Episode 221 Featuring Alex Bond

Financial Lending with Eric Youngstrom

Financial Lending with Eric Youngstrom

Eric Youngstrom is an e-commerce expert, having served as the Chief Strategy Officer at ShippingEasy and the Vice President of Business Development at Stamps.com. Eric is currently the Founder and CEO of Onramp, a purpose-built financing platform for e-commerce brands. In the 3 years since its founding, Eric and the Onramp team have raised over $16 million in seed funding and have helped dozens of e-commerce brands get off the ground. On this episode we discuss the best time to consider financial lending, how to best use funds once you have them, challenges of lending, and much more.


What is Onramp Funds

Eric Youngstrom: We're a working capital finance solution for the e-commerce small business owner, which means we help e-commerce small business owners with making sure there's always funds available to pay for inventory. And then to pay for the advertising that drives inventory, sales turnover, and then to pay for the shipping and fulfillment expenses associated with that sales turnover.

What we find is that, you know, especially in the small business range a lot of times most personal capital is tied up in there. And we think that that capital should be redeployed to more growth oriented tasks, and our capital should sit in there and really just make sure that turnover continues.

Alex Bond: Cool. So from your experience, what do you consider the best specific use for financial lending? I mean, we're talking about inventory scaling, a little bit of marketing? Is it that sort of thing or is it so diverse it's kind of impossible to answer? 

Eric Youngstrom: Well, I mean, look, there's different financing for different things, right? We are definitely that kind of quarterly financing, right? You pay back as you sell. So we're not a credit card with a 30 day term, but we're also not a five year equipment lease. Right. For a piece of equipment for your warehouse. 

And so, you know what I think is most important around financing in the general sense of it is really important for somebody to understand the structure of the financing they're borrowing and the intention that the lender had for them in the use of funds.

Because if you misallocate money that you borrow from a lender and into a task the lender wasn't expecting, their payments are geared around a specific set of expectations that may not be able to be met. Right? So if you use my funds for equipment financing, well that means there's not inventory to sell.

And I have this kind of 90 day expected turnover cycle in terms of repayment, but then also, you know, within 45 days giving you more money. Right? Whereas if you went and, you know, bought a forklift for a warehouse and you needed five years to pay it off, well, hold on. I'm expecting full repayment. 90 days, not, you know, not five years.

You know, the number one thing we see small business owners, you know, when they're challenged with cashflow is a lot of times they actually have the funds necessary to run the businesses. They've misallocated those funds, and so what the Onramp system does is very much align our funds with a specific set of use cases and turnover expectations so that you always have funds for inventory, for advertising, for shipping.

That means the money that you would've tied up in there can be used for other things, and it still leaves means that you can go and get equipment financing, right? Or lease a truck for your business using the proceeds of your business cause we're not interfering with that. But it helps make sure then that what you're not doing is having funds misallocated in places that might then, you know, prohibit you from doing something else as your business. So we very highly structured and targeted for that working capital problem. 

Alex Bond: I mean, that makes a lot of sense. Do you have to kind of hold their hand through that spending process or do you really just like, say, Here's your money, here's what it's for. Don't screw it up. 

Eric Youngstrom: No. We try to be very much coach them through how it works. Now, some of our customers already understand it very, very well. Certainly by the time you get to your second and third turnover with us, it becomes just second nature, right? It becomes something that our business clients then, actually really appreciate because then they, they've seen it in action.

They've felt it and they're like, hold on. I never have to worry about this specific problem in my accounting anymore. Right. Which is not to say I don't have other thing, other problems to solve, but they've now gotta solve problem here and that feels really good. And it makes it really easy for us to continue to work together.

Alex Bond: Part of what I'm hearing you say there is that you do have multiple clients that come back and kind of double dip Oh yeah. And get more lending with you. So how often does that happen? 

Eric Youngstrom: You know, our average customer is staying with us for two plus years, and they're borrowing kind of every 40 to 90 days and just perpetually turning that over depending on, you know, time of year, seasonality, things like that.

Things accelerated over the Christmas holidays, right? There's so many sales things slow down this time of year, right? And then the way we're structured is your payment cycles with us are tied to your sales cycles. And so if sales decline, the amount you pay us declines. And then as those sales grow, you'll pay us more, but it's a percentage of those sales.

