How to Find Working Capital with Eric Youngstrom

one level, this is George G. And the time is right what today’s guest strong and powerful. Eric Youngstrom. Eric, are you ready to do this? I am ready. Thank you. All right, let’s go. Eric is the founder and CEO of on ramp funds. They’re an organization providing cash solutions to e commerce sellers to power their businesses. Eric, tell us a little about your personal lives more about your work and why you do what you do. Sure, sure. So I’m Eric young strim. Thank you for having me this morning. It’s honor to be here.

Unknown Speaker 0:45
On a personal life, ah, so I’m married to a wonderful woman who shares my name.

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Eric and Erica, to two great kids in high school. And my wife and I both grew up in a small town called Yakima, Washington.

Unknown Speaker 1:01
Why I do what I do. In the town we grew up in there were no big businesses, there were just lots of small business owners. And those are the guys who, you know, put up their, their sign the Little League fields in, you know, volunteer to churches and things like that. And so, I have a real affinity for small business owners, small business ownership, entrepreneurship, want to do anything I can to support that. And then, you know, I’ve been in software for 20 years now the last company, I was with we we built tools for the E commerce, SMB market segment. And so the you know, that my personal interest in in small business owners and helping people launch their own businesses and pursue their own dreams really aligns nicely with this space. And so, given that, I don’t think the tool sets you know, the picks and shovels for the e Commerce Industry are nearly done being built. I felt like this is a great place to go spend my time and put my life’s work into nice. How many folks live in Yakima? Oh, I think there’s 50 60,000. Okay, small town, Central Washington is in the desert, like eight inches of rain a year. Tons of agriculture, though, because of the snowmelt runoff that happens every year out of the Cascades go into the dawn of the Columbia Basin. And your wife is also from there. Did you guys meet in Yakima, we grew up in the same street, nine blocks from one another went to first second ninth grade together. And then we never dated. When we we actually discovered we were both living in Austin on the same street about nine blocks from each other.

Unknown Speaker 2:36
When we were I think I was 31. And she was 30. And then we started dating and not long after married and kids and family and whatnot. Amazing. Yes, yes, serendipity, Eric. Yeah, it’s it was meant to be. Yeah, that’s awesome. So So you, you spent a good amount of time in software. So you sort of don’t want to say that you figure it out. You have this passion for small local business. And you grew up seeing that impact the sponsorship just being present in the community. And now fast forward, we have at our disposal all these wonderful tools and innovations and technology, but not necessarily for helping small ecommerce brands and entrepreneurs grow their businesses. That’s right. Yeah, no, I think, look, there are, if you look at the Shopify app store right there, I think 7000 Plus apps in the App Store, a lot of those are really powerful, and a lot of them aren’t.

Unknown Speaker 3:37
And I just think that there’s this opportunity to continue to find what those tools are, a lot of those things are probably not going to last the long term. And you know, as, as small business owners engage with these tools, right, we’re gonna find out which ones are or those that are built for the long term that really do solve the problem. And we’re gonna find others that, you know, solve the problem in a moment at time, but weren’t really the right permanent solution. So, you know, from from my perspective, I just, it looks like there’s a great opportunity to build a finance product that is purpose built from the ground up for E commerce as opposed to an off the shelf product that’s been used in retail or other industries. That’s, that’s more shoehorned in into the E commerce space. Got it?

Unknown Speaker 4:21
So

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tell us what is different about on wrap you you look, you see fine products, you look, you see crappy ones like oh, there’s there’s there’s a pretty good one, how do I take what I think is good, and then make this new thing? Yeah, I think, you know, one, when when I was building the product and working with a team to build the product, we’ve always taken it from the bottoms up approach on how do you solve that working capital Cash Conversion Cycle problem? So we didn’t try to answer the question, which is how do you loan money to someone I think that’s in the Old Testament, right? So we’re not cross

