A few years ago, a founder came to me with a problem that had nothing to do with sales, margins, or forecasting. His business partner wanted out.
This wasn’t a hostile split. They’d built something real together, a product-based e-commerce business with genuine traction and a clear path forward, but one partner was ready to move on and the other wanted to keep building. The problem was simple and stubborn: the remaining founder didn’t have the cash to buy him out, and he didn’t have the risk appetite to take on significant traditional debt at that stage. But leaving the departing partner on the cap table wasn’t a real option either. A partner who isn’t building is a problem you carry forever, in decision-making, in future capital conversations, and in your own head at 11pm when something goes sideways.
So we structured a seller’s note. A seller’s note is exactly what it sounds like: instead of writing a check today, the buyer pays the seller over time, directly. The departing partner became a creditor, not an owner. His exit was real and clean. The remaining founder got control of his business without tapping cash he didn’t have. We aligned the repayment schedule to the business’s cash generation so the note wouldn’t choke growth, and we moved on.
Within eighteen months, that same business needed $200,000 in tooling investments to scale a handful of products from proven market fit into full injection molding production. At the same time, a key operational hire was coming on full-time, someone critical to the business running without the founder’s hands on every lever. Cash was going out in multiple directions at once. We had two options: raise equity or get creative.
We modeled both. The payback period on selling through the upgraded units at improved margins was faster than we’d initially assumed. So we built a two-part solution. First, we went to the manufacturer. We offered to cover roughly 25% of the tooling cost as a deposit, enough skin in the game to give them comfort, and amortized the remaining balance over a fixed number of units. This is vendor financing, and it’s one of the most underused tools in e-commerce. The cash outflow per unit stayed within our prior margin profile. We weren’t taking on debt that would strangle us quarter to quarter; we were sharing production risk with a supplier who was already motivated to see us succeed.
Second, to backstop the deposit and give the business a stable base of long-term capital, we raised friends and family money at 10% as interest-only debt, amortizing after year one with an option to extend. The investors took that extension happily. We funded the tooling, the business grew into its new unit economics, and we built something that matters more than most founders realize: a track record of paying back the people who believed in us early. That supplier relationship is now an asset. When we go back to them with a bigger bet, they already know we cover our obligations.
No equity raised. No dilution. No outside investor with opinions about how to run the business. We structured our way to the outcome.
If you’ve been following this series, you know Lever Two was about working capital, how to think about cash conversion cycles, days-based financial discipline, and why growth almost always consumes more cash than founders expect. I noted at the end of that article that not all financing is created equal. This one is where we go deeper on that.
The capital stack isn’t just “debt versus equity.” It’s a full menu of instruments with different costs, different timelines, different flexibility, and different implications for your eventual outcome. Most founders only order off the first page of that menu. Let me show you the whole thing since stacking these instruments correctly enables the balance for your company to thrive.
The Menu: What’s Actually Available
Capital comes in more forms than most people think. Here’s the full range available to a $2–20M e-commerce business, roughly ordered from cheapest to most expensive.
Vendor and manufacturer financing is often the lowest-cost capital you can access, because the provider is a partner with aligned incentives, not a pure lender. When a supplier finances tooling, production runs, or inventory through net terms, deposit-and-amortize structures, or deferred payment arrangements, they’re sharing risk in exchange for your business. The “cost” is real, you’re committing to volumes or timelines, but the stated interest is often near zero. Use this whenever the structure can be made to work.
SBA loans are government-backed term loans that tend to carry higher rates than conventional bank products. That said, they’re specifically designed to finance the kind of risk profile that traditional banks won’t touch: earlier-stage businesses, thinner collateral, non-real-estate assets. For an e-commerce company that can’t pledge a building, an SBA loan is often the most competitive option available for that risk tier. The process is documentation-heavy, but if you qualify, the terms are hard to beat in the context of what you’re asking a lender to underwrite.
