Narrator: (00:01)
Welcome to the process, to e-com profit podcast, where we know top line sales, just isn’t enough to have the business of your dreams, learn to run a profitable business online that doesn’t run you.
Robyn: (00:17)
Back to the process to e-commerce profits podcast. Today, we’re gonna be talking about something that comes up a lot with e-commerce sellers and because Amazon and selling online physical products is very cash intensive. A lot of sellers end up at some point or another taking a loan and the, well, we will probably talk in depth about loans. And should you take them at another time today? We’re talking about another question and that question is I have some extra money and I’m gonna pay back my loan a little early. What do you think? So, Cindy and I are gonna talk a little bit about Cindy. I know you’ve answered this question several times and, you’ve even, I mean, I’ve even brought a tubing, like, okay, I’ve got I’ve, I’m flushed with cash. I just, because I don’t like carrying debt that’s, you know, one of the things that I don’t like, and so, you know, my, my, my impulse is always to, to rush, to pay off the debt as soon as I have enough capital to do it. And you’ve talked me out of that, a couple of reasons, and I’m, I’m glad that you have, and it, it does keep my stress lower. Can you talk a little bit about why it might not always be the right decision to pay back your loan early, if you have access to the capital?
Cindy: (01:26)
Yeah. So, I do get this question a lot, Robin and, and, and I get to use my accountant speak here and always say, well, it depends , you know, and, and what it depends on is what other, what other expenses you have coming up that you may need to reserve some cash for? it depends on what kind of interest rates you have on those loans. It depends on do you have an emergency fund or not, and what other risk factors are there in your business that you need to be prepared for? So those are a few of the things that when someone asks me that I, I go through a, just kind of a mental checklist of all right, let’s talk about other than this little pile of money that you have, what else is going on with your business?
Robyn: (02:13)
Well, and one thing that I think is good to mention is that, especially cuz a lot of people are taking like the non-conventional loan. So maybe they’re taking like a PayPal loan or an Amazon loan. A lot of those are stacked. So that at paying off your, the remaining balance, you know, in the last two or three months, doesn’t yield a lot. So especially with PayPal, you get nothing, you, you’re not saving any money on interest. you know, so, you know, you have to look at, you know, what are some tips for looking at, whether even makes mathematical sense, even if like, let’s say somebody has a hundred thousand dollars of cash flow in the bank, or, you know, six, you know, multiple six figures of cash flow that is just sitting there, you know, what should people be doing to make sure it makes mathematical sense to even pay it off early? When if, you know, if you have a lot of cash,
Cindy: (02:58)
Well, like you mentioned, many of the unconventional loans are stacked that you pay all the interest up front, you pay all the fees up front. So, you’re just paying back the principle. The, the other thing that, I think people should look at is what other uses for cash. Do they have coming up in their business? So, for example, and I see this happen, so often people pay back their loan only to turn around and have to borrow again for inventory, the next month. And that just really, it it’s, it’s, it’s kind of a psychological thing because while you’ve paid back a loan and that feels good the next month, when you borrow again, it just is like, oh, I’m right back here. And what I, what I think people can do is they can use that cash and just forecast what expenses they have coming up and let that loan be paid back on its natural course.
Cindy: (03:58)
And until you’ve gotten everything kind of sorted out and you know, that that cash flow is gonna be there repeatedly over, over and over again, especially now people need to be thinking about it because the fed raised, interest rates, a quarter of a point yesterday. I think it’s pretty, pretty reasonable to expect that they’re gonna continue to raise them. I, I, read one article that said, probably five or six more times this year. So, if you’ve got a loan that is, a very low interest loan because you took it out, when interest rates were really low, then you certainly do not need to be in a rush to pay that back. You need to do, you need to be sure that that cash, you know, and you could be putting it to work for you in other ways, but you need to be sure that that cash, that’s cheap is available to you. Should you need it?
Robyn: (04:53)
I think this is especially true as people, you know, I, I think I know I’ve talked to a couple people who are trying to pay back through the ideal loans before the payment starts. And, you know, of course, if you have the capital to pay back a loan and you have, you know, it’s not gonna impact cash, then yes, it’s something to consider. But you know, the likelihood of somebody getting a 3% interest loan on $150,000 over 30 years, you know, most, most eCommerce businesses aren’t gonna get access to that kind of interest rate again, especially as interest rates climb.
