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ASH2001
12-07-2016, 12:15 AM
I need a loan of $5,000 to buy inventory. 99% of my sales are processed by PayPal.

PayPal Working Capital is offering me $5,000 for a one time fee of $245 plus 30% of my sales until the $5,000 is paid off. Time frame is estimated at between 5 and 6 months. This sounds like a good deal to me. No financing to fight about and kinda pay-as-you-go. I don't have to worry about getting buried under payments.

But, is it to good to be true?

Thanks again, Tom

Owen
12-07-2016, 12:53 AM
I need a loan of $5,000 to buy inventory. 99% of my sales are processed by PayPal.

PayPal Working Capital is offering me $5,000 for a one time fee of $245 plus 30% of my sales until the $5,000 is paid off. Time frame is estimated at between 5 and 6 months. This sounds like a good deal to me. No financing to fight about and kinda pay-as-you-go. I don't have to worry about getting buried under payments.

But, is it to good to be true?

Thanks again, Tom

It's not, PayPal Working Capital is a dream come true.

Fulcrum
12-07-2016, 08:12 AM
Looks good on the surface. What happens if, for some reason, your sales drop to 0 and payments still need to be made?

Also, 30% off the top of all sales until the forwarded cash is repaid will eat up most of your profit and ability to save some cash. Like my earlier question, what will you do if you have a big order come through when you're 2/3 of the way through paying this off?

I'm not knocking the program as there is a time and place for it, and it probably works well for some people. I just want to make sure that you look at this from as many angles as possible and run lots of "what if" scenarios.

tallen
12-07-2016, 10:04 AM
You are buying inventory with that money, the 30% is just part of your COGS -- if no sales, no 30% payment to make, although I am sure that the deal has some provision to make sure that PayPal does get paid in full at the end of the 6 months (or sometime). The $245 is your interest expense.

What is your margin on this inventory? Is 30% more or less than your actual COGS? It is only eating in to your "profits" if the 30% of sale is more than your COGS.

ASH2001
12-08-2016, 05:04 PM
"Looks good on the surface. What happens if, for some reason, your sales drop to 0 and payments still need to be made?" - In the event that happens I'll have to make some more owner investment.

30% is close to my profit margin. So until it's paid off I have no profit. That's no big deal for me. This business is a hobby so I don't need to take regular payments as income towards me. I use the credit that paypal gives me now in to form of 0% interest for 6 months and I always pay it off before it's due. I just keep enough of a balance in case someone wants to return a item or some unexpected expense turns up.

I'm seriously thinking of taking this option. I really don't see many down falls. If my sales drop to nothing for months on end I'm only out $5,000 max on my personal account. Or if I have a slow month my payment will be less and I don't have to worry about making a large payment with light sales. How many loans are tailored to your sales?

If anyone sees any other down falls please reply.
Tom

Freelancier
12-08-2016, 05:18 PM
If 30% is your profit margin and they want that 30%, I don't see how there's an upside to this deal. Please explain.

tallen
12-08-2016, 05:37 PM
30% is your profit margin, so then is 70% your cost-of-goods-sold?

Paying 30% of your sale price to payback the doesn't seem like a bad deal to me -- you'll have 70% of your sale price to cover your other costs and reinvest in new inventory.

Remember, you've already paid for the inventory you are selling -- with the $5K loan that you would be paying off with the 30% of sales.

But if you COGS really is 70% of your sale price, you'll need to sell ~$11K+ of inventory to payback the $5K loan...

ASH2001
12-09-2016, 01:24 AM
"Paying 30% of your sale price to payback the doesn't seem like a bad deal to me -- you'll have 70% of your sale price to cover your other costs and reinvest in new inventory."

That's how I'm looking at it. I don't think I explained myself well. I got confused between "gross" and "net" mark-up and profit. My initial mark-up to sales price is well above 30%.