Traditional bank loans are available to businesses with strong financials, clean collateral, and predictable cash flow. The rate will be lower than SBA, but the criteria are stricter. Banks want to lend into stability. If your business is post-trough, generating consistent free cash flow, and can pledge real assets, a conventional term loan or commercial mortgage is worth pursuing. Just know that the underwriting process is less forgiving, and the answer is more likely to be no for product-based businesses without hard collateral.
Friends and family debt is exactly what we used above. At rates typically between 8–12%, it’s often cheaper than outside capital, structurally flexible, and patient in a way that institutions rarely are. Structure it properly — written terms, a repayment schedule, honest projections — or don’t do it at all. The relationship risk of informal arrangements is real.
Revolving lines of credit (RLOCs) are powerful when you have accounts receivable to secure against. If you sell to other businesses and carry AR, an RLOC can be a flexible, low-cost working capital tool. For pure DTC inventory companies, though, most banks won’t lend against inventory at favorable terms, which makes this harder to access than founders often expect. If you do carry meaningful AR from wholesale or B2B customers, this can be one of the highest-leverage tools on the list.
Private credit is a relatively new entry for businesses at this stage, and increasingly one of the most interesting. Private credit funds are non-bank lenders — think family offices, specialty finance firms, and institutional credit funds — that write debt checks into businesses that banks either can't or won't finance on flexible terms. Rates typically run 12–18%, which looks expensive next to a bank loan until you read the covenant package. Where a bank might fear growth and require a fixed charge coverage ratio, a clean personal guarantee, and a call provision that kicks in the moment you miss a quarter, a private credit lender is often underwriting the business's growth trajectory and structuring accordingly. For a $5–15M+ e-commerce company opening a new facility, launching a new channel, or carrying a complex inventory cycle, that flexibility can be worth several points of rate. The capital is more expensive. The terms often fit better. Know the difference before you default to the bank just because the rate looks cleaner.
Inventory financing and purchase order financing bridge the gap for product companies who need to fund production before the revenue hits. Costs typically run 12–20% annually. Not cheap, but sometimes the right instrument for a specific moment in a growth cycle.
Revenue-based financing gets marketed aggressively to e-commerce founders. The pitch is no dilution, no fixed payment and you repay as a percentage of revenue. What gets buried is the effective cost. A “factor rate” of 1.3 on a 10-month payback window works out to somewhere between 35–50% annualized. That’s not inherently disqualifying, sometimes expensive capital on a fast payback cycle is the right move, but you need to calculate it honestly before you sign.
Factoring is similar in structure: you sell your receivables at a discount for immediate cash. It’s fast. It’s also among the most expensive capital on this list. I’ve rarely recommended it without a clear refinancing strategy sitting behind it.
Preferred equity is where most founders have the most to learn. Preferred equity investors get paid before common equity holders in a liquidation or exit. In exchange, their upside is typically capped by a preferred return rate, a liquidation preference, or both. A well-structured preferred raise can be extraordinarily efficient for founders: you get patient, growth-oriented capital, and the investor gets a defined return profile that matches their risk appetite. You retain your common equity compounding on the full upside above the preference.
Common equity is the instrument most founders think of first. It’s also, when modeled correctly, the most expensive capital on this list.
Here’s a rough cost-of-capital snapshot:
Instrument Stated Rate Eff. Annual Cost Key Trade-Off
───────────────────── ─────────────── ───────────────────── ──────────────────────────────────
Vendor / mfg financing 0–2% 2–5% (opp. cost) Volume commitment, relationship
SBA loan 7–9% 8–10% Higher rate, finances risk banks won't
Traditional bank loan 6–8% 6–9% Lower rate, stricter criteria
Friends & family debt 8–12% 10–13% Relationship risk if not structured
RLOC Prime + 2–3% 8–11% Requires AR; limited for DTC inventory
Inventory / PO finance 14–18% 16–22% Asset-specific, short tenor
Revenue-based / RBF "Factor 1.25" 30–50% Fast, no dilution — but run the math
Factoring "1.5–2% fee" 20–35%+ Fastest access, highest cost
Preferred equity 12–18% pref 12–20% Patient capital, capped investor upside
Common equity "No cost" 30–50%+ (implicit) Permanent claim on your future valueEquity is Often Your Most Expensive Capital
When you raise common equity, there’s no monthly payment. No interest rate on the term sheet. It feels like free money. But equity has a cost, it’s just denominated in future value rather than present cash. Every point of ownership you give away today is a permanent claim on every dollar of value you create from this moment forward.
