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DTC Brands Finally Have a Financing Option Built Just for Them

Direct-to-consumer brands must be prepared to operate in new and different ways to reach their full potential—and finding methods to secure credit is no exception.

DTC brands trying to scale using financing from legacy banks are often saddled with challenges right from the start. It’s not unusual for DTCs to primarily rely on credit and financing to fund their inventory cycles and digital advertising campaigns. Many brands periodically require additional up-front investment thanks to seasonal product offerings, requiring advance stocking and marketing pushes.

Add the inventory-management struggles associated with this space, and these brands regularly have trouble maintaining an adequate amount of financing. Startups frequently lack the credit history required to secure strong credit lines.

Ace Marks, a manufacturer of luxury handcrafted men’s footwear, faced this exact situation when getting off the ground.

“As a startup, it’s very difficult to secure credit, especially in any meaningful amounts,” Ace Marks founder Paul Farago said. “Credit cards and alternative lenders have very high interest rates. Banks won’t look at you. As a direct-to-consumer company, asset-based lenders have a hard time fitting you into their model if you don’t have receivables.”

Brex, a provider of B2B financial services, works to alleviate these obstacles with the first credit card designed specifically for e-commerce businesses. The card offers a credit line with 60-day float, zero interest and limits of up to 100 percent of a brand’s monthly sales revenue. This allows businesses to obtain a higher limit than they’d get anywhere else without the hazards that accompany legacy banking, such as personal guarantee, collateral, high-interest rates and fees.

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Farago, who first learned about Brex at the Shoptalk conference in Las Vegas, said it’s helped Ace Marks free up cash flow to better manage its marketing budget and purchase more inventory.

This freedom around inventory management is a crucial benefit for the DTC space.

“Managing inventory is always tricky in the DTC space, with brands all competing for the same fickle customers whose purchasing habits change rapidly,” said Michael Tannenbaum, CFO of Brex. “Credit financing allows brands to take advantage of unforeseen opportunities and provides a buffer to run tests that lead to growth but require up-front investment.”

“Specifically, brands must invest in their inventory and ads upfront,” he continued, “betting on sales in the future, and this creates a capital need, as the upfront investment is meaningful.”

Investing in supply chain and shipping infrastructure is also critical for DTC success, thanks to growing consumer expectations surrounding logistics and delivery, Tannenbaum said. DTC brands commonly seek financing and credit for shipping expenses.

Once the supply chain has been established, DTC brands are then met with additional obstacles, such as product-market fit, digital marketing optimization, and funding. As e-commerce evolves, so too do digital acquisition channels.

DTC brands can issue cards “virtually” to a company’s entire team, with specific limits set to control spending. Brands with little credit history will benefit from Brex’s reporting on-time payments to Experian and Dun & Bradstreet. Brex is able to offer such terms and benefits because it developed its underwriting from scratch to meet the needs of modern businesses, said Tannenbaum.

“Legacy financiers do not have the technical capability or organizational desire to change course,” he said. “They usually offer a one-size-fits-all model of financing that makes them inflexible” such as rigid underwriting algorithms, low limits and products that fail to match the inventory/sales cycles of DTC brands.

Legacy financiers often use the personal FICO score of a DTC brand’s founder to make a credit decision. Or they might use a P&L statement—another strategy that ignores the scaling growth of e-commerce. Brex’s card was developed in response to user behavior from its first card product, which the company found was being used by some DTC brands despite being primarily aimed at venture-funded tech companies.

“Most traditional lenders haven’t really caught up to the needs of DTC brands,” said Farago, who advised other brands starting their credit journey to find the most reasonable opportunities they can—and then build a track record.

“If you can build a personal relationship with your financing partner, even better,” he added. “Ideally, take on credit or debt when you don’t really need it, so that it’s there when you do.”

To learn more about the DTC financing option from Brex, visit