Amazon. It’s the e-commerce giant that virtually everyone knows, and we’re willing to bet, has used to sell or buy any product imaginable.
Amazon seems to have a hand in every business out there—books, electronics, entertainment, food, apparel, furniture… The list goes on and on.
And in 2012, Amazon added yet another service to their list: small business loans through the Amazon Lending program. You might not have known it, but if you sell your small business’s product on Amazon.com, you might qualify for a loan from the online giant.
Interested in financing a business with Amazon?
Well, as with any business financing option, you need to think carefully about what it’ll mean for your business.
Here’s the low-down on Amazon Lending—and whether or not it’s right for your small business.
What Is Amazon Lending?
Before we dive deep into the details of Amazon Lending, let’s cover the absolute basics of this loan program.
Why Was Amazon Lending Started in the First Place?
There are over 2 million sellers on Amazon’s platform. And a lot of those sellers are small businesses.
Just like all small businesses, Amazon sellers need business financing to keep their companies thriving.
But every small business owner knows that actually securing a small business loan is challenging. If you try to go through a bank, it’s pretty likely that your application will be rejected. In fact, 1 out of every 5 small businesses that apply for a loan from a commercial bank get denied.
And while alternative lenders have largely opened up credit access for small business owners, applying for a business loan can take a lot of time and effort. So in 2012, Amazon came up with an answer for their marketplace sellers who struggle to access the financing they need: Amazon Lending.
With their lending program, the online retailing giant offers business loans of as little as $1,000 and as much as $800,000 for registered Amazon sellers.
Who Can Get a Loan From Amazon?
Amazon Lending is only an option for small businesses who sell on the Amazon marketplace.
Small businesses can’t just reach out to Amazon to request a loan. You’ll first need to register as an Amazon seller, set up your seller’s account, and start selling your items through Amazon’s marketplace.
Once you’ve become an Amazon seller, how do you apply for a loan from the financing program?
Well… You don’t.
Amazon reaches out to you if they think that your business is worthy of a loan from Amazon Lending. In fact, only top performers on the Amazon marketplace will be considered for a small business loan from the company. These top performers will receive messages from Amazon with the specific loan offer inside.
When you get invited to participate in the lending program, what kind of loan can you get?
Let’s walk through just how Amazon loans work.
How Does a Loan From Amazon Work?
A loan from Amazon’s financing program is essentially a short-term merchant cash advance. Amazon advances you a lump sum of cash that you’ll repay—plus interest—by letting the company cut into your Amazon sales.
When it comes to your loan term, Amazon financing is similar to a short-term loan.
Short-term loans will typically have terms that range from 3 – 18 months, but with loans from Amazon, your term will be even shorter: 4 – 6 months.
As for interest rates?
Well, they’ll depend on how long your term is. If your repayment term is 4 months, you can expect an interest rate of about 10%. If your term is 6 months, you’ll usually see an interest rate of 14% instead.
The interest rates attached to Amazon’s business loans are pretty competitive. With other short-term loan products, you usually have an interest rate of 14% and up—often way up.
The loan amounts offered by Amazon vary significantly. Amazon merchants who have been offered loans from the company report that they’ve received between $1,000 and $38,000—but have been invited to borrow as much as $800,000.
When you get your loan offer from Amazon, sellers can accept the full amount they’re offered.
But if you’re not interested in that much capital? Then you can choose to receive a smaller loan amount—you just can’t ask for more.
Say Amazon offers you $30,000 in funding. If that’s the perfect amount for your financing needs, you can get the whole $30,000. But if you know you only need $20,000, or just $10,000, you can request a smaller amount. Just don’t try to ask for $35,000—Amazon won’t give it to you.
In order to pay their loan back, Amazon sellers will make fixed repayments. And the repayment itself is actually out of the seller’s hands—Amazon will automatically deduct the payment from the seller’s Amazon Seller Account. (You’ll never have to worry about making a late payment, so long as your store is making the sales you need.)
Here’s where an Amazon loan and a merchant cash advance are different:
Amazon takes a fixed amount from your Seller Account each month. With a merchant cash advance, the merchant capital company takes a fixed percentage from your bank account to collect repayment.
So if you’re making fewer sales one week, the merchant capital company will take less from your account. And on the other hand, if you’re having a high volume week or month, the merchant capital company will take more from your account. With Amazon Lending, Amazon will just take a fixed amount from your Sellers Account each time they collect—no matter how well or poorly your sales on Amazon are doing.
Time to Funding
Just like short-term loans, loans from Amazon Lending have a pretty speedy time to funding.