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In the chasm with that,

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what we did look at was, you know, if you’ve got a merchant who’s going to sell a million dollars a year in top line sales quarter million dollars a quarter, and that quarterly sales requires a $50,000 purchase of inventory 30 days before quarter starts, and then requires another 25 to $25,000 in advertising span to drive the sale, that inventory right in a turnover cycle, right not, not a launch cycle, but in a recurring kind of motion. And then another 15 to 30,000. And shipping and fulfillment costs, you’re looking at $100,000 in cash out of pocket to, to drive that $250,000 in sales. And if you’re running a 10% profit margin, that’s $25,000 in profit coming out, the challenge, then is that 25,000 in profit doesn’t show up really till about day 6575 In that quarterly cycle. And at day, 60, you need to actually go outlay another 50,000 for the next quarters inventory. And at day, 90 or 91, next quarter is here. Now you’re outlaying those those additional funds for advertising for shipping fulfillment. And so when we look at that problem, we don’t see a problem that needs to be solved in a five month or a seven month or 12 month term, we see a problem that needs to be solved on a 30 day to kind of 90 day term. And so what we’re trying to do then is structure the capital around that, and then build an application that really delivers that deploys that capital collects it at the right time. Which then means that that capital has been paid down, where when the merchant needs more, they have the ability that either that prior loan has been paid off, or it’s close enough to pay it off, it can be paid off or rolled over into the next one. So that more capital is available to go into the merchants business. And so I think, you know, what we do is provide some discipline around how capital is deployed, we tried to provide a lot of education around how to think about on ramp in your capital stack, where you know, there is value in a one year term loan from from a different provider, solving a different problem, right? Potentially, I want to go buy a forklift, it’s gonna cost, you know, $15,000 you know, paying that off over a year or two is a really smart way to use capital, instead of tying up your money right now.

Unknown Speaker 7:21
And so, you know, we fit alongside that if you’re gonna go buy a warehouse, and, uh, you know, tenure mortgage right, then great, you know, we fit alongside that. So really helping merchants understand how to how to use the capital, and then, you know, the team here, prior to on ramp, a number of us were working together at a company called shippingeasy. You know, solving the shipping in order aggregation problem for merchants, for the last 10 years, we were acquired by stamps.com in 2016. So we all have one affinity for this market segment. And we want to help these these small business owners win. But too, we’ve we’ve also just seen a lot. And so we can sit down and talk to merchants around freight supply chain ocean going container shipping. How do you how do you deal with the problems in Long Beach and Los Angeles ports because of the delays there, rerouting through the Panama Canal that come to Houston where you know, it’s business as usual? How do you think about merchandising around, you know, which agency should you work with, if you’re a Shopify seller versus an Amazon seller, and really trying to partner with a merchant to help solve a broader range of problems, because of the capital that we power, you know, fits into those areas so nicely? Yeah, it’s super powerful. Having that previous experience, and for lack of a better term wisdom, Eric, I think can certainly can certainly help Help Help help an immense amount. So how does it how did they actually pay the money back. So what we do is collect a percentage of sales.

Unknown Speaker 8:48
And what we do is determine kind of when we make that loan against the next 90 days, for example, we’re loading against the expected 90 Day revenue stream. So we’re building a forecast for the merchant, we’re sharing that forecast with the merchants so they can understand what our perception of the next 90 days looks like, we then

Unknown Speaker 9:05
loan against that there’s a percentage, right, so if you loan

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20% of the 90 day revenue, we’re gonna probably collect around 20 to 23% of that per order, just in case things slow down a little so that we’re still closing it out on time.

Unknown Speaker 9:19
And then a small fee, typically kind of one to one to 2% of top line sales, depending on the percentage of those top line sales were that the loan size is. And then each time the merchant gets a deposit, and I think this is really critical. It’s not when the sale happens when the sale happens, right. The payment gateway on Shopify has the money, but the money may not show up to the Merchants Bank account for three or four days in Amazon, right? Typically, the Amazon sellers getting a deposit every two weeks, right. So sale happens today. Could be 14 days before that deposit shows up in the Merchants Bank account. And so when that merchant deposit arrives, we then sweep the funds and calculate what’s owed and sweep the funds.

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to then pay down that for the merchant. So it’s really an automated process really can be thought of as an automated line of credit that is there, when it’s time to make that next, you know, advertising purchase inventory for purchase, shipping filament purchase. And so really, from my perspective, these are, this high velocity turnover is very, very low risk, because because you can see the merchant sales, and you can look at their catalog and what products are performing over time and seasonality and all these other indicators. And so this isn’t capital, the merchant should be looking at selling part of their company to go solve why they shouldn’t be raising equity, which is a hard thing to do in the first place, but really an inefficient use of capital from that perspective. And then, if the merchant has their own funds tied up in this, those funds have not been released, right. So the merchant may decide, hey, I’m gonna start paying my salary. And we find so many, so many of these small business owners aren’t paying themselves a salary until they kind of get to 234 million a year in top line is when when all of a sudden there’s enough cash, you can start to extract some of it.

