Building A Niche E-Commerce Powerhouse: Coastal Contacts CEO Roger Hardy (Part 4)

Sramana: Let’s talk some about your supplier terms. As a fresh company just getting started in 1999, were suppliers willing to give you inventory on credit?

Roger Hardy: Initially we were pretty constrained. Often we would get half-way through the month, and we would have to take the revenue from the previous couple of days of sales to go make a payment to a supplier. We noticed at the three-month and six-month points we received better terms from suppliers. That was probably due to the growth we were seeing and due to our payment history. Customers paid up front for contacts, which would give us about 40 days of cash flow.

Sramana: What were the actual terms with suppliers?

Roger Hardy: It got to be 45 days and in some cases 60 days once we hit the six-month point of the business. The first six months were complicated. We were often at the bank daily to pay different suppliers and we were constantly juggling to make sure we were keeping up with supply. At the same time we were doing hiring. Cash management in the early days was a juggling act.

Sramana: Did the bank play an important role in cash management during those first six months?

Roger Hardy: No. We cannot credit any bank with any type of assistance. In the second year of our operation, a credit union gave us some financing. We borrowed $500,000 in sub debt financing. That is an expensive way to get financing, but it is a way to get growth without having to issue equity. Our business grew 10% every month during that time, so total growth was over 100% a year. We did not want to find an equity partner and were more comfortable getting access to capital via sub debt even though it came with a 15% interest rate.

Sramana: With that $500,000 credit line, how much were you able to accelerate the business?

Roger Hardy: That freed up some capital and allowed us to serve customers better. It allowed us to carry more inventory. Our capital expenditures were growing as well. We needed new phone systems, more shelving, and more space. That money let us grow into a more professional organization.

Sramana: Essentially it was $500,000 of working capital, and you did not have to account for how you spent that money.

Roger Hardy: Exactly. It was an injection that took our working capital constraints away. We had looked at a number of different types of debt products and talked with a number of banks. In the end we found it to be the most affordably source of capital.

Sramana: How did you find a bank willing to do sub debt financing?

Roger Hardy: At the time we were constantly on the hunt for money. We were looking under every stone. We were referred to them and we gave them our forecast. We were fortunate that they came on board with us and offered us subordinated debt financing.

Sramana: I am probing this point because managing the inventory/cash management hurdle is a total nightmare for entrepreneurs in the e-commerce space.

Roger Hardy: It absolutely is. It is so easy for those entrepreneurs to fall into the equity trap too early, in my opinion.

Sramana: I completely agree. I tell entrepreneurs to defer equity financing as long as possible.

Roger Hardy: You are entirely right. We were fortunate that our company was growing fast enough that every time somebody offered to put money into the company, three months later we were 30% larger and the equity proposals we received were no longer interesting. We eventually stopped looking for equity and wanted to discover what else was out there.

This segment is part 4 in the series : Building A Niche E-Commerce Powerhouse: Coastal Contacts CEO Roger Hardy
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