And so what that really means then, right, is that the merchant should never feel the pence to be able to make a payment when they have 'em in the sales to drive that payment. The alignment's very, very tight, which then means, you know, if you find yourself in a situation where your credit card processor is holding a higher reserve rate, well what you're gonna pay us is reduced because of that until those reserves get released.

And so what we've really done is built an engine that completely aligns with that sales turnover cycle, the sales receipts and deposits of the small business owner so that we are not putting them in a pinch accidentally. Right? So it's really about helping getting them to a much more stable place with turnover and really addressing kind of the cost of goods sold and inventory expenses associated with running these businesses.

Financial lending process at Onramp Funds

Alex Bond: So just to kind of take a step back and start from maybe inception to execution to payment, how easy is it to get a loan with Onramp? Do you mind walking me through that process a little bit? 

Eric Youngstrom: Sure. Our customers can, in about 10 minutes of their time, be fully completed the entire application process, right?

So creating an account by, you know, giving us your email and creating a password. Connecting your online stores, stores, connecting a bank account, and then providing us the business documentation necessary to validate that you are who you say you are. Right to prevent fraud and comply with all the federal lending regulations.

Our fastest loans are out in less than two hours, so from sign up to actually, you know, funding. Leaving our bank going to you. You know, most customers need a couple of days cuz they actually want to think about the offer before they just say yes. But it's a really pretty painless process. And in fact, you don't actually have to even give us the business identity verification data until you've been fully approved for a loan.

We won't deploy funds without it. But we're actually using, you know, bank data. We're using your, your sales performance data from your Amazon or Shopify or BigCommerce store to make these offers. And so really the hardest part of that process, right, is tracking down your e i n letter, your secretary of state filing documentation for your business and a copy, a picture of your driver's license, your passport.

And we actually don't make you do that. Don't ask for that data until we actually know we can loan you the money. And so it's, it's worth taking that additional step, right? Cause you're like, oh, hold on, there's $20,000 waiting for me. Yes, I will go spend the next five to 10 minutes to track down those documents, upload them via secure upload folder. So that you can then, you know, complete the identity verification step. 

Key factors they consider when qualifying a brand for a loan

Alex Bond: So what are those specific factors and qualifiers that you look at that, it sounds like you guys work closely with Amazon and WooCommerce. I think Shopify is one of them as well. So if you're kind of only looking at the business. Right? Instead of the personal I think I read somewhere, you don't look at personal credit history or anything like that either. So what are some of those factors that you're looking at? 

Eric Youngstrom: We're out there looking at, you know, what has your sales performance been historically? And then we're gonna build a forecast for what we think your sales will be over the next three to six months.

We're gonna look for you have sufficient sales, right? That we can build that forecast. You know, we're gonna look at your banking data, right? Transactionally, and see, hey, if you have had a problem making loan payments in the past? Right? Or, you know, do you have problems with, you know bank balances, you know, checks bouncing and stuff like that?

And really trying to get a sense of just what that merchant's pay, payment history has been, right? And sales history. We can learn work with merchants who have literally their first 5,030 days revenue. We have a program called launchpad that we help emerging merchants with. 

Our core customers are typically gonna have at least six months for revenue underwrite, you know, and we're gonna use that revenue trend, right? To then say, Hey, great, what's the next 90 days look like? And then probably loan against that 90 day expected revenue stream. 

Alex Bond: And what's kind of the range of the loans that you give out? I've heard you throw a few numbers around, is it 5,000 to 200,000. I mean, what's that range look like? 

Eric Youngstrom: Yeah. We're typically loaning anywhere from a thousand dollars to 400,000. It's kind of the sweet spot range for us right now. We will be increasing that over time, but right now it's really, really target. Right. 

And that's, you know, we're really focused on working with small business owners with revenues of 10,000 a month to about a million dollars a month in recurring revenue. And our sweet spot's, probably about a hundred, 200,000 in recurring revenue. On a monthly basis. 

But again, even that launchpad product, right, where it's your first $5,000 a monthly revenue, we have a product for that emerging class of merchants. 

