Every brand leader has faced the stomach churn from inventory invoices stacking on top of ad spend payments stacking on top of the regular ongoing bills stacking on top of payroll. Maybe due dates were pushed out by using a credit card or short term loan, but eventually the combined payments come due and the brand leader is staring at due dates and amounts that don’t line up favorably with the bank balance.
Other brand leaders have built rocket ships and have a different stomach pain. They see growth that could have been but they couldn’t capture because they lacked the capital. They struggle with the knowledge that they could be growing faster if only they could source the capital.
The Cruel Reality
The brand business model is governed by a cruel reality. You pay for your inventory long before you monetize it.
We use terms like Working Capital, Net Working Capital and Cash Conversion Cycle to describe and manage this iron law, but despite our efforts, it lurks in the background and underpins all we do. It forces the constant dance of deciding how to pay for inventory and pay for ads. Play it too conservative and we leave demand unmet, sales unmade, cash unrealized and customers unacquired. Play it too aggressive and we can spark the cash crisis that leads to bankruptcy.
The Problems with Current Capital Offerings
The biggest problem with the current capital solutions is not their rates or their terms, it’s that they don’t match the inventory cycle of the brand. They either provide all the capital now in one big shot (equity, term debt) or they force repayment long before the brand can fully utilize the money (MCA’s, short term lenders, ABL’s, LOC’s, factoring).
The second biggest problem is that the current alternatives don’t match the capital available to the capital needed. If you could use $3 million but can only get $1 million, the cost of that $1 million wasn’t the interest rate, it was the cash you didn’t generate from that incremental $2 million PLUS the future cash flows from those unacquired customers. That’s a huge price to pay.
To put a finer point on it, your main criteria in judging capital options should be the growth over time enabled by each option. The capital option that best matches your inventory cycle will have a natural and compounding advantage over the options that don’t match your cycle.
Paying for Inventory As You Sell It
Two legendary retailers, Amazon and CostCo, understood this cruel reality and designed their business models to solve it. Finance people call it Negative Working Capital, but all it means is they designed their business models so that they received cash from their sales before they had to pay their inventory suppliers.
The results were magic. The more they sold, the more cash they had. They could finance more of their growth using that cash and didn’t need as much outside capital.
Simple Thought Experiment
If you could pay for your inventory as you sold it, you would do that all day long. You don’t need to look at your financial model or consult your CFO. You know intuitively that paying for inventory as you sell it is better than paying for inventory before you sell it. And you have already tried to do this by negotiating better terms with your suppliers.
A Better Way
Elephant Herd Capital enables you to pay for your inventory as you sell it.
We do this by matching our funding and repayment cycle to your inventory cycle. We fund 100% of the inventory invoices enabling you to unlock the same magic Amazon and Costco captured. All the cash that was tied up in inventory is freed up. It falls into your bank account. And you can use all that incremental cash to invest in more growth or distributions.
- We advance the funds needed to pay the inventory invoice.
- There are no payments while the inventory is being produced and shipped to you.
- Then payments happen based on when you expect to monetize the inventory. So if the inventory is being used for DTC, Amazon or a retailer, we set our repayments to match your expected monetization.
In exchange for this service, we charge a premium of ~1.5% per month on the amounts advanced.
One facility. 100% of inventory financed. Growth unlocked.
Who We Work With
Elephant Herd Capital is not for everyone. We look for brands with strong unit economics and repeat sales who are profitable of near profitability. We also seek brands with a solid finance function either in-house or through a fCFO. Brands with annual sales in the $2 million to $25 million are the current target and we plan to serve larger brands in the future.
Who Are Great (and not so great) Fits
Brands that will find the most value from Elephant Herd Capital fall into two camps.
- Rocketships that have unmet demand and are scaling past their current capital options.
- Successful brands that are growing slower and where the founders are seeking increased cash distributions.
We are not a good fit for brands that are facing short cash runways.
How It’s Better
The most important criteria for judging capital alternatives is the growth enabled over time. As mentioned above, if you could deploy $3 million, but have access to only $1 million, the cost of that $1 million facility isn’t the interest rate and fees, the true cost is the opportunity cost of missing out on that initial and then future cash flows from that incremental $2 million.
Terms and price of the capital are important and Elephant Herd Capital compares favorably to alternatives on those criteria too. But where the advantage becomes absolutely clear is in the capital over time and the different growth rates our capital enables versus alternatives.
We will be happy to show you this difference in your own model.
Getting Started
To learn more, check out Elephant Herd Capital, email partners@elephantherdcapital.com or schedule time.