gonna hate that lender going forward. So there's no way to completely eliminate that. Unfortunately it's, [00:35:00] just, you know, it's a spectrum of possibilities, right.

Mike Luebbers: But a lot of these, a lot of these fintechs are, really conscious of, you know their, reputation and, they need to be because if, you know, all of a sudden there's bad press. , they're not on the same footing as, you know, Amazon or Shopify who have a million different revenue streams. So yeah, I would think that, you know the, your smaller, you know, scrap or FinTech, probably more likely to want to work with you through a problem.

Mike Luebbers: But I also think it's a function of, you know, how well do they know your business model? And how well do they know your industry, right? If they're a generalist, it's possible that they just don't quite get it. And they freak out at their own things. Right. 

Ben Tregoe: You made a good point about.

Ben Tregoe: You know, the terms of these loans or whatever you want to call them are, completely in the favor of the capital provider. And, you know, when I read through them they're, almost always like we can change 'em at any time, for any reason, you know, best of luck. Right. So obviously they don't wanna do that, but if they're in a jam, you know, they, they can, I think I guess I'm just making the point that like, you know, maybe borrowers need to be really careful about like oftentimes when they need the money, the most, the conditions of their business are gonna be such that what they thought were capital available to them or at certain rates is not gonna be there when they try to call it down.

Ben Tregoe: Is there anything that they could do. Are you, do you try to be proactive about that? Or how do you, or do you just have to kind into 

Mike Luebbers: consideration? Well, I mean, first I'm, you know, I'm over here nodding but, I would make a distinction. There are certain products out there where there's a, what I would call a committed capital amount available.

Mike Luebbers: And so that could be. You know, okay, I'll give you a $500,000 facility and you can draw $250,000 now. And 250,000 later, there are providers out there who will commit to that. There's levels right there. There's some who will say it's yours when you want it. And maybe there's a window. You know, you need to draw it in the next six months for next 12.

Mike Luebbers: but the bar to clear to get access to that, that second tranche of two 50 is, pretty low. There are others who may say, okay, I'll give you access to that. Two 50 provided that certain key performance metrics are still being met. I put that at sort of the next tier down, you know and, now this becomes a, process of negotiation when you're looking at those, like, are those reasonable milestones or, you know, funding conditions.

Mike Luebbers: then you know, way down the list or is what I think you're getting at in general is that a lot of providers will say, Hey, you've got this credit limit available to you, and we're constantly taking in your new data and we're constantly, you know updating that credit limit, but that's not a committed credit limit.

Mike Luebbers: It's a calculation that to your point, they can. You know, for whatever reason decide to turn off. And so, yeah, that can be a problem. I think the, other angle to your point is, again, the, you, you need a lender who understands your business model. So speaking to D to C eCommerce, a lot of that's gonna be highly seasonal.

Mike Luebbers: And so your need to, build your inventory ahead of sales ahead of the holiday season. is gonna necessitate access to capital. So if you don't have a committed facility and you have a lender who doesn't quite get your seasonality or they've put, you know, pretty tight performance metrics around your, point in time performance.

Mike Luebbers: Yeah. There's a good chance that you're gonna, you're gonna run into a situation where you, can't access the capital when you need. That's sort of counter. I mean, it's very counterproductive if you're the lender, right? Because now you've almost as the lender, you've almost manufactured a problem that you could have avoided had you just understood their model better.

Mike Luebbers: So that's a category where I'd say, you know, that's just a bad lender, that, that didn't know what they were doing, but that doesn't help the entrepreneur who was stuck in the middle of that. So. Again, I go back to you gotta be able to read those terms in, the term sheet before you execute anything and model it out.

Mike Luebbers: And by the way, a good lender will help you with that. A good lender will, you know, model it out. And if they're vague [00:40:00] or they don't quite know, or they try to model it in a, you know, non-seasonal way. And you know, your company's super seasonal. Those are probably red flags that, that maybe they don't get what you're, trying to accomplish.

Mike Luebbers: Yeah, a lot of it is you gotta do that work upfront to make sure again, it's the right fit. And it's and, when I say loan structure though, that's exactly what I mean, you're access to it under the conditions and at the timing that you need access to. So is the, and a lot of these facilities they're yeah.

Mike Luebbers: They're not committed. So that's the biggest thing to keep in mind is, you know they can pull back that credit limit whenever they want. So 

Ben Tregoe: as a, the entrepreneur. give some thought to how important is committed capital to you. You know, do you anticipate that you, might get into a period of economic or business or both related issues that, that could cause the lender to pull back or, you know, do you want the certainty of having committed capital and, knowing that 

Mike Luebbers: they'll be there?

Mike Luebbers: Right. And I, I do again, I think a lot of it boils down to speed to close. So you. I, again, I don't think speed to close is, the end be, but the, quicker it is to close in just my sort of instinctual logical take is more likely that there is or, less likely that it's gonna be perfectly attended to what you.

Mike Luebbers: You need it for, right. Well 

Ben Tregoe: they're yeah, cuz they're 

Mike Luebbers: gonna be conservative. It's like one size fits all. Yeah. They're yeah. They're either being conservative and, or they're, it's one size fits all and they're just they're, you know they're, trying to build volume and it's, less of a what happens in the future discussion at, those shows, right?