Getting funds within 48 hours

Alex Bond: According to your website, brands can actually have their cash in hand within about 48 hours from the step-by-step process that I saw after creating an account. 

So is the loan coming directly from your account? Where is the lending money actually coming from specifically? 

Eric Youngstrom: Yeah. So we're loaning from our bank account and depositing those funds in the Merchant's bank account.

We do it all via ACH and, you know, the ACH network is not, well, they're adding real time functionality now. Right? But it's typically an overnight network. And typically, you know, When I said earlier that somebody could apply, you know, enroll, apply, request money, be approved, and have funds dispersed same day, it happens.

But that typically means that overnight is when the funds will arrive in, in their, in the client's bank account. So it is a pretty rapid process. And then, yeah, we're gonna talk to the merchant about what our expectations are around, you know, the funding is, you know, to really help this sales turnover, right?

So we're not funds for you to go buy a truck for your business. However, your personal cash now has been released from cash conversion cycle problems, right? You're not having to use that money for inventory anymore. You can borrow against the inventory you have in stock, which means then, your personal funds can be redeployed to those other investments in your business that'll help it grow.

And that might just be redeployed into paying your salary. Because if you think about it, a lot of business owners this use a million dollar a year revenue stream as an example, right? If you're generating $250,000 in top line sales every quarter, but let's assume that you need 40% of that for turnover, right? To pay for shipping and fulfillment and advertising and inventory. 

Well, that means you needed a hundred thousand dollars at the beginning of quarter, right? To to have the necessary inventory, then drive the advertising and shipping to create sales. If it's midway through the quarter. When you need another a hundred thousand for the next quarter, well, you haven't actually extracted a hundred thousand in profit yet.

You're actually not gonna ever have a hundred thousand in profit. Right. But you haven't had, you haven't had the sales necessary to, to free up a hundred thousand in cash for the next quarter. Our cash is there for that. Right. And so, and then what WE'RE suggesting the merchants is without us.

They'll get to the end of the year, their accountant's gonna say, Hey, congratulations, you did a million dollars in sales last year and let's just pretend you had a 10% profit margin. So a hundred thousand dollars in profit. You owe the IRS for your taxes. But then you go home and your wife or your husband's saying to you, hold on.

There's no cash in the bank. We're still eating peanut butter and jellies. We haven't been on vacation, right? We're not putting money away for retirement for college, and that's because it's captured in that cash conversion cycle. And so what we are doing then is saying, great. Release your funds from that. Leverage the inventory that you now own to release your personal capital from having to own $50,000 in inventory. 

You can borrow against that. You've now freed up your capital, which means you can use that to pay yourself. And so now you can pay your salary while you're using our capital to continually just churning over your sales and inventory, and it's always there for that next round, and because you're paying it down as you sell, essentially, the merchant now is paying their cost of goods sold on a per unit basis.

When they've received the sales receipts for the sale of that unit, not in advance. And so that's the real power of a product like ours is it's highly optimized to help the merchants escape. You know, to get out of that just captured cycle of my money's stuck in inventory and advertising, how do I free it up, put our money in instead?

Empowering business owners through funding

Alex Bond: And part of what I like there, Eric, that I hear is you're not essentially writing these guys a check, to help them get out of a tight spot is you're actually, the real value comes from the coaching aspect in empowering the entrepreneurs and the business owners in how to almost like, liberate themselves a little bit.

You know? It definitely feels more of an empowering process then okay, here's your money. Pay us back when you're ready. I really like that empowering piece there. 

Eric Youngstrom: No, no. I think that's the mission, right? Like we wanna help more small business owners reach sustainability. And, and reach the scale that they want to achieve. Right? And that scale answer is different for everybody, but sustainability is the same for everyone, right? 

Sustainability is I have a business that generates the revenue and the profit margins that I want. One person's, you know, definition of I've reached the scale I want might be 20 million a year in revenue, and somebody else's could be a million a year in revenue, right? That's not for me to decide, right? 

I don't have an opinion one way or the other on that. But what I wanna help them do is reach the point where they're at sustainability. And then, you know, the reason that we like working with customers for the long term is that it, once you've done a cycle with us, right? A 30, 60, 90 day cycle with us, and then you do another, you actually then really you've internalized the power of the solution, right? 