Cindy: (05:24)
Yeah. And, the other side of that though is, is the governments in your business a little bit. And, and you do need to look at what is in those loan requirements and is that going to be a restriction for you, but there is nothing to say that you can’t be, you can’t put that money aside and let it earn interest. And as soon as you are ready to pay it off, you just pay it off lump sum. When you’re, if you’re getting ready to bump into some, requirement with the, the E I DL loan that feels restrictive to you, but at the same time, then you kind of become your own bank. Yes, you borrowed from, from, the government for the E I DL. But if you’ve got that money sitting there and you have to use it in the future, then you can become your own bank at that point. And, that low interest rate, you’re essentially able to fund other projects with, so long as they fit the E I DL restrictions.
Robyn: (06:23)
And you know, the thing, another thing to think about too is if your margins are shrinking, because, you know, especially if you’re a private label seller and the cost of freight has been increasing, it’s gonna be even more important that you have a longer cash flow runway, right? Because, you, you know, you have to, you might have to launch new products. You might have to pivot quite a bit in order to make sure, you know, I, if the prices continue at this point to make sure that you’re remain profitable.
Cindy: (06:48)
Yeah. I mean, there’s so many variables with inflation operating in, in our economy right now. as you mentioned, the whole, shipping situation and, the cost of, fuel, I impact that heavily, but also there’s a lot going on with labor as well. And for people that have, facilities and people, based in the us, especially, labor rates are really taking a, hit the ability to hire people, is taking a hit. So, your, your operating costs are likely going to go up. And, and you know, there’s a lot to consider about how you mitigate that. but having access to that capital that you, you got early on in the pandemic through the E I D L even if, if, as I mentioned, even if you got the cash there to pay it back, you can start to use that to fund these, these, unexpected, costs that we’re now, incurring,
Robyn: (07:49)
You know, and of course you wanna make sure that you’re, you know, sometimes people, you know, you’re not trying something new with that money that, you know, something that you already have proven experience with, but, you know, if you can generate more than that, what, what is, a situation where you would say, yes, it’s a really good idea for you to pay off. Maybe let’s let the idea is kind of a monster of, of, in of itself. So, let’s say somebody’s looking to maybe pay off their Amazon loan a little early. When would you say yes, that’s a brilliant idea? Let’s go for it.
Cindy: (08:17)
I would love to be sure you’ve got, a couple, three months’ worth of, reserves, set aside in your bank account to be able to fund your operation to, you know, if you are using, especially if you’re using your Amazon business to fund your life and your family’s lifestyle, then you wanna be sure you can continue to pay yourself. And, I would also make sure that I had the money set aside to be able to buy another round of inventory. If, if you’ve got your, your, yourself covered for a few months, two to three months, and you also have another round of purchasing inventory covered, and there’s not some other thing that’s coming down the pike that you , you know, you need to think about, all right, what else might happen? when you feel like you’ve got those bases covered, then you can use that money to, to pay back. because it is expensive. I mean, I, I don’t, I don’t like operating with debt either, or I don’t like operating. but I, at the same time operating cash, poor is a worse situation than having debt, especially if you’ve got debt that’s, not too expensive.
Robyn: (09:28)
Cause I think the biggest thing is if you get to the point where you’re cash poor, you start to make bad decisions, but also the more urgently you need more money, the more expensive it gets.
Cindy: (09:38)
Exactly. I mean, trying to get money right away is costly. And, and that’s why I like the whole profit first methodology, because what it does is it forces you to think about things well in advance of when you have a situation. So, think about when you are, considering getting a loan, how, how, what are the, steps that you’re gonna take to pay it back? when, if you think about those things at a time when you are levelheaded, then you’re just applying rules. When things get a little stressful and profit first gives you the window to do that. If you’ve been operating in a, in a situation where you’ve built up your profit account, to be able to sustain you and to have that reserve, in a time where something unusual happens, like shipping cost or your inventory gets lost.