Mike Luebbers: There's an 

Ben Tregoe: interesting strategy. I don't know how you would do it besides having a good network, but there is an interesting strategy of trying to find these recently launched FinTech or programmatic lenders and get into their beta program. where they give you basically 

Mike Luebbers: anything you want. You're going.

Mike Luebbers: Yeah, you might have to always think about the next one. Like you might only be able to do that for six months at a time. Yeah. But but yeah, you're right. There is. As with anything else, there seems to be a tendency to launch fast and be aggressive and then figure some of it out later. I mean, on the landing side.

Mike Luebbers: So I'm, a risk adverse guy. So I try to advise, advising against, or being a little bit longer. Term and, you know, your strategic thinking if you're a lender but, yeah you, might have a point there. 

Ben Tregoe: What what are some of the things that think about, you know, if you've taken programmatic debt, I mean, you know, one issue that we see people fall into is, they kind of make assumptions that like, oh, I'll take this loan from these guys.

Ben Tregoe: And I'll take some from these other guys and some of 'em over here and then I'm gonna run these credit cards up. , you know, so what are some of the things that other things are, you know, maybe just talk about some risks of it, of the, 

Mike Luebbers: yeah. It's I've seen that it's a challenge. And I think it really is incumbent upon the lender to, do, to help the entrepreneur during the kind of closing process of, you know, educating them on that.

Mike Luebbers: Because for most of these lenders, , they are taking a, legal security interest in, the assets of, your company. And what that means is, you know, as debt, if you think about the kind of cash flow waterfall, typically debt gets paid back first, then unsecured creditors, like AP and stuff, then the then the equity holders.

Mike Luebbers: So that's usually first. . And so these lenders, when they, sign these deals they're, typically requiring that they're kind of first in line for payback and they do that through a legal instrument. So they if, you're a, if you're a senior lender and, some other debt kind of provider comes in after you you might have a legal, like leg up.

Mike Luebbers: But you're still now, you know, dealing with a company who has a different kind of debt burden, meaning like their repayment situation is different than what you underwrote. So a lot of lenders will say, Hey, I need to be in first place from a legal security standpoint, but also you can't take on any, more debt, cuz I don't want to be in a situation where now there's three debtors trying to get paid back from the same cash.[00:45:00] 

Mike Luebbers: There's, another complication with MCA isn't typically, or technically debt from a legal perspective, but they MCA providers are they're attached at almost at the top of the waterfall because they're, tying into your Shopify or whatever, and they're getting, you know, their daily payments.

Mike Luebbers: So. Any other kind of debt provider doesn't like playing with MCA. They don't want any other MCA. So what, what could happen? You, could decide. Okay, well, screw it. I'll I'll world the dice. And you know, I'll take on debt from settle or, you know, lighter capital or novel. And then I'll, take on an MCA after the.

Mike Luebbers: Now you're in default of the agreement with your senior lender, they can do a lot of things to, you know, try to get their money back and, you know, back to their earlier point of like, you know, things to keep in mind during the underwriting process. I mean, character is the biggest thing. So you know that, that, doesn't bode well for a long term relationship.

Mike Luebbers: If you sort of immediately, you. As, the entrepreneur, you know, kind of break the rules. So there's a lot of reasons why you need to be well, ignorance back to your kinda big picture question, excuse for breaking 

Ben Tregoe: the rule. Right. So, 

Mike Luebbers: right. Yeah. Right. And that's why I saying, yeah, you're right. I mean it's, in the, it's in the fine print of the documents.

Mike Luebbers: And like I said, at any good lender should be upfront about that and educating. When in doubt, assume there's going to be an issue taking multiple forms of debt without at least getting the consent of your, current debt provider. And it can get really messy if you have multiple not, to mention the fact that it just, you know, now you've created an extra burden for yourself.

Mike Luebbers: So. yeah the, advice would be, careful if you are considering taking out another form of debt, talk to your existing lenders first and understand if it's allowed under what conditions it's allowed. And or if you just have another, you know, better deal. Talk to that new lender about taking out the existing debt.

Mike Luebbers: So, you know there are ways around it. You just need to be thoughtful and you, don't wanna run into a situation where you're in fault of. Lender's agreement. Cause first thing that goes out the window is the long term relationship. The next thing that's at risk is your short term viability.

Mike Luebbers: If, the lender feels like they need to take action to try to get into the situation. But yeah, traditionally MCA is one of the tougher ones because it's so it's hard for traditional lenders to or, even, you know, other fintechs. Stay in front of that since, the MCA provider is, seeing the cash first and, pulling their payments on them.

Ben Tregoe: Do you wanna tell me a little bit about novel? I mean, you've been there three weeks, so you must know everything about the company by now. 

Mike Luebbers: Yeah, no I'm, super, thank you for that. I'm super excited. So novel capital is it's, a revenue. Financing. So they're, focused on companies that have you know, recurring reoccurring and repeatable cash flows.

Mike Luebbers: I am new and it is, and we are, you know, as probably no surprise, constantly evolving, you know, our target markets and, the spaces. So there's a lot of good things that are underway. Also looking at, you know, how can we expand beyond just providing capital products? So how can. You know how, can we provide more value add to our customers?

Mike Luebbers: So lots of good things on that front, I'm super excited to be there. And so for anybody out there, who's looking for financing, check us out. Awesome. 

Ben Tregoe: Mike, thanks so much. Great to see you again, really appreciate 

Mike Luebbers: making the time. Pretty good. Thanks man.

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