This Issue's TLDR...
👉 Did someone forward you this newsletter? First of all, give them a crisp high five when you see them. Second, head over here to subscribe and read past issues. BEST From MeThis week continues a three-part series on debt financing for your Amazon (or eCommerce!) business. If you don't need capital to grow your Amazon business: Congrats! You're in the minority. Everyone else, pay close attention to these three issues of B@A and save them for future reference. Part 1: The Different Types of Debt Financing for your Business Part 2: A Side-By-Side Comparison of Debt Options (and How to Evaluate Them) Part 3: Insider Secrets from a Commercial Lender * I mentioned in Part 1 of this series that finance is filled with jargon and marketing-speak, intended to obfuscate and distract from the real costs of things. Finance is also filled with complex math that, when combined with jargon, creates a maelstrom of confusing economics and fund flows. So, to help you cut through the complexity and jargon, I'm going to walk you through how to calculate what different debt options will REALLY cost you. Part 2: A Side-By-Side Comparison of Debt Options (and How to Evaluate Them)Let's start with the most commonly metric as it relates to the "cost" of debt: APR. APR = Annual Percentage Rate. APR represents the yearly cost of borrowing money, expressed as a percentage. Think of it as the price tag on the money you borrow. Whether you're taking out a loan, using a credit card, or financing a car, the APR tells you how much that borrowing will cost you over a year. Understanding APR is crucial because it affects how much you'll pay in total when you borrow money. A lower APR means you'll pay less in interest and fees, while a higher APR means you'll pay more. It's a key factor to consider when comparing different borrowing options. OK, now let's look at the factors impacting APR, for the different debt offerings that I discussed in Part 1... "Cool table Jon. Now show us the math." Because these debt options don't work in the same ways, we need to calculate what is commonly called an Effective APR to make an apples-to-apple comparison. To calculate an Effective APR:
If you learn by seeing actual examples...good news! I have one for you. Here's the example that we're going to work through:
These assumptions leave us with analyzing the APRs for:
Line of Credit Terms:
Calculation:
APR for Line of Credit: 15.5% Term Loan Terms:
Calculation:
However, since the loan is being paid down over time we need to use the average loan balance to calculate the APR. The loan is being paid down in 26 equal payments. We can use the midpoint of the loan or $125,000. $15,000 / $125,000 = 12% APR. Revenue Based Financing Terms:
Calculation:
With Revenue Based Financing we can begin with the APR of the term loan but then need to adjust for the fact that the loan is being paid back in less than 1 year. To do this we take 12% / 8.83 = 1.36% (monthly interest rate) 1.36% * 12 = 16.32% APR. Merchant Cash Advance Terms:
Calculation:
We can once again use the midpoint of the loan of $125,000 to account for the periodic payments. Using the implied interest the APR is: $37,500 / $125,000 = 30% APR. None of these seem *that* bad. Right? Well, unfortunately, the above calculations are leaving out one very important variable when analyzing debt options for your business. 👉 OPPORTUNITY COST 👈 What do I mean by "Opportunity cost"? Simply...the cost of not being able to re-borrow the funds that you are repaying with all of the options except the LOC. (You'll see what I mean below) The above calculations primarily focus on the direct costs and APR of each financing option without considering this opportunity cost. To include the opportunity cost, we need to account for the lost potential earnings from not being able to use the repaid funds for other profitable investments or operational needs. We are assuming this opportunity cost at the APR for the various debt options. Line of Credit (w/ Opportunity Cost) For a line of credit, since it remains open and funds can be re-drawn, the opportunity cost is less significant. The main cost here is the interest rate itself. Terms:
Calculation:
Revised APR for Line of Credit: 15.5% Term Loan (w/ Opportunity Cost) Terms:
Calculation:
The assumption here is that you need to replace the $125,000 you paid back halfway through the term with another $125,000 term loan with the same terms and that cycle continues forever until all money is repaid. $125,000 * 12% = $15,000. Added to the $15,000 you are paying for the first-term loan it effectively doubles your APR to 24% (adjusted for opportunity cost). Revenue Based Financing (w/ Opportunity Cost) Terms:
Calculation:
Using the same logic as above we would multiply $125,000 * 16.32% = $20,400 added to the total interest paid = $35,400 Now we need to calculate the annual interest rate: $35,400 / $125,000 = 28.32% Adjust for payment frequency = 28.32% / 8.83 (months outstanding) = 3.21% * 12 = 38.52% APR (adjusted for opportunity cost) Merchant Cash Advance (w/ Opportunity Cost) Terms:
Calculation:
The calculation for this is the same as the term loan since we are assuming a 1-year duration so for simplicity we can assume double the APR or 60%. * Is your head spinning from all of this? Did you start to skip through this section when you were only halfway through it? Or, perhaps you know the severity of this debt math through painful, first-hand experience, after taking on too much debt for your business. If you need help navigating the world of debt financing, my team and I offer Capital Advisory Services for brands. Just send me an email for a free consultation: jon@colormorelines.com. BEST from Everyone ElseBest Deal That I've Seen This WeekRegular B@A readers know that I'm an advocate of Acquisition Entrepreneurship (AE). When I last wrote about AE, I said that I would start to share more AE-related educational content in here, as well as deals that I've looked at. Last B@A issue, I shared a Sports & Outdoors Brand and had close to 20 readers(!) inquire about it. The AE "force" is strong in this group. So, to continue to deliver what many of you want to see, here's another deal that I recently looked at: 🎣 Bedding & Furniture Brand
ASKING PRICE: Inventory Only ($3mm) 👍 BEST Reason to Buy: This is a 15 year old business (I believe in Lindy effects in small businesses) that is in good health; the seller is simply divesting it...for a great price. How is the seller able to do this? Well, apparently, in 2018, the seller sold 70% of the company to a publicly traded company (NYSE). The seller repurchased all the equity in March 2020, presumably at a healthy discount. 👎 BEST Reason NOT to Buy: You will need a lot of upfront cash for this one. Creative and/or back-loaded deal structures aren't being entertained since the Asking Price is inventory only. (BUT...remember...it's doesn't have to be *your* cash. OPM = Other People's Money) PS: If you're interested in pursuing this deal, respond to this email and I'll share more details. Best From XIf I had to form an Avengers style team of finance geeks in the world of eCommerce, Chris would be part of my squad. Not just because he knows his stuff. But also because he has a unique way of writing about finance to make it fun and entertaining. Here's an oldie, but a goodie, on Amazon Lending options:
Best From LinkedInAmazon is gradually taking more and more control away from how brands merchandise their listings. There are legal and regulatory implications of this for Amazon, which I've written about here, here, and here. But, also...it's just...annoying. And arrogant for Amazon to be asserting this control. Particularly because it's done so through algorithmic systems that aren't finely tuned. Rebecca Thomas recently posted about this. It's a thread worth following if you, you know, care about how your products are merchandised on Amazon. Updates to the Amazon Private Label PathwayNo updates this week. * Back Story on the Amazon Private Label Pathway, ICYMI... A few months back, I had a small group of coaching clients that were at the same point in their Amazon seller journeys. I found myself answering the same questions, and pointing them to the same resources, so, in true Amazon fashion, I asked myself "What's the 1-to-Many solution here?" and built a Notion page of helpful resources, which I've called "Amazon Private Label Pathway." You can get access to it here: https://auxo.gumroad.com/l/amazonpathway (it's free; but if you want to buy me a beer, I won't object) |
I'm a former Amazon marketplace leader and current 8-figure seller. I write about advanced strategies and tactics for Amazon brands, that you won't read about anywhere else. Not for beginners.
This Issue's TLDR... I have a rock in my shoe. And the name of that rock is "FBA reimbursement provider bullsh!t" A comprehensive list of the best outside traffic sources for Amazon sellers in 2024 ASMR for Amazon 👉 Did someone forward you this newsletter? First of all, give them a crisp high five when you see them. Second, head over here to subscribe and read past issues. HIRE MY AGENCY ($$$) SPONSOR BEST@AMAZON ($$) GET AMAZON ADVICE ($) ACCESS AMAZON PRIVATE LABEL PATHWAY (FREE!) SPONSOR...
This Issue's TLDR... I found Amazon's secret database of suppliers, and I'm sharing it with all of you Q4 dates that matter How to take a brand concept and put it into words 👉 Did someone forward you this newsletter? First of all, give them a crisp high five when you see them. Second, head over here to subscribe and read past issues. HIRE MY AGENCY ($$$) SPONSOR BEST@AMAZON ($$) GET AMAZON ADVICE ($) ACCESS AMAZON PRIVATE LABEL PATHWAY (FREE!) SPONSOR Riverbend Consulting Click In Case Of An...
This Issue's TLDR... I'm giving away a list of lenders that can offer *non-predatory* debt capital for your Amazon business A new way to use Search Query Performance data The current market for Amazon business exits 👉 Did someone forward you this newsletter? First of all, give them a crisp high five when you see them. Second, head over here to subscribe and read past issues. HIRE MY AGENCY ($$$) SPONSOR BEST@AMAZON ($$) GET AMAZON ADVICE ($) ACCESS AMAZON PRIVATE LABEL PATHWAY (FREE!) SPONSOR...