Building a business as an Amazon FBA Seller offers a ton of advantages to the online small business owner—an enormous marketplace to sell your wares, access to customers from all over the world, a helping hand for storing and shipping your inventory, and recently, a source of funding for your business growth.
Nothing is more frustrating as an online seller than being held back from growing your business by a limited cash flow. To help solve this issue for their FBA Sellers, Amazon rolled out a lending program back in 2011 designed specifically for third-party sellers on the site. The program has proved to be pretty popular—according to CNBC, Amazon had loaned its FBA seller community over $1 billion dollars between 2016 and 2017.
Despite its popularity, Amazon Lending isn’t for everybody. First of all, it’s not available on demand, not even for FBA sellers. You have to be invited by Amazon, not just to use the program but to participate at an amount and interest rate set by the company. From what we hear, that rate could vary from 6% to 16%, which is admittedly lower than the rate you’d probably be paying if you charged your business expansion costs to your credit card.
How do you come by one of these invitations to borrow from Amazon Lending? Hard to say—Amazon selects potential loan candidates based on any number of factors in a given seller’s site activity. Your sales history, inventory maintenance, customer service ratings and more all factor into the equation.
If that seems unfair, it’s important to remember that this program isn’t designed simply to do FBA sellers a favor. By charging interest and allocating the money exclusively for Amazon inventory (see below), the company makes money off this program, which means they only want to lend to sellers that they look at as a reliable investment. And while yes, it can help you do more business too, it’s up to you to make sure the circumstances are right for that to happen. In other words, you have to weigh the pros and cons to see if Amazon Lending is a good solution for you.
Pros
Quick approval
Amazon FBA sellers can be approved for their Amazon loan in as few as 24 hours. Once you’re approved, the capital shows up in your Amazon Seller Account.
No credit check
Since the loan is based entirely on Amazon’s assessment of your candidacy, there are no other hoops to jump through (paperwork, background checks, financial history, waiting for a bank’s approval, etc.)
No danger of default
Amazon Lending sets up your repayment plan for you, and takes the funds directly from your Amazon Seller Account. So you never have to worry about being penalized for making a late payment. With other types of loans, such as a merchant cash advance, the lender will scale their expected repayment based on your income or volume of sales from one week to the next. With Amazon, it’s a fixed percentage that stays the same regardless of how much or little you’re making.
Fewer fees
Other lenders (including banks) charge a whole range of fees for the privilege of borrowing money—origination fees, application fees, closing fees, and so on. You even get charged a penalty fee for repaying your loan early—how crazy is that? Amazon Lending doesn’t do any of that. Plus, they’re fine with it if you pay off your loan early.
Cons
You don’t get to choose how much you borrow.
The loan amounts offered by Amazon Lending vary significantly. The company can offer loan amounts from as little as $1,000 to as much as $750,000. However, you can choose to borrow less than the full amount they offer you.
You can only use the funds for one thing: Amazon inventory
Amazon Lending exists for one purpose only: to help you buy more Amazon inventory. You can’t use the money for something like an office renovation or making payroll during a poor sales quarter.
Amazon sets the repayment terms
Like we said in the “Pros” list, Amazon sets the terms of your repayment (both timeframe and monthly amount) and takes the funds directly from your Amazon Seller Account. There’s nobody to negotiate with if the repayment amount impacts your overall business financials. In other words, the “pro” of no default danger has a flip side.
It’s important to know that Amazon uses your inventory as collateral for the loan. Which means that if your Seller Account can’t cover the loan repayments, Amazon will either hold your inventory “hostage” until you pay them back, or reclaim your inventory and sell it themselves to recoup the money.
The Bottom Line
Amazon Lending is not free money. It’s one of several options for financing the growth of your business. Like any type of loan, it only works well for people who have a reliable plan for how to pay it back. That plan requires two things:
- An accurate picture of your numbers. If you can confidently predict how much you’ll make in sales, and build your Amazon Loan repayment into your plan for the year, then this might be a great program for you.
- A plan for making the loan worth it. Remember, interest means you’re actually paying back more than you borrowed. Simply using the money to buy more Amazon store inventory doesn’t make a lot of sense if you’re not going to move that inventory fast! Taking out the loan should be part of a bigger effort toward the growth of your store–learning more about your customers, building out a great marketing strategy for the year, tightening up your operations, spiffing up your brand as a whole. If you’re ready to do the extra legwork, an Amazon loan will be the most worthwhile for you.
If you do decide to take advantage of Amazon Lending, make sure you create fields on your income and balance sheet that account for the sudden increase in funds. Track your sales growth carefully against your monthly repayment amount (noting the amount you’re paying in interest), so you can see the cost/benefit in real time.
