Debt can either be a terrifying word or a powerful business tool. Depending on your beliefs and willingness to take on extra debt, you can learn to harness it to grow your business faster than ever before. There are multiple avenues open to business owners, from business loans to credit cards, but before you borrow other people’s money, follow these tips to catapult your business in the right direction.
(With your hosts Andrew Youderian of eCommerceFuel.com and Bill D’Alessandro, of RebelCEO.com.)
Andrew: Thank you so much for tuning in today. And today I’m really excited for this topic. It’s something that I feel passionately about, my guest feels passionately, about and it’s debt, business debt in particular. Is it good? Is it bad? Can you use it healthily? Can you use it responsibly? Or is it all around just a bad deal? And joining me, a man just coming off an enormous shopping spree at the mall financed completely on plastic, Mr. Bill D’Alessandro from Rebelceo.com. How are you doing Bill?
Bill: Doing good. This should be an interesting discussion. I know we have some similar views and also some very different views on the use of debt in your business, so I’m excited to talk about it.
Andrew: Yeah, and I think most people know who listen, but it bears repeating, we come from the world of finance where debt is a very commonly used instrument for acquisition especially for you if you’re in the private equity world and that kind of stuff. We’ve seen it personalized and we’ve also seen it in much higher scale than what we operate on in business, so it would be interesting to look at it from that perspective as well. So we are going to go ahead and dive right into this discussion on debt.
So, Bill I think probably right out of the gates we should probably mention that there’s a lot of bad kinds of debt that we do not endorse in any way. Credit card debt for consumer spending like I was teasing you about at the beginning, lots of heavy consumer debt, debt for bling bling, your finance escalates for sales calls, not a good call. We’re talking about, in this episode at least, business debt that hopefully you can use responsibly to grow your business and debt that can produce a return on investment.
Bill: I think that’s really the bottom line on, if you wanted to say in one sentence what makes responsible use of debt, responsible debt is debt that you take on that allows you to grow your business in a way that you otherwise would not have not been able to do.
Andrew: Before we get into the nitty gritty, can we maybe talk about just our high level experiences with or mindset behind debt so people and it’ll become apparent pretty quickly I think. But what’s your high level 30,000 foot view on debt and maybe any of your experience with it in general.
Bill: My experience on debt is that it’s a very powerful tool, period. And like all powerful tools, it can be used to ruin yourself or to vault yourself to the next level. The reason you’ll very often hear debt referred to as leverage is because it is just that. It’s like a long leverage, magnifies outcomes. It allows you to buy. For example, everyone who’s familiar with this is buying a house and nobody pays cash for a house. If you were to say you have all the money to buy a house in cash, very few people would buy houses. But debt allows you to put a small amount of money down and purchase the house. It allows you to magnify your outcome. And similarly if the house loses only very little bit of value, you can lose the entire house because you still have to pay the loan. But if the house goes up in value, you could make a lot of money because you only had to put down a little bit of money in the beginning and that’s the leverage of debt. That’s the magnification of the outcome. If you use it responsibly, I believe that debt can be a very, very powerful tool to grow your business and that’s everything from sort of line of credit, if you’re in inventory business, where you’re buying inventory, you might need to stock up before the season and you might not have all the cash in hand to do that, you might want to buy inventory and pay it down as the season goes by. That’s a valuable use of debt. You might want to do it in acquisition. Myself, personally I have used to debt to do two separate acquisitions over the past couple of years and I know we’ll get into that over the next couple of minutes. I have used a lot of different types of debt. We have a line of credit in our business, I’ve used an SBA loan, I’ve used a little bit of seller financing, I’ve used a variety of different debt types and they’ve all worked out. I would not be where I am today without debt. I am pro debt and on the other side of the table…
Andrew: The other side of the table. My experience, I think it’s difficult because in business, I’ve never used debt at all and I think it’s really shaped by my upbringing and just personal experience but especially my upbringing. Just like debt in my household was something that was heavily, very heavily warned against. I remember coming out of school, my beater car hit a deer three months into my job, stone broke and I remember going over to the dealership and I was looking to a buy a five, six thousand dollar car, could have easily afforded the payments but walked away because I didn’t feel comfortable taking on debt for that car. It was almost like a line in the sand I didn’t want to cross and much more on don’t take on the risk, pay off the house, really work on getting your debts eliminated and just being able to build up cash and getting rid of payments. On one hand I think it’s great because you do hear about people who abuse debt, get themselves into enormous holes and it causes a ton of pain. On the other side, though, I think, Bill, you could make a very good argument especially given your experience that I’ve limited my growth, limited maybe some of my opportunities in that way. It will be interesting. I’m excited. This is something you have more experience than I do. And I say it in the best way possible because known it responsibly but I’m interested to dive into this because it’s something that is psychologically for better or for worse. I’ve always had a little bit of an advesion to.