And in theory, right, people can kind of look at and get it. But there's, there's no escaping the fact that it's always more powerful once you've used a product and actually understood the use, cuz you've been through a full turnover cycle with that product. Then you're like, hold on, now I get it right. 

This really, really helps my business and it means that I can still go use my credit cards for other expenses if my business wants to go borrow money from the bank to buy a forklift for the warehouse, right? Or something like that. Onramp's not in the way of that.

Because we're just not structured. We're structured in a way that makes sure that you can take advantage of different types of financing to help scale the business, right? And we're not equipment financing, but then we don't impede that. And by the way, if you have equipment financing, that doesn't stop your ability to borrow from Onramp.

We're really structured well and what becomes really powerful and the reason we have such good repeat business. Is that the merchant's begin to understand that and see the power of it, and then dial us in for what we're we're best for so that they can use other vendor, other financing for what it's designed and best for.

Bad debt, good data

Alex Bond: How often, if you don't mind me asking, are brands unsuccessful in paying back their loan? I imagine it's rare, but I am curious. 

Eric Youngstrom: Yeah, no. Look, every lending business has the unfortunate side to it that there is gonna be bad debt. What we see is that it's a pretty infrequent occurrence. You know, what we really accept in terms of bad debt is, you know, the risk that we're taking on is that your business can't deliver to the next. Call it 90 days of sales, right? 

And if that means that your business is going under, but you're treating us fairly, right? If we're, if we're supposed to be paid 10% of sales every time you get a deposit, if we're seeing those deposits come through, but the business just goes under, then we accept that risk. It's our job to build a risk forecasting engine. 

They can tell us that you're gonna have the sales necessary to repay us. Now we do have customers who just decide they don't wanna pay. And then, you know, unfortunately then we have to go through a collections process, right? It's, it's not what we want to do, but if customers able to pay, but just decide they don't want to pay.

If we don't find a way to get paid, we don't have a business for the other 5, 6, 700 customers that we're supporting. And then we're not supporting the vast majority of good borrowers. But, you know, from my perspective, the risk that we're really willing to accept is that your business goes under. For some reason, you know, let's face it, small businesses have a failure rate and it's unfortunate, right?

But we're willing to take that risk with you. And if as we're, if as long as we're treated fairly on the way down, then we're gonna accept that that was a loss that just, you know, happened, right? And then we're gonna refine our risk modeling, right? To say, hold on. Why we'rent we able to detect that that business was gonna have that problem in the next 90 days?

Alex Bond: I was just about to say the same thing. I mean, bad debt, sadly. Good data, you know? 

Eric Youngstrom: Well, and it is good data and we will refine for that, right? So that hopefully then the next time that we can see that we can go back to that merchant and say, hold on, you're not ready to borrow from us right now. Because you have these problems.

But if we can uns spot those problems, then can we actually help the merchant say, Hey, great. If you can solve this problem, here are the steps you need to take and the data's gonna reflect that over the next 30 days. And then by the way, you'll be eligible. Well then we're actually being a partner to that merchant, cause you're helping them spot that trend maybe before they even recognize it.

Payment terms

Alex Bond: How long does it typically take for a brand to pay back their loan? So let's say they are, I'm hearing you say 30 to 90 days, something like that.

Eric Youngstrom: So our loans are structured, you know, or are advances rather are structured in kind of a 30 to 150 day expected payback period. And it's really customized per borrower based on. The unique sales turnover, inventory turnover cycles of their business. On average, it's about 90 days, right? Which the average inventory turnover cycle for an e-commerce business is about 60 days.

So we've got a little cushion in there for you, but we do have customers who go faster. We have a lot of customers who are on kind of 30, 60 day cycles, and then, several, like even running 120 to 150 day cycle. 

But we work with each of our borrowers, right, to understand that need. We use the data from their sales history, from, you know, from their inventory history and whatnot to actually ascertain that. And then we optimize the loan offering against that and any specific requirements that Meha might have for, you know, for their immediate needs. 

Alex Bond: And just to kind of, you know, circle back a little bit. So these businesses, are they essentially making a payment to you at the end of every month or week or whatever instead of you being hooked up to their business and pretty much taking money off, off the top until you're paid in full?