Unknown Speaker 11:04
And then the other thing we look at is it’s just not long term capital. So when we see, you know, bank saying, Hey, here’s a one year loan with a, you know, fixed payments over the next 12 months. Well, you know, you can make a far bigger payment December because of Christmas than you can in January. And so that doesn’t make sense, right? It doesn’t align with the natural ebbs and flows and cycles of the E commerce, business and ecommerce ecosystem. So, you know, we’ve we’ve just aligned it around all of that. So that it’s, again, purpose built for E commerce from the ground up, versus shoehorned in to go make the lender happy. That makes a lot of sense.

Unknown Speaker 11:44
Your your approval, process selection screening, whatever term it is that you use, how much of it is objective, how much does subjective How does that work? I’d say it’s mostly objective, it’s data driven, right? We’re getting

Unknown Speaker 12:00
I guess, I guess I say it’s all objective. We’re getting, you know, we’re connecting to your online order sources, Shopify, Bigcommerce, Amazon, Walmart, right, what have you, we’re connecting your to your bank, right? We need people to see that we’re validating that right. The the expected sales deposits at Amazon are actually showing up in that bank account right at the at the right pace, we are looking at the business credit report, sometimes a personal credit report, it’s our objective that the other piece of this right is most small business owners have to use their personal borrowing power, right, they’re not getting a business credit card, or if they are, it’s still underwritten to the business owner, and the business owner has that personal liability personal guarantee on it, we typically don’t use a personal guarantee, there are a few exceptions to that. But our goal really is that the business should be able to stand on its own two feet with our loans. And that in borrowing from us, that business is actually building their credit profile, and they’re learning how credit works there, the business is proving it can use it correctly. And what that means over time, is we think somewhere between five and 20 million in revenue, this small business owner is going to really graduate from the on ramp product set, because that’s when they’re gonna hire a CFO, VP of Finance somebody who’s really focused on this part of the business, then that person is going to be able to go, you know, button up their financials, get some audits done on that, it’ll take six to 12 months, but then they’ll go to a bank and say, Great, here my audit financials, I’d like to get a business line of credit, it’d be a more cost effective solution for them and, and they’ll have graduated from on ramp. But the way we like to think of on ramp is we’re kind of your CFO Partner before you can afford to CFO. And so while we’re not the most, we’re not the lowest cost capital solution. When we look at the value we bring, I think, you know, we bring a lot more value, and we’re doing so in a way that gives you a CFO on your team without having to go pay, you know, 150 or more $1,000 a year salary.

Unknown Speaker 13:57
Makes sense? As you

Unknown Speaker 14:01
when you decided to explore the space, say, Okay, I’m interested in starting something new. Here’s, here’s what I’m thinking. What, what, what surprised you, I’m just curious what regulatory agencies that you’re working with and partnering with questions like that. Yeah, we’re kind of, we live in this kind of area called kind of unregulated lending.

Unknown Speaker 14:26
We, you know, we do fully comply with all 50 state regulators requirements around lending around the SMB lending. One of the things that does mean is we do not work with sole proprietors.

Unknown Speaker 14:39
Not that there’s a gray area between, you know, consumer lending and sole proprietor lending, and our preference is to stay away from that gray area. So we work with LLCs, LLPs, B Corp, C, corpse, and S corpse, because those are true business entities that comply with the different state laws around lending to businesses. So our objective there is

Unknown Speaker 15:00
You know, if the merchant is a sole proprietor, well, no, no, we can’t work with them. But if they go become an LLC, great, we’re happy to then work with them at that point in time. And I think that’s just good business hygiene, right? You should, you should have a liability protection of the business entity between yourself the owner, right and the market out there. So, but from that perspective, right, at that point in time, this is a very data driven process, right, we’re looking at, you know, credit scores, and you know, things like that on the business, we’re looking at, you know, history of payback, you know, if you had tax liens, if you had collections against you, that kind of stuff, all of those come together, then to give us, you know, a score that we use, and based on that score, you know, that’ll determine the offer and the price that we can offer you.