Bill: I don’t think that’s a bad thing. I think a lot of people listening probably feel that way. If you’re a responsible human being you probably have been raised to be a little bit scared of debt because you’ve seen it go bad. We saw it go bad for the entire country in 2008/2009.
Andrew: Entire world.
Bill: Entire world, yeah. To be afraid of debt is a good thing. You should be afraid of debt, you can ruin yourself with debt. But that being said, as I said before, it’s a very powerful tool.
Andrew: Yeah, I think where I’d love to structure this Bill is let’s talk about four or five different ways that you can get financing in business, some of those different debt structures. Talk about them and kind of dive in deep. So the first one is loans from family and friends. This is one where…man, I may have just given a way my entire thought.
Bill: This one in summary…sigh.
Andrew: This one is summary. Did I do it. Are you on the same page with this? Have you done this?And if not, have you had friends or family that you’ve seen done it where it turned out well? It just seems like it’s so littered with potential mine fields.
Bill: It is completely littered with potential mine fields. That being said I have done it. I, initially in the very beginning, borrowed some money from my family in order to get my business off the ground. I did it, though, being that I was aware of the potential pitfalls. We did it in a very arms length way. There was a written contract, there was an interest rate, there was a payment schedule. It was very much a defined contract. It was as though it was an arms length transaction with a third party investor. Loans from friends and family can be great and the reason they’re great is because those people implicitly trust you so you don’t need a crazy underwriting process with the bank. The reason they can be bad is they’ve ruined relationships and families. The downside, if you default on a bank loan, at worse they put you through bankruptcy but it doesn’t ruin your marriage or your relationship with your parents or relationship with your friends. There’s just a lot of personal downside in the friends and family loan. If it is your only option, I’m not going to say don’t do it but if you do something with family and friends, I would do it as armed length as possible, not just, “Oh you’re going to invest X in my company and maybe I’ll pay you back eventually.” You really need to figure out what a market rate is for debt, what kind of interest rate is fair. This person should be doing it as an investment, not to help you out.
Andrew: I think increasingly as I get further and further along in business and see more and more people’s experience with business, it’s really important to strongly separate my business life and my personal life. There have been a lot of times where there have been great people that I know personally that could have done a great job on a project within my business or partnered up on something and a lot of times, even if it looks like a good fit, if something goes wrong, a lot of times I just don’t want to take that risk. I love having my business world need to be able to make business decisions without having to worry about the repercussions on my personal side and vice versa. But in your case Bill, it worked out great.
Bill: It worked out great. In my case it scared the crap out of me obviously because there’s so much more on the line than just your business. Like I said, it’s one thing to go bankrupt and at least your family is still there for you but if your business goes bankrupt and you screw over your family and friends at the same time, that’s a tough place to be.
Andrew: Talk about bottom of the barrel right there. Loans from family and friends, the first one. The second one is a line of credit. So Bill I’m going to quick overview. Let me know if I’m mistaken on this. Line of credit is almost like a home equity line of credit where you’re approved for a certain rate. Let’s say you’re approved for $50,000 and you can draw on that whenever you need to. You can go to the bank and say, “Hey, I need 20,000 of that,” and then it’s on a variable rate. So the rates on that will flow up and down as rates go up and down and it’s something where, does it have to be paid off in 30 days or 90 days or is it something that just can stay outstanding but you just have to pay the interest on?