Tom

Freelancier
12-09-2016, 07:36 AM
Example: if I buy something for $50 and sell for $100, that's a 100% markup. But if I have to pay 30% off the top to my lender, my markup is down to 40% (not 70%).

If my markup is only 50% and I take 30% off the sale, my markup is now down to 5%, which isn't enough to keep the lights on unless you make it up with a HUGE volume increase.

So, again, depending on your markup, this could be a bad deal unless you're just trying to move product out without much concern over your profit.

turboguy
12-09-2016, 10:56 AM
It sounds to me like some of the answers are thinking of the 30% payback to be the cost of the loan. Of course the interest cost is $ 245.00 to borrow 5 grand. Now that sounds like just under a 5% interest rate which would be quite good except the money will be paid back in 6 months which would be a 10% interest rate. Of course he would not be borrowing the full 5 grand for the 6 months since 1/6 of that would be paid back each month so if you figure the APR it is more like 15% interest which would be good for PayPal but definitely not a cheap loan.

The $ 5,000 loan would allow him to buy merchandise that he would sell for just over $ 7100.00 if his profit margin is 30% then he would generate about $ 2100 in profit on that amount of product. The key issue to me would be if having that inventory would allow him to increase his sales in that full amount or somewhere close to it. If having the inventory doesn't allow for increasing sales then it may not be such a good deal.

With the cost to borrow the money being $ 245.00 the most he really has to lose is $ 245.00 which isn't big money. However I am constantly seeing offers similar to this advertised on the radio and internet and it might not hurt to shop around to see if someone has a better offer.

Freelancier
12-09-2016, 11:38 AM
I was actually thinking the 30% payback was the amount you had to pay back... so if you're running a business and you get this $5K loan and then sell the results for $7100. Here's what happens:

$7100 * 30% = 2130 => how much you must immediately pay back on the loan for what you borrowed
$7100 - 245 - 2130 - 5000 = $-275 => amount in your pocket
$5000 - $2130 = $2870 => loan balance
So you borrow $5K, buy $5K of inventory and ended up with a $275 loss AND still have a loan balance.

This is why I don't think it's such a great deal unless your markup actually pays down the loan AND leaves you with a profit.

Let's try a 100% markup:

$5K loan, $10K sales.
$10000 * 30% = $3000 => how much you pay back of the loan
$10000 - 245 - 3000 - 5000 = $1755 => amount in your pocket
$5000 - $3000 = $2000 => loan balance

So you borrow $5K, and at the end of the transaction you have $1755 in your pocket PLUS a $2000 loan balance you still need to pay off. So you're still net-negative.

I just don't see how this is a good deal without a MUCH higher markup... and 100% is a damn good markup on most things.

turboguy
12-09-2016, 12:31 PM
Here is another thing that doesn't add up.

Borrowing 5 grand which would allow the purchase of inventory that could be sold for $ 7,100.00 that would take 6 months to sell and they would keep 30% of the transactions.

To sell $ 7,100 in inventory in 6 months would indicate sales of 1,1033.33 each month. ($ 7100/6). With them keeping 30% of the transactions and applying them towards the loan that would be $ 355.00 per month (1033 x. .30) they keep. At $ 355.00 per month it would take around 14-15 months to pay off the loan.

I am guessing the difference is that there are pre-existing sales that would also be charged the 30% .

Bobjob
12-09-2016, 01:54 PM
Have considered looking locally for funding? Or on the internet like kiva?

nealrm
12-09-2016, 03:32 PM
If they are taking 30% of sales, they are taking 30% of COG + 30% of the markup. So in order to keep a 30% profit margin you will need to have a markup of 85.7%. If you also want to recoup the $245 fee, you would need a mark-up of 92.7%. For break even, the mark-up would need to be 43%.

Here is how the numbers work out.

