Raising Debt Financing for Your Amazon Business

We bring back Fernando Cruz to discuss raising debt instead of using equity to grow your Amazon business. He and his partner Nick have done more than 25m in sales and raised 1.3m in debt along the way…

This show is brought to you by data bro the scalable amazon ppc management for large amazon sellers and brands visit seller sessions dot-com forward slash agency for more details hey guys welcome back to cellar sessions again we bring back for their their cruise hey do me good man thanks for having me again you’re welcome last time we had you and nick on which was

Really good could be done a bit of a background like these guys are quite successful in the sense that you know i figure sellers but you ate your bumpy roads and stuff like that and what i wanted to talk to you about today is the financial angle but before we address that to only give a little bit of background on yourself yeah so we started selling a little bit over

Three years ago since then we just hit about twenty five million dollars sold on amazon which is kind of crazy in hindsight but yeah i mean it we’ve in terms of like financing yeah we’ve raised over a million dollars actually in debt so we had you haven’t had to give up any equity which i think is pretty cool but yeah i mean we’re probably close to 35 employees now

Mostly overseas and then you know we’ve like kind of expanded since then so now we’re selling on amazon walmart like a bunch of the different marketplaces as well as now worth building out like retail and a few other initiatives going on fantastic okay so let’s pick this apart like you just said you’ve raised just over a million in debt do you want to break that out

Because not obviously sellers are very smart they understand things but there’s so many different ways of bringing in money into the business you know you’re talking about raising debt therefore not giving up any equity if you want to break down all the benefits that doing so and how much you you know you and nick still retain control to business et cetera all right

Yeah so i mean i guess when you’re thinking about like capper is right there’s there’s generally like just to kind of buckets and then there’s like obviously a lot of like nuances teeth but you know you can raise money through debt which is basically just getting like you know alone through the business and then like the other side is taking on equity so you’re

Basically putting on i can value to the specific company and then you’re saying like okay well i want to raise a million dollars the company is worth 10 million dollars so i’m giving up basically ten percent you know like for my simple like numbers but you know as i apply today like especially for the consumer products business there’s there’s a ton of benefits

Just because like in the beginning you know that like you’re like the smallest and you need the cash like the most you the least like options but if you’re able to take on debt to help yourself like grow then if you’ll if they want to take on equity a year later then you’re gonna have that like you know growing amido which is gonna be like a better evaluation and

Then so you’re giving up like less equity by taking on debt earlier on so that it allows you to i kind of grow the business and then get like a better value like a later point if you decide to like take on equity investors or venture sells stuff like that yeah that sounds cool and so talk me through the the debt prices you just say to you you know you’ve raised

Up to a million in debt where did you start with that and where did you go to to raise this kind of money and like obviously you got to a million eventually was that done in in stages or i don’t own the stages yeah i mean i think now we’ve raised probably a total of 1.3 maybe and we pay back a lot of it well yeah i mean i think okay so in the beginning so no bank

Will touch you and even even then it’ll it still takes a long time to get like the relationship build with a bank to actually loan you money and i can go into that like a little bit more why but yeah i mean it’s in the beginning i mean we have like a little bit funds ourselves putting in we started reaching out to like i mean honestly like there are the people that

Would talk to so family friends we were able to raise i think it was two notes each for 30k in the beginning and that was like really helpful like because we put in maybe the run 30k and then so that basically like you know tripled like what a minute we’ll funds we hunt for an inventory but then we hit a home run product and like literally we could not keep it in

Stock without taking on more debt so we went to like you know a friend that’s like you know basically there’s a high net worth and we’re like hey ma’am here’s our financials like we’re doing super super well but like we cannot keep this like in stock and fortunately i came from money back around consumer products he like understood like the challenges of a keeping

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In stock so yeah he like he loaned us the money like an amazing terms he’s a really good friend and so yeah i mean that’s that’s basically what we did for the first maybe year and a half is like just going to like former bosses or people that had worked with this woman past they trusted us and then we gave them like really really like like the best terms of we

Could be thought we could afford because we just knew that we needed the money and like giving up equity in my long term will be way way more expensive so we are giving out like it was a compromise area note simpler its interest only which means you don’t pay principal you only pay like the interest that we’re paying twelve percent so we’re a lot of people were

Like oh my god it’s so high am i like my bank loan is you know six percent or my student loan is eight percent which is totally true but the risk is a lot higher for like a startup and so yeah we we paid twelve percent interest only with the to your notes with an option to extend for a third year and i mean that put us on the map i mean that gave us like the cash

