Amazon Cash Flow: When Debt Works For You

This week I had a call with a potential client whose eCommerce business has been around for about ten years. They have grown and changed over the years, and I was really impressed by his intimate knowledge of his business. He really knows his numbers. He wants to implement Profit First yet is concerned that the debt they have in the business is going to be an issue.

In his situation, debt is a tool and is being used responsibly. While I generally advise many of our clients against the use of debt in their business, it can have its place. There are good reasons to have debt, such as loans. Here’s how I differentiate between the good and the bad (to avoid the ugly!).

Bad Reasons to Use Debt for Amazon Cash Flow

Here are just a few of the things you might tell yourself to justify putting your business into debt:

• It’s going to help me grow my top-line revenue and that’s the only thing that matters.
• It’s being used as a band-aid to cover expenses, but after Q4 I can pay it all back.
• It’s being used to buy inventory, even though I don’t know my gross margin on the products.
• I’ll be paying well above market interest rate, but it’s the only loan I can get.
• The repayment terms are inflexible, and the creditor takes their cut from my income before I get the money, but it’s the only loan that is available to me, so I’ll make it work.

Good Reasons to Use Debt for Amazon Cash Flow

These are things you should be confident of before incurring debt:

• I have made a strategic decision based on knowing my historical numbers and being brutally honest about them. I'm also being brutally honest with what I know about what lies ahead in the marketplace.
• I know myself, and once the decision is made, I will be confident that I’m going to sleep at night instead of being constantly worried about making the payments.
• I need more funds for inventory, and I know my gross margins. There is enough margin to cover the interest and contribute to profit, paying myself, taxes, and the operating expenses required to run the business.
• The loan comes at a reasonable price and with flexible terms.

Be Aware of Lenders’ Terms

There are many different lending models out there now and traditional loans can be difficult to acquire. An expensive loan can suck all the excess cash out of your business and put you on the hamster wheel that requires you to borrow again. When the lender gets their funds before you get access to your income, you are left with less cash and the power to decide how it will be utilized day to day.

Profit First Creates Growth Without Debt!

We do have clients that are not using debt and still growing their business. Using the Profit First model, they are setting aside funds for Inventory, Profit, Owner Pay, Taxes, and Operating expenses. They are typically making enough margins to also set aside funds for Market/Product Development. They bank these funds and as they roll out a new marketing strategy or a new product, they use them for this specific purpose. The available funds are what determine the timing for these initiatives. It allows them to grow organically, without funds from outside the business.

Using debt for good reasons (and with good terms) and growing organically using your own funds can both be sound strategies for Amazon businesses. I suggest understanding how comfortable you are with debt and how well you’ll sleep at night if you have debt in your business. For some people, knowing that they may grow “slow and steady” is fine because the loan would be a cause of worry for them. Others have done their homework and see a loan as a tool based on the best information they have available. They know that level of risk will not be a cause for undue worry.

If you don’t have all the levers of your business dialed in, I can say with certainty that a loan is not the right tool for you at this point in time. Go a little slower and build a good foundation before you add that cost to your business.