Eric Youngstrom: The payments are automated. So we're connected into their business. So we automate the payment and we're determining, you know, when we make the advanced software, we're telling the merchant that there is a certain percentage of each sale. And that, to be clear, that deposit, right. So not you sold the day on Amazon, but they're not gonna give you the money for 17 days.

No. We're gonna wait the 17 days. We wanna make sure that the cash is coming to you when you make the payment to us. And then we're determining what percentage of those sales that is, and then synchronize that with a deposit pace of the different sales channels. So if it's Amazon every two weeks, well you're gonna be making a payment every two weeks.

Shopify. That could mean that you're making a payment every day. And it's for sales. It happened four days ago because of the lag between the, the sale date and the deposit date. Right? And then other channels might be weekly. And so then what we're doing is basically saying whenever you're receiving sales receipts, when those deposits are coming to you, that's when you're making the payment back to Onramp.

So you're paying the cost of goods sold. For instance, if you sell this pen, right, and it's sold it for 40 bucks and you're paying us 10% of each sale, For the cost of the pen and the fee associated with the loan, well then, great, that $40 is deposited, we're gonna sweep the $4. And now you owe $4 less, right?

Because you paid it off for that pen. And, but then let's just assume that all of a sudden you go 10 days without paying, without selling a pen. Well, great, you don't have payments in those 10 days because there's, there's been no sales. And so that way we're in sync. And then as I say, you get to day 15, all of a sudden you sell a hundred of them. Well, now you get always $400, but that's because the sales were there to generate that payment. 

Financial challenges that smaller eCommerce business owners face

Alex Bond: And we're talking a bit about some of the hardships or obstacles that e-commerce business owners have to face. What are some of the broader ones that you've seen in terms of financial challenges that smaller e-commerce business owners have to face in this current landscape? 

Eric Youngstrom: Let's face it the number one challenge for a small business, and it is true for e-commerce in all small businesses.

It's cashflow management. And typically the biggest, you know, if you start to subdivide that the biggest challenge is I don't have enough of it. There's not enough cash. But I will say then the, the one that follows on that is it's not so much that you don't have enough, it's that you've misallocated funds.

And that could be because look, your forecast was just off, right? And so I bought too many blue pins and not enough red pins, right? Or what have you. It could be that, hey, the bank was willing to give me a, a two year loan. And so I bought a car, but now I don't have money for inventory.

Or, you know, something like that where you've really misallocated funds because you weren't used to the structure and kind of the different expectations of different types of funding. Right. And so all those things come together. And so, you know, again, that's what Onramp's really designed to help people understand is we are here to keep the business humming.

But we're not an investment and we're not a long-term loan where we can say, Hey, great. You know, there's a forklift for $20,000. Here's the 20,000 to pay for it, and you can pay us off over five years, right? What we're saying is you need enough pins to sell for this quarter, and then halfway through the quarter you need to order that next batch.

We're here for you for that. And there's still a lender, right? That So Sheba. Forklift company, right? Who will say, great, and here's a lease, but we also know if you don't pay it, we're gonna come collect the forklift. And then, you know, that's how they're gonna, you know, collateralize and protect that investment.

And so I think, you know, that's probably where we see the most challenges, right? Is just as these small business owners are getting used to these different challenges, right? They're having to think about. The financing in a way they haven't had to before. And there are all kinds of different paths to launching an e-commerce business.

Most people don't come to launch an e-commerce business with an incredibly deep finance and accounting background, right? Most people are coming to this from, they've got a product passion. They're passionate about pens or watches, or I love woodworking and I've got this array of woodworking products that I like to build.

Accounting and finance is the necessary evil for a lot of business owners, right? And so that's where we really try to step in and, and say, look, we're here to help you. We structure the product in a way that's designed to make sure that it works for your business. 

We're using data to drive that decisioning. So that it's based on the realities of what your business is doing today. And we wanna see you grow in scale and, and we wanna make sure that we're not giving you too much money can also cause a problem cause you can't pay it back. 

And so what we're really trying to do is hyper optimize it for that specific portion of your business problem. In doing so, that still leaves you open to go work with other lenders. For other parts of those business financing challenges that aren't working capital related. 

