Rounds of seed funding, promises from venture capital investors and a lack of credit history make startup e-commerce businesses anything but ideal lending candidates for traditional banks.
But at the end of the day, startup money is still green and a handful of “alt-lending for startups” providers are filling that need in the modern economy, including Ampla, which launched in 2018 and boasts lending certification, which according to its VP of marketing Mike Grillo, sets it apart from its peers.
“We can quote actual APRs and [do] proper lines of credit vs. cash advances,” Grillo told Sourcing Journal.
Grillo first met Ampla as one of its early customers when he was looking to get his prototype for gravity blankets into Target, but didn’t have the capital on hand or the collateral to secure a traditional bank loan.
“It was actually a perfect use case for what we do. I went to Ampla and was sort of impressed by how flexible the price was versus other cash advances,” Grillo said. “After I exited that business, I invested in Ampla and figured I might as well come on full-time. That was about a year and a half ago.”
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Grillo said there are hosts of reasons why alt-lending would be more attractive to a young brand.
“Banks want a personal guarantee from a founder or someone at the cap table and that gets scary,” Grillo said. “We don’t require a [bank guarantee], and there’s a lot of folks they won’t lend to on business history.”
Grillo said the interest rate from a bank would almost certainly be lower than at Ampla, but alt-lending can loan greater sums, generally.
“A bank might start at the $100,000 line, but we can do almost 200 percent of what your monthly revenue is just because we’re not a publicly traded entity and we have a lot more flexibility,” Grillo said. “The bank we’re building is designed in [the] CPG [consumer packaged goods] space, so we know our customers are sending a lot of wires, so we give them that for free… We’re really looking for folks using our bank to graduate into a line of credit product. So we’re not necessarily looking to go head-to-head with Chase Bank, we’re looking for upstarts who may not necessarily qualify right off the bat, but if they can get into our bank and we monitor their performance over time, that can get them pre-approved for a [traditional bank] loan in their life cycle.”
Grillo said Ampla, which counts apparel brand Ministry of Supply among its clients, is insured up to $250,000 under FDIC and debits a percentage of a client’s revenue every day until the interest and principal are paid back.
He said being disciplined in the noise of too-good-to-be-true promises of investors has helped his company keep its default rate below 2 percent.
“We raised our A round when a lot of things happened badly for Wayflyer and Clearco, but were working well for us,” Grillo said, referring to the Irish revenue-based financing and growth platform and the Canadian startup lending firm, respectively. “They were lending at a very high risk tolerance; they were betting that the brands could always go out and raise more venture money.”
Not biting on the enticement of endless seed money has enabled Ampla to don a more traditional and conservative banking model in the alt-lending space.
“We raised our A round when funds were tightening up a bit. We used a lot of rigor, and so perhaps we’re not growing at 200 percent year over year, but our default rates are low and we’re driving a profitable business,” Grillo said. “That’s why we’ve been able to act non-loan shark-y; not taking huge risks on these brands.”
Grillo said some startups get taken in by lower interest rates from cash advance models, but end up paying more in the long run.
“We look at whole balance, how much cash on hand, revenue forecast, how long you’ve been in business—that’s what spits out the APR, which can fluctuate anywhere from the high single digits to 15 percent, which, depending on the business you’re in can be quite competitive,” Grillo said. “A lot of people look at cash advances and people will see their 5 percent fee and we can give them a 10 percent APR, and they’ll say, ‘oh, no, we’ll go with the 5,’ not realizing that you are paying 5 percent on $100,000 no matter how fast you pay it off. We’re annualized so if you pay it off in a month, you’ve only paid a small fraction [in] interest.”
Grillo said food and beverage startups have been Ampla’s favorite customers, followed by beauty products and apparel due to their high margins. Jewelry, and the like, tend to be the least attractive, especially given its price points in the face of inflation. In e-commerce clients, Grillo said Ampla is on the lookout for bootstrapped startups with an omnichannel presence and a diversified revenue stream. For e-commerce businesses, that diversification includes companies that get bang for their advertising buck.
“We’re looking for businesses with a really healthy return on ad spend. For a long time brands were just lighting money on fire on Facebook and Instagram and no matter what cost they’d do whatever to get it back, so we look at how they’re managing that spend,” Grillo said. “When we’re talking about diversity in terms of e-comm, yeah, there’s Shopify, but we actually like to see Amazon, Walmart, Wayfair, Macy’s… and then the third tier is you have to have a path to wholesale. Not every brand is going to be in Target, but if you are, say a home brand, Macy’s or Bed Bath [and Beyond] or something like that has got to be in the mix. If you’re going to be solely e-comm, you have to be perfect from day one.”
Grillo said he doesn’t see alt-lending as being in competition with venture capital; rather he sees it working in a sort of symbiosis.
“We don’t like to think of ourselves as a substitute for venture; we’re really for inventory, marketing expenses and other vendor bills and we usually work alongside the venture round,” Grillo said. “VCs don’t want to see all their money burned on inventory because that takes a long time to convert to cash, so we’re not competitive with them at all.”
Grillo said if he were to approach Ampla with his same business plan for gravity blankets at Target, he’d be confident he’d be approved again.
“Knowing what my margins were, and we were approved for that reason, yes, that’s a brand we could get excited about,” Grillo said. “We are not about brands that are in the red or don’t have a clear path to profitability. There are brands that are perhaps not profitable but have an opening to multiple wholesale channels and have a path clear to 8 to 12 months, but there has got to be a clear path to profitability. And then there are some that have 12 months of runway but we know they’ll just burn through that runway so we won’t loan against that.”