Robyn: (10:29)
And if somebody borrowed that money, maybe they borrow it as an Amazon loan or PayPal loan. I think that sometimes when you’re really cash strap and you’re taking a loan to like a bridge loan that you get, like, it gets easy to get stuck in like a survival mode where you’re like, okay, I just need to get it. I just need to get here. And one thing that you might forget is, okay, okay, we’re out of that crisis. But you know, we, in order to be able to be ready for Q4, I need to buy new pallet racks. And because of the cost of steel, I know that in October I’m gonna have like a million dollars that need to go out of our business for new racking or for something along those lines. Then if you haven’t been thinking about that, you might be focused on just the next couple of months and forget that you would be in that cast position going forward.
Cindy: (11:16)
Right. You know, there’s, there’s no substitute for doing a forecast for your business. And, and we like to, at the end of the year, when people kind of settle down a little bit from Q4, we, we like to start working on forecasting for the whole next year coming up, because, and, and, you know, it’s a forecast it’s gonna change. but at the same time, it allows you to think about it when you’re not in the middle of the crisis. And when you can see, all right, I’m, I’m probably not gonna have the million dollars to buy these pallet racks. but I know I’m gonna need to borrow the money. At some point, it gives you time to start identifying those sources to start shopping so that you’re not just stuck with whoever next week can give you the money because you gotta pay for it next week. And so having, having the runway of, some planning and some forecasting about what you want to have happen in your business sets you up to, to, to make decisions, at a time when you’re levelheaded and at a time when you have the opportunity to investigate and, and come up with the, the best options for yourself.
Robyn: (12:32)
And I think that really comes down to making sure you’re thinking strategically and that you have actual plans and goals that you’re looking at. And you’re not just looking at today. Cause I think that it can be easy to be focused on what needs to happen right now. but especially if somebody’s got, you know, if you’ve got a couple private label brands that are doing really well, or maybe you’re a young brand, that’s looking to expand into retail, all those things can be cash intensive. And so if you can make sure, you know, and if you can be looking at how can I make sure that my books show the story that I’m gonna wanna present, maybe a potential loan officer or, or lender then that that’s gonna reduce your costs a lot more over a period of time versus, maybe having that psychological, like dopamine hit of getting that loan paid off a little early.
Cindy: (13:20)
Yeah. Yeah. It, it does feel good to do that. but I’ve seen it happen so many times than the next month. You’ve got the crash of having to go back and ask for more money. And then you realize the next time that the, it was harder to get possibly, and that it was gonna cost you more.
Robyn: (13:38)
What have been some of the impacts? Is there any, like a, like something you can share from your experience of when somebody was, you know, did pay off that loan and maybe there was something unexpected that kind of hit them a little bit later that they weren’t prepared for, or that kind of caught them off guard?
Cindy: (13:56)
unfortunately I see it happen a lot. I see people, we talk even talk about it and we, we say, all right, this is our plan for paying off these credit cards. And because a lot of people are using credit cards. I mean, it’s a good strategy for building points and things like that. but then they pay it off. And then the next time, you know, I usually talk with them monthly and the next month when I talk with them, I thought you weren’t going to pay that off. And they’re like, well, I ha I just, this money just wasn’t working for me. It wasn’t doing anything. but I need to ask you, what do I do about buying this inventory? I’ve gotta pay my supplier next month. And I’m like, well, where can you get access to money? I guess I have to put it back on the credit card.
Cindy: (14:43)
And I’m like, yeah, I guess you do. And I mean, it’s, it’s, like I said, it’s, it’s a little bit of a defeatist feeling to have to, to do that. But in other situations, I’ve seen them pay, pay back that loan, and then there’s something else that they need to, to borrow the money for. And they can’t use the credit card. It’s, you know, they’ve got a payroll situation and they can’t put a payroll. they they’re wanting to hire someone, and they can’t put that person on a credit card. So, they would’ve been better off leaving the money on that credit card, using the cash to pay for the, the thing that they had to use their bank account for. And so, you know, particularly with credit cards and loans, when you pay those back then that, very often you can’t use them for other things that you’re wanting to, to use in your business.
Robyn: (15:40)
I think that that’s a really good point, too. It’s not just about how much cash do you have in the bank. It’s what kind of cash are you gonna need to have access to? Because if you, you wanna put down money for a larger space, if you want to do something with payroll, those things are all, you know, you, you cannot use any kind of funding. And so, if you have, if you think, if you can think about it that way, then it can help me determine, you know, where do you wanna? And if, especially if you have multiple loans, which one did, did you wanna pay off first? but you know, it, it is, it is, it is. And, and if you have to, if you try to borrow that money at a higher interest rate, of course, any benefits that you had from paying the first loan off are gonna be more than erased.