Bill: I would say for the non-home owners out there, I would say maybe a better analogy for a line of credit is a credit card. You can swipe it at any point. Instead of swiping it, you don’t use it directly to buy things you draw $10,000 off your line of credit into your bank account, which you then use to buy things and then you can pay off a line of credit over time. It’s really just like a big credit card. You don’t pay it off every month like as soon as you draw down from a line of credit, you begin paying a daily interest rate and that daily interest rate might amortize out to seven percent annually or 10% annually or whatever it might be. But you only pay for the days you use the money. You don’t have to pay it off monthly or anything. You can draw it and keep the money for 10 days and pay it back if that’s all you need it for. You can draw it and keep it for four months and then pay it back. I have a line of credit with my bank and the only thing they said they want to see is they want to see the line of credit rest once a year and rest means go to zero. So I could draw it all the way to max in January and then just keep it drawn at the max level and pay only interest all year and then pay it 100% down in December to zero and they wouldn’t care at all. The more common scenario and this is how I do it, we use it for inventory buys. We sell sunscreen, so it’s very seasonal in the summer. In early summer we have big inventory expense because we’re stocking up. I draw from the line of credit then I kind of typically pay it all back down by the end of August. I borrow that money for three months and I just bake that in my cost of goods because it’s only a couple of percent and then the line of credit rests again sort of all Winter and I draw it again at the beginning of Summer. So it’s just like a big fat credit card.
Andrew: It seems like, personally for me, out of all the different debts we’re going to talk about, this one seems like it’s the one that makes the most sense. If crazy, old, paranoid, risk adverse Andrew who hates debt is going to come out of the dark side in one level, it would be the line of credit. I think because it helps you even out those cash flow issues you have where you have, like in your case Bill you don’t know for certain, you know almost with a very high degree of probability you’re going to be able to sell those things. You just need to be at the bridge financing and it’s a cheap easy way to do it without a lot of risk you’re taking.
Bill: It’s purely a time shifting thing. It allows you to buy inventory before you sell it and hold on to that inventory, to not have to buy it, buy something and sell the next day or buy another thing else and sell the next day. It can allow you to buy in bulk and sometimes you can come actually out ahead even though you might pay three moths of interest on your line of credit, you might get a better break from buying in bulk from your supplier, that’s more than the interest that you would pay in your line of credit so you might come out ahead by buying all at once. Line of credit is a very handy tool to have and the important thing, the difference I mentioned is like a big credit card. You can go to any bank in the world and I think we’ll do a whole other podcast episode on credit card rewards and business credit cards and get a business credit card. But the rate on a business credit card is going to be upwards of 20%. If you go down to your local bank and I would advice your local bank, the big guys the Wells Fargo, the Bank of America will do it, often times they have a little more trouble getting comfortable with any commerce business or a smaller business. But if you’re just looking for $25,000, $50,000, even $100,000 of line of credit, just go down to your local bank, walk in the door and say, “Hi, I own a business, I want a line of credit.” And the interest rate on that is going to be sub 10%. My line of credit I think is 7% and it does float a little bit but interest rates are zero in holding and will for the foreseeable future probably maybe.
Andrew: Hopefully not.
Bill: They shouldn’t be whipsawing around any time soon. It is a variable rate but it’s going to stick around seven, eight, nine. A two percent move would be giant. That’s probably not happening any time soon. Even still it’s much cheaper than a credit card. A line of credit is a great way to finance your business.
Andrew: The next type is a small business administration loan. And this is going to be, I’m guessing Bill, most commonly used, at least frequently used to purchase, to finance a business. So if a business is for sale for a quarter of a million dollars, half a million dollars, you can go out, get a loan to use it to pay the seller of the business to be able to acquire the company and then you’ve got that debt on the books. You actually did a couple of these actually, could you run us through how you got them? How much work it was to get them and then also maybe give us a sense of the debt service level to income ratio, how much you were paying when the deal closed before you did improvements how much of the income every month you were paying to interest and principle on the debt versus how much was coming in in income.