Sellers can be approved in as little as 24 hours, although some have waited as long as 5 days to receive funding from Amazon Lending.
Once you’re approved for your loan, the capital gets advanced to the seller’s Amazon Seller Account.
Use of Loan
Here’s a big difference between a loan from Amazon and a loan from other traditional and online lenders:
Amazon has just about one acceptable loan use in mind.
The Amazon Lending program is targeted towards inventory financing. That means sellers who get approved for a loan can only use that funding to purchase more inventory. And we’re not talking inventory for a brick-and-mortar shop: Amazon requires that the inventory purchased with an Amazon loan is sold through the Amazon marketplace.
Makes sense, right? Amazon wants to help its sellers sell more on Amazon.
So if you’re a small business that needs capital to buy more product, working with Amazon financing is a win-win situation for both you and Amazon.
Which Amazon Sellers Qualify?
By now, you know that you can only get a loan from the Amazon Lending program if you’re an Amazon seller.
But not just any Amazon seller. Amazon extends loans to sellers the company thinks are in the best position to use the funding to grow their business.
While most lenders will want to see your personal credit score, bank statements, annual revenue, tax returns, and so on, Amazon will determine a seller’s eligibility based on how much they sell on Amazon.
Amazon uses internal algorithms to choose sellers based on how often they run out of stock, how popular their products are on the marketplace, and how their inventory cycles operate.
And Amazon thinks it can make the best loan approval decisions possible. The company claims that it makes great loan decisions because they have such a close relationship with sellers.
How do they keep such a close relationship?
The answer is simple: data.
When you become an Amazon seller on their marketplace, the company can access and record any and all data available on your business’s inventory and sales—letting them know exactly when your business might need a loan to keep running smoothly.
Why You Should Use Amazon Lending (and Why You Might Want to Go Another Route)
Before you sign on the dotted line for any business loan, you should know exactly what the financing option will mean for your business.
Here’s why you might want to take out a loan with Amazon financing, along with why you might be hesitant to use the service, too.
Amazon Lending: The Pros
Before we get into the benefits of using Amazon Lending, here’s why you should be using Amazon for your small business in the first place.
1. Take Advantage of Amazon’s Marketplace
In order to qualify for financing from Amazon Lending, you’ll need to register your business as a seller on the marketplace. And if you haven’t already done so, you probably should! If you’re already selling your small business’s products online, setting up an Amazon Seller Account is an especially smart idea.
Take a look at the numbers. About 1 in every 8 U.S. internet users have visited Amazon.com in the last 30 days. In total, that’s about 188 million unique visitors per month.
How much traffic does your business’s website get a month? Unfortunately, it’s probably not even close to as much as Amazon gets.
When you look at the data, it’s pretty obvious why you should be listing your product on Amazon. Plus, you’ll access Amazon’s review system, which a ton of consumers consider closely when they’re buying products online. If you’re a customer service-focused business, you can use Amazon’s reviews system to prove how great your small business really is.
2. Easy Application Process
Any small business owner who has applied for business financing knows that it’s a challenging task.
To apply, you have to get together a whole variety of business loan requirements: your personal and business credit report, bank statements, balance sheet, profit & loss statements, and tax returns, just to name a few. As you can imagine, this takes time and effort that not every busy small business owner has to spare.
In most cases, you’ll do all the work to compile this information on your own.
But when you use Amazon Lending, the application isn’t as involved. In fact, they really only care about how your business performs on Amazon, and how your inventory looks for Amazon.
To retrieve that information, Amazon simply looks at the data associated with your Amazon Seller Account—so there’s no need to scramble to get the required documentation together.
3. You Don’t Qualify For Other Loan Products
When your business needs financing, you might be finding yourself in a common situation for small business owners: you took the time to apply, but you’ve gotten a big, fat “no” from the lender.
For some loan products—like traditional term loans, bank loans, or SBA loans—only the best borrowers qualify. If your credit score and bank statements aren’t where they need to be, you might be out of luck.
Amazon financing can be a great option for Amazon sellers who don’t qualify for other small business loans. Amazon doesn’t care as much about the typical business loans requirements. As long as you can prove your performance on the Amazon marketplace, you might qualify for a loan from the company.
4. Lower Interest Rates
Similar products, like short-term loans and merchant cash advances, have interest rates that can get sky-high. So when you compare the interest rate on Amazon loans to those on other loan products, Amazon Lending is a pretty good deal.
With Amazon financing, the maximum interest rate you can expect is about 14% on a loan with a 6 month term.
But remember, even if you’re getting a low interest rate on your loan, you’ll still want to make sure it’s worth it.