Cindy: (16:21)
Yeah, exactly. And if you are, you know, just itching to pay off something and, and you have multiple loans, then look, look at two things, look at what’s little that you can just pay off and check off and that’s outside of your hair. And that feels really good to pay off something like that. but the other thing to do is to look at your interest rates and is there, if you don’t have enough to pay off everything and, and, and you have decided you are gonna pay off alone, then then pay off the ones that either you can check off and they’re done or pay off the ones that have a higher interest rate. but as I’ve said, the, the idea of paying off the loan, no matter what is, is not the place to start.
Robyn: (17:08)
And it’s not that we don’t want you to pay off the loan. We do want you to pay off the loan. And, but we just wanna make sure that it’s not a vicious cycle. I think this might be a good place, you know, I’m sure that we’ll talk about this more on another episode, but, you know, the kind of the vicious cycle that can happen with loans, offer physical product businesses, where you get one loan, you start to pay it off. And then the next thing, you know, you’re taking off another one and another one and it can make it so that you start to spiral when people are looking at, you know, kind of trying to weigh, whether they should pay this loan off, what are something to consider about, you know, if you were to, to have to borrow again, and it could put you into what we call a debt spiral, you know, what is it that happens that makes it, so it’s not, you’re not able to recover from the, that kind of the taking on, of additional, bridge loans that end up never actually bridging anywhere.
Cindy: (18:09)
Yeah. Well, what happens is the, the cost of paying back those loans, the interest that you have to pay back is so high, that when you look, when they start stacking up, they head up into to real dollars. I mean, I, I have seen people with thousands of dollars of interest expense hitting their P and L every month and when their gross margin is so low, that that’s really why they got into trouble to begin with. Okay. So that’s the root of the problem, gross margin. Wasn’t high enough to really sustain their business. And so, if that is the underlying cause, and that hasn’t been fixed, then you’re just adding more dollars going out the door. And, you know, if you’re in this situation where you’ve all of a sudden got some cash from somewhere, then either you fixed your gross margin problem, but, but learn from what, what happened there really understand it.
Cindy: (19:14)
Do we, in our business, we do a after action review. We, we try to really understand the root causes behind things. So really understand, all right, how did I end up with this money? We do after action reviews, when things go bad and we do, ’em when they go really good, because if, if somehow, you’ve gotten a lot of money, but you still do have this debt, then how did that, how did that happen? And can it happen again? And how are you gonna keep from, being in the situation you were in earlier that caused you to be into debt, really look at all of those things and, and make sure you’ve got a plan before you then just, put that money back against those loans.
Robyn: (19:50)
Yeah. And there are people who feel really comfortable with that, and that’s 100%, okay. That’s why everybody has their own business. and so, but if you borrow the money saying, I knew I need to borrow the money and the everything that I did with the loan or the credit card payment, or what have you paid off, then go back and look, what I’m hearing you say is go back and look and see what caused that success and how can I replicate it again at a larger scale without reducing my margins. And if you took on the debt because you thought you were gonna be okay, and then something went wrong, you know, kind of like if you ever watch Grey’s anatomy and they do like an M and M where they go back and see what happened, you wanna do the same thing. So, what happened that led you to, to unpredictably cause you to take that, additional debt and, you know, look at how can you prevent it again?
Robyn: (20:36)
Now, if it was, you know, there was a global pandemic and we couldn’t do something, but obviously you can’t prepare for that. But if it was, you know, our margins were really a little lower so that when the pandemic hit and, freight costs, freight costs start to started to rise. We didn’t have the margins. So, what we really need to do going forward is we need, you know, rather than paying this loan off early, what I wanna do is work on, on our operations to increase our overall gross margins and our, our net margins, so that we can continue to build this cash reserve as, as the business continues.