Here’s the math. Say you believe your business will grow from a $2.5M post-money valuation today to a $10M exit in five years. You raise $500K today by giving away 20%.
Implicit cost of common equity
──────────────────────────────────────────────
Equity raised $500,000
Stake given 20%
Projected exit value $10,000,000
Investor proceeds at exit $2,000,000
Implicit annual cost 31.9%You paid 32% annually, permanently, for that capital. Now compare that to a preferred equity structure. Same $500K, but instead of 20% common equity, you issue a 15% preferred instrument that pays out at year five.
Same capital, different structure — founder proceeds at $10M exit
──────────────────────────────────────────────────────────────────────
Preferred Structure Common Equity
────────────────────────── ─────────────────── ─────────────
Capital raised $500,000 $500,000
Investor receives at exit $1,005,679 $2,000,000
Founder proceeds $8,994,321 $8,000,000
Difference to founder +$994,321 —Same capital. Same investor. Same business. One structure costs you nearly $1M more at exit. This is why structuring matters, not just the debt versus equity decision, but within equity the terms shape everything.
And it’s not just the return profile you need to model. It’s the full waterfall: who gets paid first, under what scenario, with what protections. Before my current work in strategic finance, I spent several years at an impact investing firm operating under government-imposed geographic targets that required genuinely creative capital structuring. The most important lesson I took from that work wasn’t about returns. It was about what happens when the stack isn’t right.
There was a company we genuinely liked; strong unit economics, capable management, real market position; but we passed. Not because they were over-leveraged or poorly run. We passed because of structuring. Their existing debt was a series of one-year rolling notes that had, by the founder’s account, “been rolling for years without issue.” Maybe so. But in a downside scenario, those creditors had first priority on assets, ahead of any equity we’d put in. We were being asked to fund the growth while someone else held the downside protection. The question our investment committee kept coming back to: we’re financing this company’s expansion, but to do that, we’d effectively be paying off their existing creditors first, creditors who weren’t willing to participate going forward. That’s a strange risk profile to underwrite.
The founder never understood why we passed. From where he sat, those notes were stable. From where we sat, the structure was wrong. This is why capital stack design isn’t abstract. It shapes who participates in your business, on what terms, and what happens when things don’t go according to plan.
The Finite Pie Fallacy
The most common trap I see founders fall into is treating ownership percentage as a fixed resource to be protected at all costs. The instinct to hold 100% is understandable but it leads to a specific and costly mistake.
If you’ve done the work — built the financial model, pressure-tested your assumptions, validated through your Sales Engine and your margin structure that additional capital will generate a return materially above its cost — then you’ve already established that you can build a bigger pie. The question shifts from “how do I protect my slice?” to “is the arbitrage worth it?”
Say you have an expansion opportunity that generates a 40% IRR. You can fund it by raising capital at a 20% cost. The spread is 20 points, and you have better uses for your existing cash. That is not a hard decision. You raise the capital, capture the spread, and end up with more absolute value, even at a smaller ownership percentage of a larger business, than you would have by doing nothing.
If you’ve proven that you can grow faster with outside capital, and the cost of that capital sits meaningfully below the return it generates, then holding back isn’t discipline. It’s leaving money on the table. Bootstrapping is a legitimate philosophy. But “I want to keep 100% of my company” is not a capital strategy. It’s a preference that should be tested against the actual math of what you’re giving up.