The best time to consider financial lending for a brand

Alex Bond: And speaking of growing and scaling, is there a specific time in a company's growth process that is most advantageous to consider lending? Is it go to market or a specific scaling stage, or does it really matter to you guys? 

Eric Youngstrom: From our perspective, right, like we can't work with a brand new company because there's no sales history to go forecast. From my perspective, I'd say, you know, look, you've got that six months worth of sales really going right?

We can then start working with you to forecast and then we can start scaling with you, right? That scaling is both going up and, you know, post-Christmas coming down. But if you don't borrow as much, you don't have this, you know, the cost is less so you're saving money. So we really view it as.

We're hyper optimized to the needs of your business to help your business right this quarter, right? We're always kind of looking the next 12 weeks ahead for what your business needs for that 12 week period, and then, you know, typically when you're halfway repaid, you can come get more, which means really six weeks from now if things are taking off because you launched a new marketing program.

That really has hit a nerve with your retail customers. Well, great. You can get more from us to, to, to adapt to that. And because we're seeing those same sales results Right. And the success of that, we're here to help with that. 

Scaling strategy for Onramp

Alex Bond: I heard you mention earlier that you obviously are trying to grow in this process as well. I think you mentioned that, you know, your loan range is between a thousand to 400,000, and you want to kind of raise that cap a little bit and maybe play with some, some bigger dogs. So what does that look like for y'all? How are you able to do that? Is it stuff like this more marketing or what's your game plan for growing Onramp? 

Eric Youngstrom: Yeah. No, look, we're trying to grow, but continue to support the small business owner. When you're talking to the small business e-commerce owner right, and you're marketing to that population, you get customers coming in that may be bigger than your target, but your marketing is still attracting their attention. 

And so we see that We have customers who need a large capacity that we offer today. And what we then try to, what we're then looking at is how do we go support them? Cause they're coming to us anyway.

So there is clearly a market need there. And so our goals over 20, 23 and 24 are just to be able to increase that, that average advanced size. You know, be a number of different channels. You know, there's a lot of different paths you can go do that and be there to support those businesses.

Now I do think there's a natural point where a small business outgrows what we do, and I think that's when that small business gets big enough that they're hiring a CFO, a VP of Finance, right? Somebody who really is focused on that side of the business. And you know, our guess is that happens.

Somewhere between five and $20 million a year in revenue because you just can't not, right? Like the business, as businesses get bigger, right, they demand more specialized personnel to run the different parts of the business. And when that happens, right? That, that CFO that had a finance, when they come in, they're gonna look at what we do and say, great, this is hugely valuable tool, very worthwhile.

But we think we could go to a bank and get a line of credit. We really better optimize for the cost of capital. And at that point, you know, from my perspective, that customer's graduated, right? They've, they've reached that next scale in their business, right? And that next level of stability where they don't need us anymore.

And so we're celebrating that win for them. Like, Hey, that's an awesome day. You know, we're not exactly expensive capital, we're not low cost capital. But when you actually look at what we do and the structure. And the kind of the coaching we give, what you're really actually saving on is you don't need a CFO as soon because we're doing that portion of it for you.

And so that's part of what our cost is, right? Is, is helping to provide that. And so then, you know, But when that CFO arrives and we actually have companies where the CFO has arrived and they continue to use us, right? Because there is power in it, others are like, great, you know, thank you for getting us this part.

Here's a great review. And now, you know, we went and went to the bank and got a line of credit and then, you know, that bank line of credit isn't, isn't structured for payment terms, right? That CFO has to manage that. When do we draw and how much do we draw and when should we start paying that back so that we're building up a balance that we can draw against again?

And that takes time, right? There's a spreadsheet that's getting run and there's a lot of investment in that that team of people can do. But now you're paying those salaries, right? And until you're ready to pay those salaries, we're far more affordable option. 

Alex Bond
Alex Bond

Meet Alex Bond—a seasoned multimedia producer with experience in television, music, podcasts, music videos, and advertising. Alex is a creative problem solver with a track record of overseeing high-quality media productions. He's a co-founder of the music production company Too Indecent, and he also hosted the podcast "Get in the Herd," which was voted "Best Local Podcast of 2020" by the Richmond Times-Dispatch in Virginia, USA.

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