Bill: SBA stands for Small Business Administration. It’s a United States Federal government program and the purpose of it is to facilitate lending and growth in small businesses. So you don’t actually get your loan from the government, you get the loan from a local bank. You can go to on sba.gov or just google for sba lenders your state and there will be a list of banks in your state that do SBA loans. And the way it works is the bank says, ” All right, we’re going to loan Bill some money,” and the federal government says, “All right bank, I know Bill’s a little bit dodgy, you might not loan him the money anyway but please loan him the money either way even though you weren’t otherwise going to do it. Loan Bill the money and if he doesn’t pay you back, we’ll pay you back.” The government basically stands behind the loan. The government guarantees your loan which makes it much easier for you as a small business to get a loan from a bank. And it also makes it easier to get better terms on the loan from the bank. SBA can actually guarantee anything. They can actually even guarantee a line of credit. So if you need to get a line of credit and your credit isn’t very good or big enough or whatever it might be, you can ask your bank is there something the SBA might guarantee? My experience has been the best use of an SBA loan is to buy a business because you get really, really, really good terms. I use an SBA loan just to close the acquisition that I did this January of a sunscreen business and the SBA or the bank as backed by the SBA loaned me 80% of the purchase price of the business. The loan is a ten year loan at 5.9%.
Andrew: Fixed rate.
Bill: Fixed rate, which is just about the best terms you’re going to get anywhere. That’s like a freaking mortgage. The reason the 10-year term is awesome is that means you only have to pay off a little amount of principle every month, which makes your monthly payment much lower. And you also only had to put down 20% of the value of the business you wanted to buy. So, I was able to only put down 20% of value and buy a business worth five times the amount of cash that I had on hand.
Andrew: In terms of that day one when you were in business or a month let’s say, you look at the first month PNL statement for your business, what was the ratio of debt service to income for that acquisition?
Bill: The way I looked at it is, “All right, I want to buy this business. The business is…pick a number,” the business is making $10,000 a month. The loan, after I look at all the terms, I’m going to borrow 80% of the amount of money I need to buy this business, the loan is like $2,500 a month. On a monthly basis, I’m going to spend $2,500 a month to own as asset that kicks off $10,000 a month. I don’t even look at the fact that you’re borrowing hundreds of thousands of dollars because as long as it works on a monthly basis and the business doesn’t fall apart, at the end of the loan period, you’re going to have your loan paid off, you’re going to own equity in the business, an asset that is worth a large amount of money plus the monthly cash flows and a lot of larger businesses look at it this way too when they’re taking on debt. Can the project or can the business that I’m buying, can the thing that I’m borrowing the money to do churn off enough money to cover the cost of borrowing the money?
Andrew: From a penciling stand point, it makes perfect sense. Who in the world is not going to spend 2500 a month to generate 10,000 per month. It’s a no-brainer. The point that you hit on though that I think for guys like me that get me not tied up is that business not falling apart aspect. There’s a reason why businesses like internet businesses and eCommerce businesses trade for and sell for two or three x earning sand that’s because inherently a lot of times there’s so much riskier businesses like Apple or you can even say Amazon, even though that ties into your winning bet which I’m going to give into in a month or so. Was that something that you really grappled with and something that stressed you out a lot because it would stress me out. It would even stress me out a lot. I’m guessing like you did, you were really looking for a very defensible business, a business with a brand to help a proprietary product which is going to be much less likely to fall apart but still, you’ve got issues where maybe something with the formula is messed up, maybe your main supplier goes out of business. There’s always stuff that can happen. Even for me if the probability is still lower and I think there’s still a better than not chance I’ll come out ahead, I always tend to be a kind of worse case scenario kind of guy and say, “If the business goes under, can I recover from that given the debt burden?” Is that something that really stressed you out or not really?
