Being able to reach and sell to customers directly via e-commerce has become critically important for large and small businesses. Closely held private businesses and large multinational companies alike have had to adapt to an environment in which an increasing number of consumers purchase their products online. In fact, according to data from the Federal Reserve Bank of St. Louis, e-commerce sales as a percentage of total retail sales in the U.S. have grown twentyfold since 2000.

The exponential growth in e-commerce sales also has meant an increase in the number of businesses that sell to their customers — some exclusively — via e-commerce. This growth has created a new crop of e-commerce/direct-to-consumer (DTC) borrowers that generate little to no commercial accounts receivable (as they do not sell to their customers on commercial terms and are usually paid by credit card) and whose inventory is the centerpiece of their commercial collateral.

The growth in e-commerce and the amount of e-commerce borrowers begs questions for commercial finance lenders:

1. How are commercial finance lenders pivoting to accommodate growth in the number of e-commerce borrowers and their demand for credit solutions?
2. Is the credit and collateral analysis for an e-commerce borrower similar to the analysis for evaluating a brick-and-mortar retailer?
3. What is the outlook for e-commerce borrowers and lenders in the next 12 months to 18 months?

To address these questions, Derrick Wong of Pacific Premier Bank spoke with Jessica Bates, head of business development at Dwight Funding, a commercial finance lender that provides working capital solutions to e-commerce and DTC borrowers.

Before diving into the particulars of providing senior debt solutions to e-commerce and direct-to-consumer businesses, can you tell us more about Dwight Funding?

Bates: Dwight Funding is a leader in providing working capital solutions and lines of credit to early and growth stage businesses. Dwight partners with entrepreneurs to provide funding solutions designed specifically for the unique needs of growing consumer and technology brands. The products are structured to work alongside seed funding, private equity funding and sponsor-backed businesses by covering all working capital needs of e-commerce, food and beverage, general consumer goods and technology companies.

Dwight provides revolving lines of credit ranging from $500,000 to $5 million to lower middle market businesses with annual sales ranging from $3 million to $75 million. The company is headquartered in New York City with clients located throughout the U.S.

The exponential growth in e-commerce sales has been accompanied by a similar growth in the number of companies and borrowers that sell on a direct-to-consumer basis. How have lenders like Dwight Funding pivoted to accommodate the growth of e-commerce?

Bates: Dwight Funding was one of the first movers in developing tailored commercial finance solutions for lower middle market companies that sell direct to consumer via e-commerce. Some of the tech banks identified a need and found a solution for larger e-commerce businesses, but due to the increase in e-commerce payment processing platforms such as Shopify that reduced barriers of entry to selling direct, there was a growing segment of SMBs (small and medium businesses) in this market.

We recognized that e-commerce borrowers needed working capital funding to fuel growth but that there weren’t many funding solutions available, so we sought to develop credit products suited to these needs. To do so, we did a significant amount of research and development to understand the space and the inner workings of a business selling DTC and began to understand how to properly evaluate creditworthiness.

We then created a framework to evaluate and underwrite these business profiles and began filling the funding gap for these borrowers. Over time and with more data points, we have been able to create asset-based structures that maximize availability for our borrowers while also ensuring that Dwight Funding is effectively and prudently monitoring the underlying collateral.

Can you shed more light on the approach to lending to companies that may have less in the way of traditional, commercial collateral (e.g. performing commercial accounts receivable) on their balance sheets? What are some of the alternative metrics that e-commerce lenders can use to measure the creditworthiness of e-commerce borrowers?

Bates: As asset-based lenders, we’re still collateral focused. However, we have developed a unique way of underwriting the health of a DTC business and its collateral. This enables us to provide inventory only or inventory heavy revolvers to businesses of this profile.

Evaluating the health of a DTC business isn’t too dissimilar to evaluating the health of a retail business. The difference is that traditional retailers will combine health of inventory (using metrics such as inventory age, turns, sizing and gross margins) with the overall health of the retail store. We treat digital storefronts like retail, only we can obtain better data (size and quality of email lists, conversion rates, cost of customer acquisition and lifetime value).

How do you foresee the lending landscape evolving for e-commerce borrowers and lenders in the next 12 months to 18 months?

Bates: The current environment has accelerated the need for businesses, large and small, to develop e-commerce platforms as more consumers shop digitally. As such, A/R will continue to shrink as a percentage of working capital assets.

Lenders will need to evolve and tap into available data to meet these changing needs. My sense is that there will be more than enough growth in e-commerce and that there will be plenty of opportunity for additional lenders to enter and thrive in this space.

Overall, the rise in the number of e-commerce companies presents new opportunities for asset-based lenders. Similar to the way in which e-commerce/direct-to-consumer companies are evolving to consumers’ preferences and demands, commercial finance lenders — including Dwight Funding — are also adapting to meet the needs of e-commerce borrowers.

Asset-based lenders’ consistent focus on underwriting collateral on par with — and at times with precedence over — cash flow allows them to remain nimble and to deliver businesses (e-commerce and otherwise) with the creative working capital solutions they need. •

The views, thoughts and opinions expressed for this article are those of the participants. They do not purport to reflect the views, thoughts or opinions of Pacific Premier Bank. Pacific Premier Bank makes no representations as to the accuracy, completeness, correctness, suitability, or validity of any information presented and will not be liable for any errors or omissions in this information. Further, the information presented is for general informational purposes only.

Jessica Bates is the head of business development for Dwight Funding. Derrick Wong is the director of commercial banking for Pacific Premier Bank.