This Issue's TLDR...

• How to calculate the actual cost of the different types of debt available to your business (Pay attention if you don't want to get buried underneath a mountain of interest and fees)
• DEAL ALERT - An omni-channel brand selling for just the inventory value
• How the Amazon Big Bets Team is screwing with your listings

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BEST From Me

This 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

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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:

1. Identify all costs: Include interest rates, fees, and any other charges.
2. Convert to annual terms: For financing options with payments based on revenue or sales, estimate the total cost over a year.
3. Use an APR calculator: Many online calculators can help you convert different costs into an APR for easy comparison. (I use https://www.calculator.io/apr-calculator/)

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:

• The prospective borrower is an eCommerce business only and does not have Purchase Orders from retailers to finance.
• The prospective borrower does not have receivables (invoices) from other retailers to factor.

These assumptions leave us with analyzing the APRs for:

1. LOC
2. Term Loan
3. Revenue Based Financing
4. Merchant Cash Advance

Line of Credit

Terms:

• Offered: $250,000
• Rate: Wall Street Journal (WSJ) Prime + 7%
• WSJ Prime (assumed): 8.50%
• Average Outstanding Balance: $50,000

Calculation:

• APR = WSJ Prime + 7%
• APR = 8.5% + 7% = 15.5%
• Since there are no additional fees and the outstanding balance remains constant, the APR is simply the interest rate.

APR for Line of Credit: 15.5%

Term Loan

Terms:

• Loan Amount: $250,000
• Upfront Fee: 6%
• Repayment: Equal payments every 2 weeks for 1 year

Calculation:

• Upfront Fee: $250,000 * 6% = $15,000
• Total Amount to Repay: $250,000 + $15,000 = $265,000
• Number of Payments: 26 (52 weeks / 2)
• Bi-weekly Payment: $265,000 / 26 = $10,192.31

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:

• Amount Drawn: $250,000
• Upfront Fee: 6%
• Repayment: 15% of monthly sales

Calculation:

• Upfront Fee: $250,000 * 6% = $15,000
• Total Amount to Repay: $250,000 + $15,000 = $265,000
• Monthly Sales: $200,000
• Monthly Repayment: 15% of $200,000 = $30,000
• Time to Repay: $265,000 / $30,000 = 8.83 months

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:

• Amount Drawn: $250,000
• Factor Rate: 1.15
• Duration: 1 year

Calculation:

• Total Amount to Repay: $250,000 * 1.15 = $287,500
• Monthly Sales: $200,000
• Monthly Repayment: $287,500 / 12 = $23,958.33
• Implied Interest: $287,500 - $250,000 = $37,500

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.

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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:

• Offered: $250,000
• Rate: WSJ Prime + 7%
• WSJ Prime: 8.5%
• Average Outstanding Balance: $50,000

Calculation:

• APR = WSJ Prime + 7%
• APR = 8.5% + 7% = 15.5%

Revised APR for Line of Credit: 15.5%

Term Loan (w/ Opportunity Cost)

Terms:

• Loan Amount: $250,000
• Upfront Fee: 6%
• Repayment: Equal payments every 2 weeks for 1 year
• APR: 12%

Calculation:

• Upfront Fee: $250,000 * 6% = $15,000
• Total Amount to Repay: $250,000 + $15,000 = $265,000
• Number of Payments: 26 (52 weeks / 2)
• Bi-weekly Payment: $265,000 / 26 = $10,192.31

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:

• Amount Drawn: $250,000
• Upfront Fee: 6%
• Repayment: 15% of monthly sales
• Monthly Sales: $200,000
• APR 16.32%

Calculation:

• Upfront Fee: $250,000 * 6% = $15,000
• Total Amount to Repay: $250,000 + $15,000 = $265,000
• Monthly Payment: 15% of $200,000 = $30,000
• Time to Repay: $265,000 / $30,000 ≈ 8.83 months

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:

• Amount Drawn: $250,000
• Factor Rate: 1.15
• Duration: 1 year
• APR: 30%

Calculation:

• Total Amount to Repay: $250,000 * 1.15 = $287,500
• Monthly Payment: $287,500 / 12 = $23,958.33

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%.

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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.

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FRIENDS OF B@A CORE Community ​ Some of my favorite folks in the Amazon advertising world have come together to form a mastermind community exclusively focused on all things Amazon advertising. Now, mastermind communities in the Amazon space aren't necessarily new. There's Million Dollar Sellers, Inner Circle, Titan Network, to name a few. What's cool about this is that it is PPC specific. So, if you're a current, or aspiring, PPC expert, CORE Community is worth checking out. ​ Apply Here

Amazon Questions? Amazon isn't easy. Everyone needs a little help from a friend. If you ever have a tough Amazon question, I'm only a phone call away. Let's Chat

BEST from Everyone Else

Best Deal That I've Seen This Week

Regular 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

• Channels: Amazon, Target, Wayfair, Kohls, Wholesale
• Geographic Markets: US
• Catalog Size: 100+
• Suppliers: 10+
• TTM Revenue (through Apr-24): $12.9mm
• TTM Net Profit (through Apr-24): $1.8mm
• Current Inventory On-Hand: ~$3mm

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 X

If 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:

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Chris Potter | Tax & Bookkeeping for eCom @ChrisPotter361 Amazon loans can make you rich. Or they can make you eat government cheese. You must know these 8 things about Amazon Loans. 👇👇👇 8:35 AM • Dec 19, 2023 4 Retweets 28 Likes Read 7 replies

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Best From LinkedIn

Amazon 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 Pathway

No updates this week.

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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)​

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