Capital Readiness: What It Actually Means
Most founders think of raising capital as an event: you prepare a pitch deck, take some meetings, something happens. I think about it as a continuous state of readiness, so that when the moment comes, the conversation is about the deal, not about catching up on the basics.
Clean financials is the baseline. GAAP accounting, or at minimum accrual-based books. Not because investors require it (though they do), but because without accrual accounting you genuinely don’t know what your business earned in a given period. Cash accounting tells you what happened to your bank balance. Accrual accounting tells you what your business earned.
Owning your numbers is different from knowing them. Knowing means you can look up last month’s revenue. Owning means you can explain why gross margin was 46% instead of 52%, what drove the variance, and what you’re doing about it. Investors fund operators who understand their business at that level.
A financial model that shows you’re testing assumptions, not just asserting them. Your model should show your drivers — traffic, conversion, AOV, working capital days, payback periods — and your sensitivity to changes in those drivers. Use your gut to design the experiments. Use the data to prove the point. A model you can’t defend is a spreadsheet artifact, not a financial plan.
A clean financial narrative. Owner distributions and personal expenses clearly separated so a reader can see the actual economics of the business. A clear articulation of how every dollar of spend contributes to value creation.
The last piece is what I call leading your own round. When you walk into a capital conversation having already determined what you need to raise, why that number, what structure makes sense, what you’ll pay for it, and what terms you will and won’t accept, you signal something that most investors rarely see: an operator who understands the deal as deeply as they do, or better. Capital is a trust business. Demonstrating that you’ve thought through the risk, the return, and the structure from both sides of the table changes the conversation entirely. You’re not asking for permission. You’re presenting an opportunity.
The Investor You’re Looking For Already Exists
Most founders walk into their first capital conversation with a mental image shaped by Shark Tank, or a PE firm that wants to buy their company, or a VC in a suit who needs you to become a unicorn. That framing eliminates most of the actual universe of available capital.
Capital markets have become extraordinarily specialized. There are investors who write checks specifically into $5–15M product-based e-commerce businesses. There are private credit funds designed for companies at exactly your revenue range. There are family offices that prefer the return profile of a well-structured preferred instrument over traditional fixed income. There is, genuinely, more capital chasing good deals than there are good deals to fund.
What’s in short supply isn’t money. It’s founders who can clearly and correctly articulate why their deal is a good risk-adjusted return. If you know your business inside and out — the IRR at base case, the protection structure in a downside scenario, what makes a lender or investor whole if things go sideways — and you can explain it to someone who invests in that type of deal every day, you will get a meeting. If the deal is what you say it is, you’ll get the capital. The homework is the work. Most founders skip it.
Five Patterns I See Constantly
Not building relationships before you need them. I spend roughly 20% of my time maintaining relationships with investors, private lenders, and bankers — not because I have live deals right now, but because I want them to know what my clients look like and to pick up the phone when a fit comes up. Capital is a trust business. The founder who calls a banker for the first time when they need a commitment in 30 days almost always gets worse terms than the one who’s been having an honest conversation with that banker twice a year.
Thinking the only options are bank debt or selling the company. Friends and family can come in as debt or equity. Suppliers can finance tooling and inventory. Private credit funds operate in every industry. Preferred equity structures offer patient growth capital without surrendering control. The universe of instruments is far wider than most founders ever explore.
Not understanding your own deal before you start looking. Before your first capital conversation, you need to know how much to raise, why that number, what the capital will produce, and what a realistic return looks like for the person providing it. Walking in and asking “how much do you think I should raise?” tells the room everything it needs to know — and not in the way you want.
Raising too much or too little. The founder who wants to raise a large round because it feels like validation often ends up over-diluted and accountable to growth expectations that weren’t their own idea. The founder who raises exactly the cost of one piece of equipment, without modeling installation costs, ramp time, capacity utilization, and the working capital growth that comes with increased volume, often finds themselves raising again in six months from a weaker position. Raise to a clearly defined milestone, with buffer based on your downside scenario.
