Raising Debt Financing for Your Amazon Business

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Fernando Campos comes back to talk on raising debt financing.

Benefits of Raising Debt Finance

Debt finance is like getting a loan through the business
An alternative is taking on equity and giving a piece of the company to investors
Consumer products business benefit from debt in the early days to help grow the business
Means you can still go for equity investment later but you can strike a better deal because your debt finance will have bank rolled you growing the business to get a bigger deal

They have raised upto $1m in debt finance
Done in stages and now upto $1.3m but paid most back
A bank in the beginning will not fund you
Had a little bit of funds themselves
Started out with family and friends
Raised two notes each for $30k in the beginning which tripled their pot
They hit a home-run product and took off
Then they met a high-note investor who was a friend and he loaned them teh money at great terms
Giving up equity in the long term would have been way more expensive
Were paying interest only at 12% with a 2yr and an option to extend for a 3rd year
This gave the cashflow to grow to $7m
Then took on SBA loans in the US that are loans over 10yr loans
Much better than Amazon’s one year loan that is pretty brutal

It’s a simple agreement for a Loan
Write it any way you want but for Fernando it was a two year baloon payment
Didn’t pay the principal but paid 12% or $12k per year ($1k per month)
Then at the end of the two years they paid back the principal (the $100k)
An Amazon Seller can do so much with $100k – gives you two years to grow your cashflow to pay it back
Also had the option to pay 2% up front to extend for a 3rd year
A note is an agreed upon amount that will be borrowed and paid back over a period of time
The interest rate depends on your relationship with the investor or your cashflow in the business

Interest only was best for Fernando
Cost of capital was the 12%
Average ROI on the product being sold was over 100%
So if you can flip inventory n number of times with 100% ROI
If you’re managing your inventory and product selection right then the 12% is really cheap

I’m paying 12% cost of capital
Over 2 yrs I’m paying $24k for that loan
Were growing 300% per year
If hte company was worth $200k in the beginning
Grow 3x in 1st year is valued now at $600k
Grow another % and upto $800k in value
To get that $100k when originally valued at $200k
Giving up 10% of the original $200k you’re paying $20k
But now giving 10% of the $800k is $80k and if you grow the company for 5 years to $10m – that’s cost you $1m instead of a very confined interest % in raising debt financing

Banks say – if you can’t sell this inventory what are they going to do with $1m in inventory
This comes up with bank investment
Taking out ‘personal guarantees’ can swing it but scary
It’s risky investment