Navigating the New Era of Non-Bank Financing for E-Commerce and Direct to Consumer Brands

In December 2020, I had the opportunity to interview Jessica Bates, head of business development and managing director of Dwight Funding, a pioneer in asset-based financing for consumer products companies in the article, “The Next Frontier: ABL for E-Commerce/Direct-to-Consumer Companies.”  

At that time, credit conditions for e-commerce and direct-to-consumer (DTC) companies could be described as borrower friendly and accommodative to borrowers: debt and equity capital were abundant, interest rates were near zero and traditional lenders — flush with deposits as a result of the COVID-era stimulus such as the paycheck protection program (PPP), economic injury disaster loans (EIDL) and employee retention tax credit (ERTC) — were eager to deploy these deposits in the form of commercial loans.

Shifting Environment & Lenders

Now, four years later, borrowers and lenders face a different environment: debt and equity capital are available but more selective, interest rates have risen at the fastest pace in 40 years and traditional lenders continue to prioritize deposit gathering in the wake of the regional banking crisis of 2023.

In this follow up interview with Bates, we discuss the transformation and evolution of non-bank financing for consumer products over the last four years. The borrower friendly environment gave rise to new lenders that were not focused on the fundamentals of asset-based lending or the e-commerce business model, but rather technology and algorithm-based credit decisioning coupled with a percentage of sales payback model. Ultimately, this approach would severely limit their ability to effectively analyze collateral and risk within their portfolio.

The reduction of debt and equity capital paired with higher interest rates has caused some technology-driven lenders to pull back on select facilities, with some pulling out of the space altogether. This shift has resulted in a return to the basics; a resetting of sorts in the non-bank credit market for consumer-packaged goods (CPG) companies. Borrowers who previously gravitated to low-touch, seamless frictionless and technology enabled funding now welcome the expertise and human touch of non-fintech lenders.

In the following Q&A, Bates shares insights from her work at Dwight Funding, shedding light on the changes in the non-bank financing landscape and the impact of these shifts on enders and borrowers in the DTC space. Bates shares her perspective on the evolving needs of consumer brands, the importance of experience-based lending practices and how companies are adjusting to a post-pandemic economic environment where financial literacy and adaptability are key.

Derrick Wong: Before diving into the particulars of the evolution of non-bank credit market for DTC companies, can you provide a refresher about Dwight Funding? 

Jessica Bates: Dwight Funding is the leading credit partner to growth-stage CPG  brands. We’re known for our innovative asset-based lending framework that meets the acute needs of CPG businesses through our human-first, tech-enabled approach to capital. Since 2015, we’ve provided over $4 billion in working capital to companies across consumer categories including DTC, food, beverage, beauty, wellness and more.

We offer non-dilutive working capital solutions designed to scale with our brand partners from the growth stage through to bank eligibility. Our flexible lines of credit range from $1 million to $20 million and are backed by finished goods inventory, accounts receivables and equipment assets.

Wong: The credit market for DTC companies has continued to evolve, including notable lenders pausing their lending activity. How has the competitive landscape for non-bank ABL lenders shifted recently? 

Bates: The DTC credit landscape has evolved significantly since we spoke in 2020. As pandemic-driven e-commerce boomed, many emerging brands found themselves with a financing gap — too early in their lifecycle for traditional ABL or bank financing yet in need of non-dilutive capital to keep up with consumer demand.

Traditional asset-based lenders and factors found it challenging to adapt their models to e-commerce-first businesses, particularly in underwriting and collateralizing inventory for online-only operations with little to no accounts receivables. While Dwight’s first mover advantage positioned us to finance many of the leading companies in the space, there remained a significant segment of the market that struggled to access debt financing that fit their specific inventory build needs.