30% profit margin
1.30 * $5000 = $6500 (income with 30% mark-up)

To maintain that while losing 30% of sales
(1.857 * $5000) = $9280 (1.857 => 85.7% mark up)
$9285 - (9285 * .3) = $6499.50 (income goal from above)

Break Even
Income goal = $5000
(1.43 * $5000) = $7150
$7150 - ($7150 * .3) = $5005
So if your markup is above 43% you will be able to make enough to replace the good sold, but will not have any profit.

This is basically a secured loan with a 4.9% rate. (245/5000 = 4.9%).

I would look through the fine print about defaulting, missing payment and partial payments. Sometimes, they will bump the rate to 20%+ for almost any reason. Also look into min required payments. I suspect there will be a monthly min and also a max time length.

nealrm
12-09-2016, 03:56 PM
I was actually thinking the 30% payback was the amount you had to pay back... so if you're running a business and you get this $5K loan and then sell the results for $7100. Here's what happens:

$7100 * 30% = 2130 => how much you must immediately pay back on the loan for what you borrowed
$7100 - 245 - 2130 - 5000 = $-275 => amount in your pocket
$5000 - $2130 = $2870 => loan balance
So you borrow $5K, buy $5K of inventory and ended up with a $275 loss AND still have a loan balance.

This is why I don't think it's such a great deal unless your markup actually pays down the loan AND leaves you with a profit.

Let's try a 100% markup:

$5K loan, $10K sales.
$10000 * 30% = $3000 => how much you pay back of the loan
$10000 - 245 - 3000 - 5000 = $1755 => amount in your pocket
$5000 - $3000 = $2000 => loan balance

So you borrow $5K, and at the end of the transaction you have $1755 in your pocket PLUS a $2000 loan balance you still need to pay off. So you're still net-negative.

I just don't see how this is a good deal without a MUCH higher markup... and 100% is a damn good markup on most things.

For the 100% mark-up you are not net-negative. You would have $1755 in cash + $5000 in inventory - $3000 loan liability = $3755 in the black. Depending on how you interpret your numbers, you either didn't include in receiving the $5000 loan or didn't include in the $5000 re-placed inventory.

Freelancier
12-09-2016, 04:55 PM
I messed up and double counted the $5K in costs.

$7100 * 30% = 2130 => how much you must immediately pay back on the loan for what you borrowed
$7100 - 245 - 2130 = $4725 => amount in your pocket
$5000 - $2130 = $2870 => loan balance
So you borrow $5K, buy $5K of inventory and ended up with $4725 in cash and a loan balance that's $2870 = $1855.

However, this only works if you can sell all your inventory before the note comes due. The clock is not your friend if you have delays in getting your inventory or delays in getting enough people to buy it. But if you believe enough in it and can cover the loan in case you don't sell anything, I've moved to "I can't see why not", although you probably want more mark-up to start so you can discount later if things aren't moving.

BusinessFundingPro
03-31-2017, 02:22 PM
Another benefit of taking a loan out with PayPal is that you don't need to wait a long time for everything to finalize. It's pretty much instant. Same goes for people who process sales using Square. They offer a very similar program.

msmith
07-13-2017, 04:58 PM
The one thing you need to know is that paypal is an aggregator for a larger processor. They are padding your fees each month. This is the norm for processors. If you do a forensic auditing analysis you can find the money you need. Your processor is taking from your profit. This would give you the money you need and cut your cost. Just remember this 60% of all processor pad their customer fees.

msmith
07-14-2017, 10:44 AM
First thing to know is that 60% of all processors pad their fees and rates. They will also be taking your loan payment from your credit card sales. Now your processor has been padding their fees and rates without you knowing, then they will be taking your loan payment from your sales on credit cards. This will effect your profits. Not sure if that is what you want? their are better ways to stop them from padding your fees and rates. A forensic audit analysis will uncover what fees and rates they are padding and find the money that you need

shrinkme
07-14-2017, 11:25 AM
I was thinking also that 30% will eat up your cash flow for 6 months... that may not be the best idea unless you have a wonderful margin.