Are you confident that the revenue you’ll get from selling more inventory on Amazon will outweigh what you’ll have to pay Amazon back, plus interest? If so, taking out a loan with Amazon Lending makes sense.
5. Fewer Fees to Worry About
Small business owners looking for financing should be wary of the various fees that come along with their loan—origination fee, application fee, closing fee, prepayment penalty, and so on.
But with Amazon Lending, you won’t have to pay an origination fee. You also won’t have to worry about a prepayment penalty.
What is a prepayment penalty?
Put simply, a prepayment penalty is a fee that some lenders will collect if you pay off your loan early.
If lenders want you to pay back your loan, why do they charge you for paying it off early?
Well, it’s important to remember that what you’re paying back comes padded with interest. Lenders make a profit by what you pay in interest. So if you pay back your loan 3 months early, your lender is losing 3 months worth of interest on your loan.
With Amazon Lending, there’s no need to worry about a prepayment penalty. If you pay Amazon back early, you’ll save on your loan in the long run.
Amazon Lending: The Cons
As with any small business loan, there are a lot of reasons to go ahead with Amazon Lending, but there are also a few downsides that might convince you to pursue other options.
Before you commit to financing with Amazon Lending, consider these disadvantages:
1. More Dependence on Amazon
The Amazon marketplace can be a fantastic platform for small businesses to sell their products on. But financing aside, selling on Amazon has some downsides.
There are so many reasons to start your own company, but one of the best perks of owning a small business is the ability to be your own boss and take control of what your company does. When signing up for an Amazon Seller Account, many business owners find that they struggle to maintain the ability to build their own brand.
Selling on Amazon puts a focus on the products sold and gives less emphasis on the company that sells it. A consumer could easily know everything about the product that they just bought on Amazon, but not even remember the name of the company that made it.
In short, Amazon gets the credit for providing a stellar product, even if your company is the one who actually produced it.
If you already feel a lack of control from selling through Amazon, accepting a loan from the company would only add to it. When you choose to work with the Amazon lending program, you’re now indebted to the company.
This is, of course, the case with any business lender…
But when small business owners work with Amazon Lending, they’re not only relying on Amazon to provide a marketplace to sell their product, they’re also depending on that marketplace to provide the money they need to operate their business in the first place.
In short, taking out a loan with Amazon might make small business owners even more dependent on the online giant.
2. Fixed Deductions From Your Amazon Seller Account
Amazon already charges you for using their marketplace to sell your product—they collect a commission of 8 – 15% on the sales made on their site. And if you’re a larger seller, you also have to pay a monthly membership fee.
And once you take out a loan with Amazon, the company is cutting into even more of your sales through the marketplace. To collect repayment on your loan, they’ll automatically deduct a fixed monthly amount from your Amazon Seller Account.
What if your business is having a dry spell on Amazon sales and not enough money is going into your Amazon Seller Account? Amazon will take the same amount of money from your account no matter how well your sales are doing on their marketplace. If your account balance can’t keep up with the fixed monthly deductions, your business’s financials will take a hit.
3. What If You Can’t Pay Back Your Loan?
Like certain asset-based loans, your inventory will service as collateral for your Amazon loan.
So if you fail to make a monthly payment, how does Amazon get its money back?
Well, if you keep your inventory in an Amazon warehouse and give Amazon the ability to fulfill your orders for you, then Amazon can do one of two things:
Hold your inventory hostage until you pay them back, or simply seize your inventory and sell it themselves to get their money back.
And what if you fulfill your orders yourself, so Amazon doesn’t have an easy way to seize your inventory?
If you default on your loan, your ongoing sales proceeds on Amazon.com will go directly to Amazon as repayment of your loan, and not to your Seller Account.
Is Amazon Lending the Right Business Financing For You?
As small business loans go, Amazon Lending is a pretty unique financing option available for business owners. Loans from the online marketplace will only work for certain types of businesses.
If you do a majority of your business on Amazon and you need more inventory to keep up with orders, then using Amazon Lending makes a lot of sense… Especially if you don’t qualify for other small business loan products.
But if you need financing to serve a whole variety of business needs—both on and off the Amazon marketplace—then you’ll be better served taking out a different loan product. There are many small business loans, like short-term loans, lines of credit, business credit cards, or SBA loans, that can fit a variety of financing needs.
The bottom line?
Make sure you know the ins and outs of your Amazon loan offer and compare it to the other financing options out there before you sign the dotted line.
If Amazon offers you the lowest-cost solution that, most importantly, fits your business’s model and goals, it could be the best financing option for your small business.
from Fundera Ledger https://www.fundera.com/blog/2016/08/03/amazon-lending/