Normal debt, abnormal times

Here’s why expensive debt makes it difficult to grow right now:

I recently caught up with a client who’s running a $10M NYC-based retail brand.

They just had their best year ever.

After years in the red, they’re headed towards their first profitable year-end (by a comfortable margin).

And yet, just a few months ago, they nearly didn’t make it.

Why?

First, you might need a little context on the annual buying cycle for retail companies:

Due to wholesale production time, apparel retailers typically buy ~2 seasons in advance. However, customer buying behavior varies drastically per season. Many retail companies get 50%+ of their sales in a single season. So, these companies often have to fork up cash for next year's growth during their least cash-rich time of year.

That's why best-practice for nearly every apparel brand is to forge ongoing debt-lender relationships. The retailers borrow against inventory or receivables to pay bills each year, then pay back the line when profits roll in.

Problem is, when you’re growing quickly due to gangbusters demand for your product, you have to borrow more.

And borrowing more means paying more in interest.

But here's where it really breaks: When interest rates are rising, your lending rates will rise too, eating into profits, and making the amount more challenging to pay back.

Then, if things don’t get paid back exactly as promised, (say, because sales are sluggish), lenders get heavy-handed, and can put you in a squeeze - penalties, seizing funds, asking you to put personal capital or assets (aka. your home) at risk.

It can get very messy.

It's the sort of thing that can run your company into the ground

During your best year ever.

Here’s the lesson:

You can spend all your time in your startup focused on growth

On getting those sales and building more of whatever you sell.

But if you don’t look closely at how you’re going to pay for it all,

If you don't have a plan for what you'll do in the time between

When you have to pay vs. when you’ll get paid,

Then you might just be growing into bankruptcy.

By the way - the startup in this story made it work and survived.

How?

They have an experienced CFO.

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