Optimizing for rate and ignoring terms. I’ve seen founders turn down 12% friends-and-family money with flexible repayment in favor of 8% institutional debt with covenants that nearly broke them during a soft quarter. The rate is one number in a longer conversation. The covenant package, the control provisions, the payment flexibility in a downside scenario — these often matter more than the headline cost. A 14% private credit facility with limited covenants may genuinely beat a 10% bank loan for a business still building toward stable cash flow. Price the full instrument. The terms are half the deal.
The Questions Founders Actually Ask Me
How much should I raise? Model it. Identify the milestone you’re building toward and work backwards to the cash required to get there under your base case, with buffer for variance in your downside scenario. There is no shortcut to this answer. If you can’t define the milestone before your first investor conversation, you’re not ready for that conversation.
My banker has always been happy to lend me money. Why would I consider equity? Because your banker isn’t thinking about what a 36-month operational transition does to your debt service coverage. Banks lend against stability. When you’re ramping a new product line, building out new capacity, or going through any kind of structural change, you’re asking them to lend into uncertainty, and the debt service doesn’t pause because your cash flow is lumpy for three quarters. Patient capital may be worth a higher stated rate precisely because it gives you the flexibility to build without mandatory cash outflows at the moment you least want them. It’s not always about the cost. It’s often about the timing and the structure.
Why does the bank always say no? Usually one of three things. You’re talking to the wrong institution — not every bank wants to lend to every type of business. You’re communicating your risk poorly — they don’t understand your model well enough to feel comfortable with the exposure. Or you don’t understand your own risk well enough to explain it clearly. A good loan package tells the lender the story they need to hear, not to spin it, but to give them the information that makes a yes reasonable. Walk in with messy books and verbal explanations of why things look unusual, and you’ll get a no. Walk in with clean financials, a clear use of proceeds, and a repayment analysis tied to your operating model, and the conversation changes entirely.
Isn’t equity always giving up control? No — and this distinction matters. There’s a difference between economic rights and control rights. You can share in the financial upside of your business with outside investors while retaining full operational authority. A preferred equity structure can provide growth capital without a board seat or meaningful dilution of your voting control. What you want to avoid is selling common equity at an early stage before you’ve demonstrated what the business is worth. That’s when equity gets expensive. A well-structured preferred instrument at the right moment usually isn’t.
When does bootstrapping become a mistake? When you’ve identified a specific opportunity — a hire, an expansion, a product investment — that generates a return on capital materially above what that capital would cost you, and you don’t have the organic cash flow to capture it on your own timeline. Bootstrapping is a discipline, not a doctrine. If your business grows 40% with $500K of outside capital at a 20% cost and 10% without it, you’re leaving real value on the table. The math should make the decision.
I’ve been offered revenue-based financing. Should I take it? Run the effective annual cost first. Take the factor rate, calculate the implied payback timeline, and convert it to an annualized rate. If that number is 35% and you’re growing at 55%, it may be a reasonable bridge as long as you have a clear refinancing plan on the other side. If that number is 35% and your growth rate is 18%, the math is very hard to work. The “no dilution” framing is technically true. The cost is rarely what it’s made to sound like. Run it before you sign.
Have questions of your own?
Email me at Duncan@SaorsaPartners.com
What Comes Next
Lever Seven is about pricing, specifically why it’s the most underleveraged growth tool in most e-commerce businesses, and why a disciplined 5% price increase often does more for your bottom line than a full year of cost initiatives. Everything we’ve covered on margin structure and capital efficiency makes the pricing conversation sharper. That’s where we’re going next.
If this resonated, subscribe to Conduit of Value so you don’t miss it. And if you’re sitting with a capital decision right now — a raise, a refinancing, a partner exit, or just uncertainty about whether your current structure is right for the next phase — reach out (Duncan@saorsapartners.com), this is the work that gets me out of bed every morning.