Flow that we needed to grow to about like seven million and then afterwards we took on like different like structuring so like sba loans things like that which like i think are only in the us but are very favorable towards the entrepreneur because there are over a 10-year tenure notes or ten-year alarm loans compared to like amazon’s one one year which is kind of

Brutal but yeah i mean that’s kind of what we did like in the beginning sounds good you want to break out for those who are not kind of aware of notes and stuff do you want to break out exactly what is a note and what that differentiates to other financial tools yes a note is just like it’s kind of a simple agreement for like alone and then so you can do you kind

Of write it through any way that you want and uh so like like for us like ours are specifically it was a two-year balloon beam so that means that like none of the principle we had to pay so look if we would say paid or we list it for us okay if we got like 100k know which was what actually what happened so that means we would pay twelve percent of it so 12 grand

Over a year so it comes out to $1,000 in interest payments every single month and then at the end of the two years then we have to pay back the 100k but like you know what can a marine seller can do so much you know with a hundred grand and then you have two years to basically build up enough cash flow to pay back so yeah and then we also had the option to pay

Another two percent upfront to extend for a third year so if that also is like really really helpful if you need that third year and we elected to do that sometimes but yeah i mean that’s like you know is just like some kind of like agreed-upon like i’m out i’m gonna borrow this i’m gonna pay it back with this interest over like this period of time and then so

It could be like a principal and interest payment or it could also just be like name just only payment and yeah i mean it just depends on like you know your relationship with the investor it depends on like you know your cash flow and the business like interest only for us was the best especially because we’re you know our cost of capital is the 12 percent right

And then so i’m thinking about it like okay well like the average roi my product is let’s say for sure over a hundred percent so and then if i can flip inventory like this many times with a hundred percent of our why like as long as i’m managing like a gnome you know of course you’re not have losses in there too but like if you’re managing your inventory and your

Product selection right then the twelve percent is actually really cheap and so that’s how i kind of looked at it as i was like raising like i mean a lot of money to be honest yeah yeah so then would you like to explain the difference there is that you mentioned earlier on in the show is that it cost you more in equity later if you gave way equity upfront do you

Want to explain that strategy so lt you raise debts so that you had more value later is in your company you want to break that down for us yeah yeah for sure so okay so that’s okay so if so let’s say so yeah i’m paying 12% plekoskaya so let’s just use that like 100k no so over the two years if each year i’m paying $12,000 an interest then over the two years i’m

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Paying $24,000 for having like that specific loan but you know at that time we were growing so fast like we’re growing like 300% a year so you know if the company was worth like you know let’s say 200,000 in the beginning and then if we three exit that first year now we’re 600,000 right and then you know let’s say maybe we’d grow another like you know 75% whatever

So now it were like what is that like eight hundred a little over a hundred and a thousand but it’ll say i get that a hundred thousand at a time so so much smaller and only worth like two hundred thousand then maybe i had to give up 10% of the company so it was worth twenty thousand of the original of the original two hundred thousand yeah but now i’m giving 10%

Of the eight hundred thousand and then so even by the end of the note like if you’re now you’re paying eighty thousand or what would have been the know your your value and equity he’s now eighty thousand but let’s say we build it for another five years so that couldn’t be millions of dollars like if you sell for ten million ten percent equity like yeah that’s a

Million dollars but instead of what was a very confined like interest interest percentage so so yeah i mean it really just depends on like your goals and like i mean yeah you’re like honestly you’re like a good needs like to raise that and like make people feel comfortable about it because it is a very risky investment because i mean and this is what you hear from

The bank’s all the time as i look if you can’t fill it what a mining like there’s like even lod you are like oh i like inventory that’s my collateral but like i mean you know from the base perspective we’ll just totally spot on is that like yeah if you’ve got a million dollars in inventory in you know your amazon competition or you can’t sell it then like for sure

This banker that’s never sold on amazon can’t sell it and so you have like you know really make them feel comfortable sometimes we would use like a personal guarantee which like men like you know no matter what even if the bank out of the business defaults like we’re responsible for this like personally and so that’s like really scary but i give your if you’re that

Confident in your business and your ability to choose products and all that kind of stuff like you know it can be worth it yeah and so what how would someone go about that so what you said is basically it’s about relationships like i like i’m 42 now so i’ve been in business for a number of years i’ve built good relationships like me getting money access to money’s

Not very difficult because i’ve got to that stage build those relationships to be put in those positions as long as i come along with the right financials and stuff i could pretty much raise what i need i to not too on a personal level i like to grow with my own cash or with my pc but if someone wants to do this what is the best ways that they literally going