Unknown Speaker 15:42
How long did it take you from idea conception to here, here we are, oh, I was tinkering with this idea. In knockout 2017 2018 really decided I would kind of go test it in 2019, and had a had a product here, Nick was contracting, just gonna do some side work. So he helped me build a, an Amazon harness so that we can do this pull Amazon data. And then I could go dump it into Excel and basically loan by hand, and did that with two or three different

Unknown Speaker 16:16
ecommerce business owners that I knew personally and was willing to take the handshake risk on, turn those loans over for about nine months, six, nine months, really proved that our bottoms up approach could work, that it would be useful to the merchant, and then Was there enough opportunity to generate a return that it would be actually a business you could go build, and that could then feed itself with its own revenue streams? And you know, the answers to all those questions were Yes. And so then I quit my full time job@stamps.com, after they acquired shippingeasy, I, I left there in 2020, the stamps guys were great, because I actually let him know, in 2019, I was going to start really working on this. And, you know, we spent a year working together where I was helping find my replacement and train them up.

Unknown Speaker 17:02
While they were required to say, look, we you know, we get it, you’re passionate about starting businesses, that’s, you know, we acquire your last business. So they really gave me the reign to do that while I was still with them. And then I left in July and have just been building this ever since. Nice. And the process, become a seller says, Oh, this sounds great. How does it work? You come to on ramp funds.com. There’s a sign up now link, there’s a good offer link, click that you’re going to create your your account, right username and password, and then answer a couple questions, I think three or four. And then you’ll connect your online order sources and your banks at that point in time, then we’re pulling those data elements in, to then come back and say, here’s what you pre qualify for, we will in fact, give you a pre qualification just with the order source data before we even get a bank connected, we understand that it’s sensitive to do so.

Unknown Speaker 17:55
And then, you know, each step of the way as we’re getting additional data, right, we’re refining the offer we can make. And then we’re going to spend time talking to each of these merchants to really understand what the capital need is, so that we’re structuring the right product for them, right. It’s not a one size fits all, it’s very much a tailored solution to each individual merchant based on the you know, what the data tells us and based on what their you know, where they’re kind of where they need to go spend the money on right now. So that were there that were being really helpful and delivering what they need.

Unknown Speaker 18:24
Love it. So is there a typical amount of time from time that they come to the site to time that it’s funded?

Unknown Speaker 18:32
I mean, we do stuff same day. So we have merchants who sign up and in just two or three hours, we’ve gone through the full process approved and we’re distributing funds, I would say on average takes couple of days, right? Because most of the businesses would be a little bit bigger. There are some data delays in Amazon and Shopify, right, those, those are platforms designed to run in real time to keep the real time order flow going. So pulling historic order data is not something they want overwhelming systems. And so we’re real cautious around just how quickly we can pull that historic data in.

Unknown Speaker 19:05
But yeah, once we have that data, it is it is a very, very fast process. Right? It’s, it’s, it’s computer driven, right? We know what we’re looking for. And we use that to drive the offer. And then the other piece of it is just you know, we have a sales team here. We will we talk to every one of our customers, we’re answering their questions, walking them through how it works. And then again, looking to understand what are your capital needs right now? And how do we deploy the right money for that problem versus just saying, Here’s too much cash or too little cash? Because we didn’t understand what they needed it for. Nice.

Unknown Speaker 19:38
Work. Thank you so much for coming on. Give us the website again. Yeah, well, you can find us at a on ramp funds.com We’re on all the major social sites and if you go to our you got our homepage there you’ll see you know, Facebook, Twitter, Instagram, all those types of things. We’d love to help you if you have questions, please don’t hesitate to reach out and our phone numbers and every page of the app as well and we’re happy to get on the call with you and answer your questions.

Unknown Speaker 20:00
I love it. Thank you. You enjoy it as much as I did. So Eric your appreciation and share today’s show with a friend who also appreciates good ideas go to on ramp funds.com and find out if it’s the solution that you are looking for. I’ll list all of the social and everything else in the notes to the show. Thanks again, Eric. Thank you. And until next time, remember, do your part by doing your best

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