Bill: No. Maybe it’s hubris, I’ve looked at hundreds of businesses. I don’t buy a business all willy nilly, by the time I get something on the hook, it’s something I really believe in. It’s a business that I want to own. I’ve been doing this for a little while now and I think I have confidence in myself to not drive it off a cliff. But you do make a good point. A trap a lot of people fall into is they’ll say, “All right, this business is going to need $5000 to service the debt every month and it spins off $5000. If I can only improve it, then I can cover the debt,” that is scary because you can’t always improve it. Stuff goes wrong. Leave yourself a margin of safety. In my original example, if the business is churning off $10,000 a month and your debt service is going to be $2500 a month, that business has ways to fall before you’re not covering the debt payment. Don’t bank on improvement. I’m not banking on improvement just to cover the debt payment. But no, it didn’t really keep me up at night. Maybe it should, maybe I’m crazy but no.
Andrew: And Bill, that was in a way a comment of you running the business into the ground. For me, and for the scenario it was more about the things you couldn’t control, external things, things in the market place, in the environment that happened that changed that all of a sudden made the business insignificant or less profitable or nonviable and then you’re stuck with the debt service. For me, I realize a lot of times in my worse case scenario it can be a weakness because it prevents me from taking advantage of maybe opportunities that I otherwise could. But that’s kind of the thought process that goes in my brain, that’s kind of where I was coming from.
Bill: I know you didn’t mean I was going to destroy the business because businesses blow up all the time due to no fault of the operator but I think that if you’re using an SBA loan to buy a business, using debt to buy a business, I think it goes without saying that you ought not be buying a shitty business. If you’re buying this business regardless of how you’re financing it, you should be buying a business you should be staying in for the long term and that you feel very confident owning. And if you don’t feel that way about the business then you’ve got bigger problems and maybe you shouldn’t be buying it at all especially not financing with debt. But no, it didn’t worry me although you do bring up a very good point about risk and about downside and about what happens when it all goes bad. If you’re listening to this podcast, you are going to have to personally guarantee that debt. Which means that if the business goes belly up, if something happens, you can’t declare just business bankruptcy and discharge that debt. You are personally on the hook for that debt to pay off and they can put you though personal bankruptcy, they can go after your house, they can go after your personal assets to get that money back. Maybe I should have stayed up at night, I don’t know.
Andrew: Reading financial guys, guys like Warren Buffet, one of his big things I believe, hopefully I’m not misquoting him is one of the things he focuses on is do not lose your capital. Jim Rogers the same kind of thing. Just be crazy vigilant about not losing your capital and you look at guys who do trading, successful traders. And I’ve never been one but on the little I’ve read about it and a lot of times the people that do well are the people that have very, very thick strategies that focus on minimizing their downside. It’s interesting because you can make so much money but it’s hard because it’s all a risk game. It is a little bit of calculating odds and trying to see how much risk are you willing at accept for a really good return which is all it boils down to.
Bill: It’s leverage, right? I’m willing to magnify my upside and also I’m going to magnify my downside a little bit.
Andrew: How hard is it to get this for online property? Bill someone like you has a really good sense of… can look at a business and do due diligence on it, nothing is risk free but I feel pretty good with the risk profile here. I’m going to do it. For a bank, a guy that’s going to be making this loan almost certainly doesn’t know anything about this space in online business. So is it hard to get these SBA loans for online properties?