To approach people with a decent net worth that they’ve got relationships with and showing the business and started from that way or introductions where would they go about it and what kind of level of cash should they ask for at the very beginning because i mean we’ve joked about this before in the uk you know like in the startup scene where they’ve got nothing

It’s just vapor where you know everyone wants to raise 250 cal’s to the back of the business plan but they got nothing they’ve got no users nothing else in between where is a good place to start for someone who said on amazon who needs to help with financing because inventory becomes the problem for them where would you say is the best way to start there yeah i

Mean i think introductions yeah i mean other people that invested in us like we we had a relationship with everybody i think that’s definitely i think it’s hard to go and you know somebody cold yeah i mean i definitely got a lot of introductions like your while you were running the company in some we were like we probably could have worked out deals at like maybe

14 or 15 percent pretty much everyone that was at 12 percent we knew before starting the company so um so i would say like it just really depends like if you’re willing to go up to that like 15 you know percent give or take but yeah i would say introductions you know there’s like you know kind of investor groups like like angel investors they can go like percent

To them and then yeah i mean it’s honestly just like it’s a lot of networking like i mean i spent like so much time talking to banks and then like the banks would refer me to okay you should check out this guy like oh you know you’re you don’t have enough like two years of tax returns so you know maybe you can talk to this venture debt firm and then it was just

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Like constantly like practice we’re finding my pitch like getting really good at explaining like our cash flow model getting really good at explaining our business model like putting together like decks i mean it was pretty much like a full-time job for me like i i definitely stepped away from like minnijean like the amazon stuff for a while as i was like kind of

Thinking about okay like how do i like raise this much money so yeah i mean it highly like a business partner like nick is really really helpful so that he could like manage the day-to-day of amazon and then like yeah i was like like raising money yeah that makes sense so wherever you’re you are in the cycle now you’ve obviously you raised money you said you paid

A big chunk of that back what kind of do you do you think you take more money now are you definitely a position where cash flows taking care of or expanded quite heavily in the last four years of you right yeah i mean that’s a good question it’s tough like we you know i i always loved growing i think that’s like you know most exciting part for me it’s like running

A business but yet we’ve taken on a lot we’ve actually played a good portion of it back thankfully yeah so i think our our major goal this year is to hit a two million dollar give it up and then once we do that then i think we’re gonna kind of re-evaluate and see because once you’re like above that like one or two million dollars even like you’re in a much much

Better financial position to take on like a bigger line so we could take on like like i could two or three million dollar like line and it’s less risky like oh you know we’re more stable as a company we’ve got 35 employees like we’ve got systems like technology like there’s just a lot more to invest in with versus just like i’ve got one product it’s killing it you

Know what i mean and like i’ve been telling for six months so i think i think we’re never evaluate like i’m in the beginning of next year and see like what our options are in terms of like those those types of lines but i think like i mean i definitely want to continue scaling and in like you know come over time earlier is like there’s ways you can structure your

Manufacturing relationships and stuff to kind of help you with like cash flow but just like a nature of working with china a lot of the time like then you’re not gonna get like great terms and so i would love for us to like you know take like a slightly bigger note and then see like what we can do with that for the next year – sounds great all right let’s wrap that

There is there anything you want to add before we go yeah i mean no i think there’s that’s it i mean there’s one other option i guess you could look at it’s like pretty that if you guys are interested like that it’s pretty popular in the startup world and like people have asked us to do it we decided not to do you want to give it back please there’s something called

A safe like or a convertible note which is like really helpful but it basically gives you like debt like it’s a base like a debt offering in the beginning but it’s like with a promise and sometimes there’s the constituents to get equity in like a later round so they’re going really big like that might make sense but it’s also like it’s it’s really founder friendly

Because it’s pretty standard template so you don’t spend a lot of link all fees and then there’s just a lot of advantages of not having let’s hear raising from five different people you don’t need to get them all to agree on evaluation you’re just doing like specific debt and and that it’s really said a lot like a simpler process so you can focus on building your

Company yeah sounds good and that’s why people could reach you to let me know about what you up to in terms of other ventures you’ve got going yeah yeah more than happy if you guys have questions on it like i’m happy to try to help hanging on me and fernando it so it’s our tradecraft calm and yeah i mean we just launched a course and then we’re helping kind of new

And like even some experienced sellers get to that kind of six or seven figure mark so everything from product selection inventory planning sourcing launching facebook god cement excellent right thanks for joining us today guys thank you for joining us if this is your first time don’t forget to hit the subscribe button up and that we’ll see you again in the next few days take care

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Raising Debt Financing for Your Amazon Business By Seller Sessions