Cindy: (21:10)
Yeah. And you mention mentioned the pandemic and some of the cost associated with it. The other side is true too. A lot of people had a really big boom with the pandemic and they’re on the other side of that. Now, things are not like they were a year, a year or a year and a half ago. you know, they may have been in a very fortunate situation considering everything else that was going on, but, but now things have started to level out. People are going back into stores, et cetera. And so, if the pandemic was something that caused your, sudden growth in your business, then you need to be prepared for, that’s not gonna be sustainable possibly. And what are you gonna do to continue to, especially if you have set up your operations now to be at that higher level, what are you gonna do to operate at a lower level when the costs are starting or when your revenues are starting to go back down,
Robyn: (22:06)
You know? And that can be really difficult because, you know, a lot of times our products are babies. and so it, you know, we say, look, look at our baby was honor, honor student, right? But you need to look at, is it realistic to maintain or grow year over year over the next couple years? Or did you get artificially, you know, five- or six-years growth in a year? And so now maybe staying the same or like a much smaller year over year growth is, is it really predictable? You know, you might look at the numbers year over year and say, okay, it should be that we end up at this particular spot, but in reality, that, that, you know, things might level out. So, if you had, you know, a company that was centered around breaking bread, or if you had something that was centered around things to do inside the home, to keep people busy, then you might notice that yes, you’re maintaining that growth that you had before, but you’re not having any additional growth. And so, you need to be, you know, when we would do cash flow of planning, we would, when we would, we would look at best case scenario, worst case scenario we’d have, we’d basically create two files. Like if things went, we went, well, you know, what, what would the cash flow be? And if things didn’t go well, what would our cash flow be? And make sure you’re looking at the, you know, like the worst-case scenario and planning for that as, as, just as much as the best-case scenario.
Cindy: (23:24)
Yeah. As entrepreneurs, we always put on our rose-colored glasses, but sometimes they, they lead us astray and, look looking at what the worst case could be is, is really helpful. And, you know, the, the other thing is, what I see with clients is their products. Don’t just always continue going up. It’s not like this forever, it’s like that. And then competitors enter to the, the space and then it starts to erode. So, there’s definitely a life cycle with products. And if you’re offering, multiple products that are at different places on that life cycle, that starts to level things out, but you gotta be very mindful of that. And it takes cash to be able to introduce those new products. And you have to know when you’re gonna cut off and quit putting money towards those products that are, are on the downhill side of the, of the life cycle. So, it, it, it, it’s a holistic business thing, but then you have to drill down to what’s really going on at the individual product level as well.
Robyn: (24:26)
And it is, it is, you know, it, it is something that you need to really be thinking about. And when you’re looking at this and we, we talked about making sure you have goals, looking at how much cash runway you have, but also looking at what testing budget do you have, how much budget do you have time, aside to test for new ad types to keep your products alive, but also to test new products to test, new branding, or maybe even new distribution channels, if you’re, if you feel like there’s still a lot of lifecycle left on your product, maybe you do wanna look at retail, or maybe you do wanna look at, additional channels, and making sure that you adjust it for that in your cash flow budget, for, so that you don’t end up in that position where you’re having to re rebar again at a later point,
Cindy: (25:08)
Right. And, and that’s, that is the connection back to, you know, whether you pay that money back is, are you gonna need that cash to then launch your next product? And is this the most affordable, cash you’re gonna have access to? So, it, it, I think we’ve talked ourselves right back to the, to the beginning of, should I pay this money back? And, and there’s so many reasons to, to take your time and figure out whether or not that’s the best strategy and it gets, it’s more than just interest rates. It it’s really, how is your business operating and, and where might you need cash in the future? And is this the, the cheapest best source of it?
Robyn: (25:51)
Yeah. And I, so, I mean, I think make sure I’m not missing anything that some of the things that we covered are you need to have three months of cash runway, plus another round of inventory. You need to clearly thought about your goals for the next six to 12 months and looked at any part like infrastructure or, additional investments that you would need to make in your business. You wanna look at, if you needed to borrow money again, would you be able to get it at the same rate or lower, and what’s the probability that you would need to borrow that looking at your overall product and where it is in the life cycle to make sure that the growth that you’re currently projecting is realistic. And if possible, to even look at creating a worst-case scenario, to make sure that you’re able to pivot, and then also look at how have you integrated testing new products, new ad structures, new retail channels, in order to make sure you have the capital in order to continue to your brand to grow, and foster those products through the life cycle. And, you know, one thing we kind of touched on was making sure that you have products that are always in the pipeline to make, to level out the product life cycle. So, one product life cycle, it doesn’t, completely tank your entire business. Did I, did I miss any of the big ones?