This gap attracted various new entrants over the years, including a wave of merchant cash advance providers and venture-backed fintech lenders. These players set out to serve earlier-stage brands with quick access to capital through a streamlined user interface. However, the complex nature of DTC presented them with unique challenges, such as effectively managing risk within their portfolios and/or securing the equity funding needed to sustain portfolio losses. As a result, many of these groups had to shift focus or pause lending activity altogether, once again leaving emerging businesses with limited optionality.

These shifts highlight that success in the DTC lending space demands thorough underwriting practices, extensive industry expertise and stable funding sources to support digitally native brands as they scale.

Wong: With financial technology lenders pulling back from the market, what does this change mean for DTC companies that are ABL borrowers?

Bates: These market shifts have reinforced an important reality: while technology is essential for streamlining friction-filled lending timelines and reporting requirements, DTC brands need more than just a modern interface to thrive.

The most successful borrowers are choosing to partner with lenders that lead with deep industry expertise and genuine partnership, layering in technology to drive efficiency. This means having both the operational speed to capitalize on opportunities when they arise and the support of an experienced team who can provide flexibility and guidance through fluctuating market conditions.

Wong: The pandemic drove many stay-at-home consumers, flush with stimulus funds, to shop on e-commerce platforms. This resulted in surging revenue for many e-commerce companies across multiple industries. Has this trend reversed since the end of the pandemic? Broadly how are e-commerce companies faring in light of their customers facing higher inflation and interest rates?

Bates: The pandemic-driven e-commerce boom was a unique circumstance, and the industry has since shifted toward a healthier, more balanced omni-channel approach to scaling. While online shopping remains popular, consumers today are more likely to seek out in-person touchpoints with brands and products, coupled with the convenience of online purchasing.

It’s not so much about reversing the trend as it is about adapting to a new normal where digital and physical retail complement each other. This is why most brands launching in the post-pandemic era are positioned as ‘digitally native’ or ‘e-commerce first,’ structuring their company to expand into wholesale and/or retail from the start.

As for how e-commerce companies are faring in the face of inflation and high interest rates, the answer is much more nuanced. Generally speaking, companies with established customer loyalty and a unique value proposition have been able to mitigate the effects of market conditions by prioritizing unit economics, repeat purchase rates, customer lifetime value over pure, top-line growth.

Others, particularly those in saturated product markets or with higher price points, have responded with impressive agility. Across the board, there’s a universal focus on operational efficiency to protect margins. Many are enhancing their value propositions to justify prices, while others are launching strategic, lower-price collections under their brand umbrellas. This adaptability speaks to the resilience of the sector, even in challenging economic conditions.

Wong: What significant changes do you foresee for e-commerce borrowers and lenders in the next 12 to 18 months?

Bates: We anticipate several changes in the coming year, including:

1. Increased demand for asset-based lenders: The scarcity of venture capital or private equity combined with fintech lenders retreating from the space creates a growing need for established ABL lenders who understand the nuances of the DTC environment.
2. Shift towards relationship-based lending: The pendulum is swinging back from purely tech-driven solutions to a model like Dwight’s that values experience, industry specialization and strong relationships. Lenders who can offer value beyond capital, such as strategic guidance and industry insights, will likely see increased demand.
3. Greater emphasis on financial literacy: Founders have realized the importance of a proper education around credit financing. This knowledge is crucial for staying on track with growth targets and avoiding expensive, unreliable or inflexible capital sources.

As for Dwight, evolution is part of our DNA. We’re committed to growing alongside the industry and providing a human-led, tech- enabled lending experience that meets the changing needs of digitally native brands. •

Derrick Wong is managing director of Private Credit advisory at Eagle Pointe Capital, a boutique investment banking firm providing best in class M&A and debt capital advisory exclusively to lower middle market companies.

Jessica Bates leads Dwight’s Business Development team, which is focused on building and nurturing relationships with the best brands in the space and the network that supports them. Prior to her work at Dwight, Bates was a director of Strategy and Partnerships at a fintech lender and previously raised private debt and equity capital for companies globally in the investment banking division of Barclays Capital.