How Wayflyer fits into your brand’s finance stackHow Wayflyer fits into your brand’s finance stack

The previous article set the scene for this one. It explored the different providers of capital and the scenarios each might be most suitable for.

Now we're going to focus on Wayflyer specifically. If you're considering a financing partner like Wayflyer for your short-term working capital needs, what should you keep in mind?

In a similar fashion to how we previously suggested putting yourself in the shoes of a venture capital portfolio manager, it might be helpful to get an insight into our perspective for a brief moment.

Just like you, the venture capitalist and the banker, we are capital allocators in search of a return. Our raison d'être is to democratize access to financing for fast-growing consumer brands.

To deliver on this, we've built a pool of capital that can be "put to work", backed by Tier 1 banks like J.P. Morgan. And by "put to work", we mean allocating it to businesses that can generate a return greater than our own cost of capital.

In just 4 years, we've already deployed over $4.5 billion to thousands of brands worldwide. And this is just the beginning.

So, how do we decide who to finance?

Every brand gives off "signals" that reflect its financial health and growth potential. For traditional financing providers without a deep understanding of how consumer brands operate, deciphering these signals is difficult.

As a result, most high-growth consumer brands struggle to access financing, and if they do, it's because the situation has been de-risked for the bank by extensive collateral requirements.

This needed to change, so we built a proprietary technology that allows us to assess brands in minutes, informed by our deep understanding of the space.

And having already worked with thousands of brands and processed millions of data points, the picture of what "good" looks like is becoming clearer each day.

Once a brand connects to our platform and requests a financing offer, we can surface some of the key metrics mentioned in previous articles: contribution margin, marketing efficiency, operating leverage, cash conversion cycle, and so on.

Our underwriting team then make an assessment on whether this business is a good fit for our financing. And what they're looking for is latent opportunity, or what our matrix from a previous article would call "the sleeping giants."

These are brands that have built a healthy business from a unit economics perspective and are continuing to see strong demand for their products, but whose growth trajectory is limited because cash gets tied up in inventory cycles.

They're looking to unlock this inherent working capital strain by partnering with an external financing provider, so they can use our financing for inventory cycles and maintain a cash buffer elsewhere.

Access more capital. Purchase more inventory. Make more sales. Earn more profits.

There are also lots of brands that approach us for financing but we say "not right now" to. This isn't necessarily a reflection on your business health. It just means that your scenario isn't best suited to our financing right now.

For instance, your unit economics mightn't have reached a sustainable level yet, signs of demand aren't clear, or your intended use of funds might be misaligned.

If you're scaling your inventory cycles with a short-term influx of cash, then of course we're a good option.

But if you're building a warehouse extension, we have no problem pointing you towards financing options that have a longer time horizon.

OK, now more importantly, step back into your own shoes. Let's assume you've chosen to pursue our financing, you've completed our seamless application process and now have an offer in front of you. What are you going to consider?

The cost of capital is undoubtedly going to be your main consideration. The most common way to compare different financing options apples-to-apples is by looking at the quoted APR (annual percentage rate).

That's a perfectly reasonable assessment to make; it has become the societal norm. But sometimes it doesn't paint the full picture.

Our quoted APR is almost always going to be higher than that of a longer-term loan from a traditional bank, but there's a reason for that. Now, we're going to explain why that is, and why it's worth thinking deeper than the quoted APR alone.

How we construct our fixed fee

Our pricing needs to reflect the risk involved. It would be irresponsible otherwise. It's this risk management approach that we pride ourselves on.

Too risk-averse, and our financing becomes inaccessible for brands. Too loose, and we won't be in business for long.

So what do we need to take into account when finding a sweet spot? Consider the features of our financing that more "traditional" options can't match - fast, unsecured and non-dilutive.

Each of these adds an element of risk. From a baseline that's tied to the prevailing interest rate, we need to add an appropriate margin that reflects the additional risk we take on.

Of course, we could align our approach more with how banks operate and request collateral and personal guarantees. That would trim prices, but it'd contradict our goal of providing a more appropriate financing option to consumer brands.

In addition, building a machine that underwrites consumer brands in hours isn't cheap. It requires the best data scientists, engineers and financial analysts. There's a cost to this that needs to be reflected in the price.

How a condensed timeframe leads to a higher APR

To establish a basis for apples-to-apples comparisons, the APR approach annualises the cost of capital, regardless of its actual duration.

For example, consider a $100k cash advance with a fixed fee of 5% (or $5k) that's returned weekly over 6 months. The APR for this arrangement works out to be approximately 18%.

Given the primary use case for our financing is to invest in inventory cycles, which rarely take a year, our quoted APR can appear high when compared to the longer-term financing options that you might be used to.

As a general rule, a shorter term length will raise APR, so if your remittances are tied to revenue and you have unexpectedly high sales, the APR calculation on our fixed fee increases. Some operators want to ensure the term length remains as agreed upfront, so we introduced cost caps to allow this.

Instead of just looking at APR, what's another way to frame this? It's a good idea to look at the actual dollar amount paid for financing, and ensure you're comfortable that said financing is going to generate a return that exceeds that.

Imagine you sold a product similar to the example in our earlier contribution margin article:

You're generating a contribution margin of $35 on each unit sold. Demand is strong, but working capital constraints are limiting how much inventory you can order.

You have $100,000 of cash available. You use this to purchase 1,538 units, which once sold will generate $53,846 in total contribution margin.

But as you can see, the business hasn't yet scaled beyond its fixed cost base for that period, ultimately ending with an operating profit shortfall of $46,154.

Now imagine an alternate scenario, with Wayflyer in your corner. You approach Wayflyer for additional working capital.

They crunch the numbers and are satisfied that your unit economics are healthy and demand is strong. You're just cash constrained.

Your cash conversion cycle, or the time between ordering stock and making the sale, is 6 months. You agree an additional $200,000 advance from Wayflyer, with a fixed fee of 5% (or $10,000) that's returned weekly over 6 months.

Some of this goes towards product, freight, fulfilment and transaction costs - which are $19 per unit. The rest goes towards ad spend, averaging $46 for each unit sold.

At a total variable cost of $65, you buy and sell an additional 3,077 units, generating a total contribution margin of $161,525.

Even after subtracting the fixed fee of $10,000, you've earned an incremental $97,695 for your business, which helps you scale beyond the fixed cost base and towards profitability.

Many treat our fee as an additional fixed cost that's baked into margins. In this case, the contribution margin earned is more than the fixed fee for accessing the cash, so it's an opportunity worth pursuing.

If the pathway to earning a positive return like this isn't clear, then we'd recommend against taking on short-term financing. Every $1 of capital should be put to work effectively.

A final cost consideration you should make is something that's harder to quantify directly in the cost of capital: the time involved.

There's a headcount cost to pitching for financing from a venture capitalist or organising reams of paperwork for a bank.

In the fast-moving world of consumer brands, where opportunity knocks suddenly, it can be a blessing to access financing in hours and avoid the cost of standing still.

Now, with all of the above context in mind, here's a secret we'll let you in on: if external financing is used in the right scenarios, a virtuous loop can take hold. You can use our financing to capitalise on growth opportunities that arise.

You then use this growth as leverage to negotiate better prices and payment terms from suppliers. Your margins improve as you realise the economies of scale, and this offsets the cost of capital.

Your cash conversion cycle also improves from more favourable payment terms. A shorter cycle helps you secure improved pricing from us, because we don't want cash tied up for long periods either.

This loop is repeated over a series of short-term cash injections throughout a long-term financing partnership with us.