Bill: Yes and no. There are a few different ways you end up with an SBA loan. The probably most swimming way that you will end up with an SBA loan is if you go to buy a business and it is SBA pre-approved. Very good business brokers know that a lot of business buyers will want to use an SBA loan to buy this business. What they’ll actually do is before they even put the business up for sale, they’ll open an SBA bank for that bank and go, “Hey look. Here’s the business, someone is going to buy this business. Is this a business that you would finance with an SBA loan in the acquisition of this business?” And the bank will give it’s sort of a preliminary thumbs up SBA pre-approved. It’s basically like a blank form. So you, the buyer, just sort of step into that role of buyer X and the bank goes, “Yeah, we’ll finance you to buy this business.” If you’re lucky the business would be SBA pre-approved. And then as long as your personal credit is good, you’ll be able to get an SBA loan to buy that business. If it’s not SBA pre-approved it could just mean that they never went to the SBA so you’re going to have to lead the charge. I would very strongly encourage you to use a smaller local bank. I went to Wells Fargo initially and they had so many processes and algorithms that they couldn’t see it. It didn’t have a ton of inventory and they liked a loan against collateral and things like that. But I went to a smaller bank, US bank, still a large bank by any measure and I had a really good banker there and he was able to completely understand the business, he understood my plans for it, and he was able to help me get my SBA loan through. I have friends that have gone to local banks and they do SBA loans all the time. Just again google your state SBA lenders and you will be able to find a list of all the banks in your state that can do an SBA loan and talk to as many as possible. You’re going to sense really quick how many are going to bog you down in bureaucracy and just not going to get it and how many are actually going to spend time to get to know you as an entrepreneur and not just look at you as a credit score and a balance sheet. Assuming you get a bank that is interested, then it comes into this different definition of how hard is this loan to get closed? Or how hard is this loan is it to get close and the answer to that is a freaking nightmare. Most of that it’s because it’s the government. Because you need this government guarantee to get the loan but because it’s government, there’s red tape like crazy. There’s all these forms, there’s all these check boxes. They’ve got to do title work on your house to make sure it’s clean, there’s just so much. They took me three to four months from deciding I wanted an SBA loan to closing the loan in the acquisition which is just excruciatingly long. And no bank would take that long if the government guarantee wouldn’t imply. If you think you’re going to want an SBA loan, start way early. It just takes forever.
Andrew: What is the alternative though? I’ve kind of been equating SBA loan as really the only type of loan from a bank that you can get to finance a business purchase for an eCommerce store. Is it possible just to get a straight up loan from a bank that’s not SBA guaranteed that can help you finance a business? Would you take a regular commercial loan? Or are those a lot harder to get given the fact that eCommerce is a little bit of a unique animal.
Bill: Is it theoretically possible? Absolutely. Is it practically possible? No, not really. Because the banks, they’re not comfortable with eCommerce, they’re not comfortable with these asset light businesses that is eCommerce. If you wanted to buy a restaurant, yeah, you could probably get a non-SBA guaranteed loan.
Andrew: Which is really funny because the restaurant business is almost certainly worse than the eCommerce business.
Bill: Right, right, exactly, exactly but they don’t see it that way. It’s very, very old school. If you wanted to buy a moving company like a fleet of trucks, you could probably get a non-SBA guaranteed bank loan for that. It is most likely that if you go into a bank and you own a eCommerce business or thinking about buying an eCommerce business, they’re very quickly going to look at you and think SBA loan. They’re going to want to do it through the SBA. They’re going to say, ” We know we’re not going to get comfortable with this without an SBA guarantee and we’re going to do this through the SBA.” Assuming your other options, if they did not require an SBA guarantee would be like a personal loan where you could just walk into any bank branch and say you want to borrow a bunch of money with no collateral.” Those are tough, you could potentially take out a first or a second mortgage on your house. I’ve seen that done before. Sometimes that can be a good option because line of credit home equity second mortgage or first mortgage is banks do those all day long and the interest rates are almost nothing right now. If you do own a house, a second mortgage on your house or first increasing the first mortgage on your house might be a better, cheaper way because an SBA loan, they’re going to take a personal guarantee anyway which means if you default, they’re coming after your house. Your house is on the line no matter what. Sometimes you’ll get a better rate just by straight up borrowing against the house and then using the money to buy the business in cash.
Andrew: Bill, it’s funny because you analytically it make sense because you’re right. Even if you take home equity on credit, with the SBA loan you are guaranteed they’ll come after the house. But for me there’s something so emotional about borrowing against your house to start a business. You’re two worlds now. If you’re business world isn’t going well, then you can lose your home and for me that’s just… we have totally different risk profiles. Maybe I’m just a wimp.
Bill: You have a family too and I don’t. I can imagine that affects your calculus a little bit.
Andrew: It’s a lot easier to couch when you’re single on your own versus with a couple of kids.
