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Cant' blame Amazon for taking advantage of an opportunity to lend money at 13% but I question the need for anyone with a truly self-sustaining business to borro

Cant' blame Amazon for taking advantage of an opportunity to lend money at 13% but I question the need for anyone with a truly self-sustaining business to borrow funds at such a high rate. If your margins are low and you need the capital to factor your receivables, the interest rate is going to be painful or destructive to you long term. On the other hand, if your margins are high like in software and subscriptions/services you probably get paid quickly and don't really have a need to borrow. The only businesses I've seen use borrowed money for payroll are failing businesses. Admittedly I'm a big believer in bootstrapping. If you're young and have nothing to lose, I think it's a lot more effective to obsessively work on your business and just run up your credit cards than waste time with investors and lenders.

JumpCrisscross 14y ago
13% is not that high a cost of capital for a business - venture capital is far more expensive yet still a smart choice for many companies. To put it in perspective the cost of equity for the S&P 500 has historically been at least around 13%.
- aristidb 14y ago
  That's the ex-post return on equity, not the cost of equity. You could argue that the former is an approximation of the latter, but they are not necessarily the same. Anyways, it's not really relevant for a small Amazon Seller who may get a _loan_ at which rate a huge S&P 500 business can get _capital_ (if a S&P 500 business wants a loan, I doubt it would typically even pay 5% these days).
  - JumpCrisscross 14y ago
    That's CAPM cost of equity assuming a market of rich and emerging market stocks and bonds and a risk-free rate of gilts or Treasuries, whichever cheaper; the average ex-post return of the S&P 500 for the period (1926-2012) is closer to 10.5%. Regarding VC one plugs in expectations; VC is modern portfolio mechanics at its most vivid. This is relevant because 13%, as a cost of capital, is not intrinsically high when even Bank of America today would pay that if it raised equity (it has) and could assume a long-run return on its stock of at least 7.3% (below its targeted ROE). A quick bond search shows that several S&P 500 members, BofA included, paying over 13% on at least some of their bonds (no doubt the riskier ones). Therefore 13% isn't usurious and probably a fair cost of capital for a small business.
andyakb 14y ago
Credit Cards are almost definitely going to have an interest rate much higher than 13%. How would that be better than a loan from Amazon? If you need to take months to arrange the line of credit, then I understand your argument, but Amazon seems to make the process pretty easy
- OldSchool 14y ago
  Yeah, it's more about how easy it is to get the credit. Applying for a business credit line tends to be a relatively formal process and often requires a personal guarantee anyway so there's often no liability advantage for a business credit line, at least if you actually need one. In fact it may be worse if you eventually fail and you happen to be less broke than your partners since likely you'll have jointly taken on the guarantee. I think you could keep your interest costs down by playing the 0% balance transfer game and pay only transfer fees.

JumpCrisscross 14y ago

13% is not that high a cost of capital for a business - venture capital is far more expensive yet still a smart choice for many companies. To put it in perspective the cost of equity for the S&P 500 has historically been at least around 13%.

aristidb 14y ago
That's the ex-post return on equity, not the cost of equity. You could argue that the former is an approximation of the latter, but they are not necessarily the same. Anyways, it's not really relevant for a small Amazon Seller who may get a _loan_ at which rate a huge S&P 500 business can get _capital_ (if a S&P 500 business wants a loan, I doubt it would typically even pay 5% these days).
- JumpCrisscross 14y ago
  That's CAPM cost of equity assuming a market of rich and emerging market stocks and bonds and a risk-free rate of gilts or Treasuries, whichever cheaper; the average ex-post return of the S&P 500 for the period (1926-2012) is closer to 10.5%. Regarding VC one plugs in expectations; VC is modern portfolio mechanics at its most vivid. This is relevant because 13%, as a cost of capital, is not intrinsically high when even Bank of America today would pay that if it raised equity (it has) and could assume a long-run return on its stock of at least 7.3% (below its targeted ROE). A quick bond search shows that several S&P 500 members, BofA included, paying over 13% on at least some of their bonds (no doubt the riskier ones). Therefore 13% isn't usurious and probably a fair cost of capital for a small business.

andyakb 14y ago

Credit Cards are almost definitely going to have an interest rate much higher than 13%. How would that be better than a loan from Amazon? If you need to take months to arrange the line of credit, then I understand your argument, but Amazon seems to make the process pretty easy

OldSchool 14y ago
Yeah, it's more about how easy it is to get the credit. Applying for a business credit line tends to be a relatively formal process and often requires a personal guarantee anyway so there's often no liability advantage for a business credit line, at least if you actually need one. In fact it may be worse if you eventually fail and you happen to be less broke than your partners since likely you'll have jointly taken on the guarantee. I think you could keep your interest costs down by playing the 0% balance transfer game and pay only transfer fees.