Cindy: (26:59)
The only one that I would add is just think about what other risk factors are out there. Yes. And is there something that could go wrong and, and this, because we’re entrepreneurs, it could happen in our personal life too. So, so give some thought to what might go wrong in my business, where I need this cash, but also what might go wrong in my personal life, where I might need to draw extra money out of the, business. you know, if, if you, if you know that your car is on its last legs or something like that, that may be a place where you’re gonna have to, you may have been taking out a very small amount, as an owner pay. and if you’re gonna have to all of a sudden have a car payment now, then you’re gonna need to take more out of the business. So, so think about it from the standpoint of your, your personal situation too, and are things pretty level in your personal life. If there’s some big risk factors coming up there, you know, the business can, start to pay you a salary so that, your, your personal life can be leveled out a little bit too.
Robyn: (28:03)
I think it’s also a good time to think about, what would happen if you got sick or if one of your key employees got sick for three months and they were only able to work part-time or you were only able to work a couple hours a day or not at all. this is a good opportunity for you to figure out what structure needed to be in place. So really using this win, cuz you have, you have extra cash. That means you’ve had some really great wins at first. You should celebrate that, but maybe the first celebration isn’t to pay loan off early it’s to look forward to planning the next celebration.
Cindy: (28:34)
Yeah, that’s a good way to put it and definitely celebrate. If you’re winning, if you’ve got cash in the bank, then definitely you’re winning. But, but, but don’t set yourself up, you know, to not win next month. just you can, you can take that win and use that buffer to make better decisions and slowly pay those loans off and, and not have to repeat the cycle. Getting out of the cycle of borrowing is what we’re, we’re wanting people to do.
Robyn: (29:06)
Well, we’ve kind of hit our time for this episode. we’re gonna go ahead and go to our five-minute fix, but we wanna thank you for joining us today. This is Robin Johnson with your five-minute fix today. We’re talking about lead times. Staying in stock is one of the most important things you can do to protect your organic cranking on Amazon and protect the hard work, hard earned wins that you’ve gotten, in advertising. So, it’s important that we remain in stock. However, one of those key components staying in stock is to really understand your lead time. That means from the time that I need, notice that I need to restock, how long will it take one until I can get that product to me to, until I get that product to Amazon, we recommend that you always carry anywhere from three to six to eight weeks.
Robyn: (29:49)
you know, probably aiming towards six but three to eight weeks of inventory at Amazon at any given point in time. Then we also remember you have stock in your location that would be provided that would provide you an additional four weeks of coverage. This allows for big ramp up, you know, a, a blogger, it really highlights your product and maybe you have a big acceleration. It gives you a buffer for additional sales. So, you can send in additional inventory quicker. If there’s a need for it. Then we wanna look at how long does it take for your factory or for your whoever you’re buying your inventory from to get to you. So, when you’re calculating your lead time and when you’re needing to restock, you wanna include all of those periods and then add two weeks buffer. So, let’s say that I know that it takes me six months for my product to arrive from China.
Robyn: (30:34)
Then I’m gonna start with six months as a Le as the base. And then I’m gonna say, well, then it takes me two weeks to, for my team to prep it and get it in, get it shipped to Amazon and another week or two for Amazon to get it. So, then I was set my lead time at seven months. Now some companies have very short lead time. Sometimes it can be as short as two or three weeks. Sometimes it can be as long as a year. So, you wanna be thinking about that as you’re restocking, if you’re trying to forecast and you know, you’re gonna need to place bigger orders to forecast for longer periods of time. It’s more helpful to launch your products with enough time for you to see how your sales have studied out and how you’re starting to perform before you have to place your next big order. This can help make sure that you have enough inventory and don’t have to place a smaller reorder where maybe you don’t get the same economies of scale as you place that order. So that’s it today for lead times. And we hope that you have a fabulous day.
Narrator: (31:28)
Thank you for listening to the process to e-comm profits podcast. Make sure you subscribe to get updates for new episodes, leave a review and one lucky winner each month we’ll win a one-hour call with your choice of our hosts. A value of over $300. Keep listening to hear the winner announce on the first show of the month. You can contact our hosts by using the contact us form at process to e-comm profits.com. You can also find the contact information of our hosts and show guests in the show notes for each episode.