Bill: Right. To me, I am the business and the business is me. To me there is one world, I do not have a separation of worlds but not everybody is that way.
Andrew: We’re running out of time but I want to do one last financing type quickly and that’s seller financing and I believe in one of your other acquisitions you used this as well, right?
Bill: Yeah, just a little bit of seller financing.
Andrew: And seller financing is pretty much where you’re buying a business and the seller, I think we’ve maybe talked about it in past episodes a while back. But it’s when somebody’s selling a business to you and they pretty much act as the bank the seller of the business where you repay them over time. Is it something where it’s actually a legal obligation? Is there something that if you default they can personally come after you? How do the mechanics work and it’s always been something where I would never do seller financing because one of the reasons I would likely sell business is to get rid of my risk, to have cash in the bank versus the potential risk of the income generating asset decreasing in value and with seller financing, you’re pretty much just extending that. You’re pretty much saying, “I’m going to keep extending this risk that the business is going down and the new owner can’t pay me even longer.
Bill: True. That’s why if you’re a buyer, the first type of financing you should ask for is seller financing. That’s the type of debt you can probably get because the seller, unless their lawyer is just crazy intense, I just don’t see a way that a seller will be able to put you through personal bankruptcy if you don’t fulfill your obligation. Maybe they sue you and maybe the court ends up requiring you to work it out with them. But seller financing is essentially like I’ll pay you half now and half later and the half that I pay you later, I’m going to part interest on until I pay it to you. That’s essentially what seller financing is. It’s a great way to buy a business because you don’t have to pay all the money upfront. Also your terms on seller financing are typically better than you would get from a bank. Only a couple percentage points of interest because they are incentivized. The bank is only making a loan for you in order to make interest on the loan. The seller is really making a loan to you in order to sell the business. So they’re not looking at the loan from a pure profit perspective. They might even loan it to you at no interest, at one percent, two percent, three percent interest because they need you to buy the business. They want a chunk of money from buying the business and seller financing is something they have to do to get you to do it, they will. They might be kind of already figuring out seller financing is not something you see very often in the hottest deals. If there’s a very, very good business for sale, they’re not going to have to offer to seller financing because people will be at a negotiating point. If you came in and said I’ll pay you X with 50% seller financing, someone else will come and say I’ll pay you X upfront and now your offer is a lot less compelling. Seller financing becomes a negotiating point. I’ve used it in the past for inventory. I paid them for their business upfront and then I paid them a much smaller percentage of that over the next three months. They gave me time to count the inventory to make sure everything they said was there was actually there and gave me a couple of months for interest free loan and it gave me a chance to have not given them all the money in case something was really wrong. I could clutch that money a little bit to twist their arm. I’ve never financed entirely with seller financing but it can be a nice save 10, 20 thousand dollars held back over a couple of months just to make sure everything is okay.
Andrew: Bill, this has been super helpful at least in terms of understanding and hearing your experience with it. I hope too much of my risk aversion hasn’t rubbed off on you, you’re just going to be laying in bed all night staring at the ceiling and wondering what’s going to happen with your business.
Bill: Having nightmares after our talk. No, I’m not that worried.
Andrew: What if my sunscreen causes cancer? What if people eat it and die?
Bill: I know.
Andrew: Aah! Curse Andrew!
Bill: I got insurance for all of that.
Andrew: Bill, thanks so much man. Good as always to chat with you. If you’re not following Bill rebelceo.com, that’s the place to check him out. Thanks man.
Bill: Sure thing. Thanks for having me.
Andrew: That’s going to do it for this week If you enjoyed the episode, make sure to check out the eCommerce fuel private forum: A vetted community exclusively for six and seven figure store owners. With over 600 experienced members and thousands of monthly comments, it’s the best place online to connect with and learn from other successful store owners to help you grow your business. To learn more and apply, visit ecommercefuel.com/forum. Thanks so much for listening and I’m looking forward to seeing you again next Friday.
eCommerceFuel Forum Members Only:
Photo: Flickr/Kimberly Brown-Azzarello
