This Issue's TLDR...

• Specialty funding companies make debt quickly and easily available to eCommerce sellers through products like merchant cash advances and revenue-based loans
• But beware: They aren't white knights, nobly riding in on their steeds to help out the little guy for nothing in return. They are profit-maximizing businesses, just like you and I.
• In some cases, their financial products can be more expensive than credit cards.

Cash is King - Part 2

It seems like eCommerce funding companies are everywhere these days.

Companies like 8fig, ClearCo (sort of the O.G. in this space), OnRamp, Payability, SellersFi, Wayflyer, and countless others all promise accessible "growth capital" of up to $20M (what??) at lightning speeds.

They inundate you with taglines like:

"Loans that move at the speed of eCommerce"

"Scale smarter and faster with continuous funding for eCommerce sellers"

"No equity dilution. Cash available to fund your growth. No dipping into personal savings."

And rely on trusted thought leaders in the Amazon space to market for them.

If you're serious about growing your Amazon business, it seems like a no brainer to get funding from them.

These financial products are NOT what they seem though, and today I want to show you some actual math to hopefully give you pause on two products that these companies commonly pitch:

1. Revenue-based funding (RBF)
2. Merchant cash advances (MCAs)

I'm going to walk through an example of what a typical RBF loan would actually cost you in the section below. And then, I’m going to pass the metaphorical mic to my friend Bill D’Alessandro, founder of Elements Brands, to walk through the math on MCAs.

Revenue-Based Funding

Let’s start first with a definition. And, to underscore how cleverly marketed (and dangerous!) these products are, I’ve copied below the language that one of the leading eCommerce funding companies uses on their website:

Don't let the folksy, "aw shucks" language fool you.

Remember that (most of) these eCommerce funding companies are institutionally-backed, and in the business of, you know, actually making money.

They are NOT running a charity aimed are supporting eCommerce entrepreneurs like you.

Let’s break down the terms of these RBF loans…

First, you have the Origination Fee.

It’s also sometimes called a Setup or Structuring Fee. Pro Tip: When people in the finance community invent new phrases to describe the same thing, be cautious.

Most of these eCommerce funding companies charge an Origination Fee between 6-10% (although, there is one company that I know of that charges 1%; but they make up for it in other ways). On a $100k RBF loan, that $6k-$10k in interest that you’re paying upfront. Remember that fact when I do the math in a moment on your effective interest rate.

Next, you have the Factor Rate (which also comes with different names attached to it so, you know, beware). The Factor Rate determines the amount that you need to repay in a given period.

"But Jon, isn't that a good thing?"

Well, on a $100k RBF loan with a Factor Rate of 1.1, your payback will be $110k in, e.g., Year 1.

If you're keeping score at home, that's $6k-$10k that you’re paying upfront in the Origination Fee, and another $10k for the Factor Rate.

Finally, you have the Repayment Rate, which is simply the monthly % of Revenue needed to pay back the $100k Principal + $6k Origination Fee + $10k Factor Rate by the end of Year 1.

Confused yet?

A cynic like me might say that is by design.

Let's look at an example to demystify...

Here's the monthly P&L of a business that just took out an RBF loan to finance an inventory purchase.

To keep things simple, I kept revenue flat and margins stable. I also made some baseline assumptions about the RBF loan terms, based on ones that I've actually be offered.

Feel free to dive into the math, but for all you lazies out there, pay attention to the red output numbers.

While, in this example, you only pay back $46k on a $39k loan, your "True APR" of this debt is 432%!

Not cheap.

For comparison, I've modeled out what it would look like if the exact same business used a credit card for this inventory purchase.

Notice anything?

That's right, not only is the total amount you pay back slightly less, but the True APR is only 192%!

"But Jon, I tHoUgHt cReDiT cArDs wErE eXpEnSiVe?!"

Well, they are. But, in this case they are *relatively* cheaper.

The simple, intuitive explanation for this is: In this credit card scenario, you have use of the money for longer before you have to start paying back principal.

Meaning...the money is "free" for you for a period of time.

Final Thought

Don't interpret this to mean that I'm advocating for credit card use over RBF loans. In fact, RBF loans with the right *terms* can be advantageous.

Also, don't interpret this to mean that you shouldn't use *any* debt to grow your business. Debt can be effectively used by eCom businesses to grow! (In fact...the Amazon Lending options are quite compelling these days.)

All I'm suggesting is that you do the math on the debt terms and model the impact to your forward-looking P&L before taking on that debt.

A Deep Dive Into Merchant Cash Advances

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Bill D'Alessandro @BillDA Entrepreneurs, this is an intervention. 🚫 STOP taking merchant cash advance loans from Wayflyer, 8fig, ClearCo, Shopify Capital, and more. 🏦 The entire business model of these lenders is exploiting the fact that you can't do interest rate math. That ends today. Read on ⬇️ 8:19 AM • Mar 16, 2023 61 Retweets 421 Likes Read 42 replies

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