Does Amazon Lending Make Sense for Your Small Business?

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If you need business supplies, equipment and books, you can find almost anything you need on Amazon. It’s one of the world’s largest and most successful retail companies. But when it comes to finding financing options, did you know that the e-commerce giant also offers loans? Amazon Lending only offers loans to businesses that sell products on its site. If you own one of the more than a million small and midsized businesses that feature products on Amazon, it may be an option for you. Let’s take a look at how the program works alongside some alternative forms of funding so you can weigh your options and find the best loan for growing your business.

What Is Amazon Lending?

Amazon business lending is a financing program for registered Amazon sellers who are looking for money to purchase inventory. Instead of accepting applications for loans, Amazon pre-qualifies and invites sellers to participate in the program based on a variety of data points they track internally. Since its launch in 2011, Amazon has made more than $3 billion in small business loans to more than 20,000 Amazon sellers, reported Forbes.

What Types of Loans Does Amazon Offer?

Amazon loans are short-term business loans with repayment periods that are capped at one year. While Amazon doesn’t disclose its interest rates, they are usually lower than most credit cards, noted Forbes. Currently, according to a CreditCards.com survey, the average credit card rate is 17.64 percent.

Amazon loan amounts range from $1,000 to $750,000. When Amazon makes a seller an offer, it includes a variety of options for terms and associated rates. A source told CNBC that annual rates typically range from 6 percent to 14 percent. Sellers can accept the full amount or a lower amount.

Similar to other short-term business loans, Amazon provides quick approval and funding, delivering the loan in about 24 hours. Funds are advanced into the business owner’s Amazon seller account where they can be withdrawn and used. Amazon business lending doesn’t charge origination or closing fees. Sellers repay the loan with fixed monthly payments that are automatically deducted from their Amazon accounts.

Who Qualifies for an Amazon Loan?

To qualify for a loan, the borrower must be an Amazon seller. To identify potential loan candidates, Amazon monitors sellers’ sales history, inventory maintenance and customer service ratings, selecting businesses that demonstrate a strong product category as well as good business practices.

How Can You Apply?

Amazon business lending is different from other loans because it’s issued by invitation only. Unlike most lenders, you can’t fill out an application; you must be chosen by Amazon to proceed. Sellers will receive an offer through their seller dashboard. Amazon will pre-qualify a seller for a set amount based on the data they collect. The payment amount will be shown on the offer so there are no surprises. The business owner simply accepts all or part of the loan offer.

Workers sorting boxes and browsing internet in distribution center

How Can You Use an Amazon Loan?

This is an area where Amazon Lending is vastly different from other funding sources. Unlike most loans that can be used at the business owner’s discretion, Amazon business lending issues loans that can only be used to purchase inventory that is to be sold on Amazon. Funds cannot be used for other business needs, such as overhead, staffing, marketing, equipment or other needs that can arise during a slow sales cycle.

What Are the Features of Amazon Loans?

Amazon offers its narrow audience a low-maintenance application process and quick approval. Unlike traditional lenders, some of which may have lengthy loan applications requiring borrowers to gather and submit a substantial amount of business documents, Amazon selects loan candidates based on information it has already collected. Amazon has access to your sales history and keeps your personal information on file. That saves you time and energy because it has based its approval on its own internal algorithms.

In addition, if you have been rejected for a loan through traditional methods, you may find it easier to be approved for a loan from Amazon. Amazon only cares about how well you perform on its site. If you are a strong Amazon seller, you may find it’s easier to obtain funding by going directly to this company with which you already have a business relationship.

Amazon Lending may offer lower interest rates than other lenders. If you are paying a high rate due to bad credit or no credit, you may find Amazon’s loan rates attractive. Also, Amazon business lending doesn’t charge fees, such as origination fees, closing fees or prepayment penalties that some lenders collect if you pay off your loan early. These amounts can add up, which means an Amazon loan might offer you savings.

Amazon Lending also offers easy follow-up financing. If you repay your first loan on time and with no issues, Amazon may offer you a second loan with the potential of a higher amount and lower interest. In fact, several Amazon sellers do just that. More than 50 percent of borrowers take a second loan through Amazon, reported Forbes.

A final feature of this type of loan is its repayment plan. Amazon takes a fixed percentage of gross sales each month from your seller account. If you’re making sales, you won’t have to worry about late payment fees because your payments are deducted automatically.

What Are the Downsides or Limitations of Amazon Loans?

While Amazon’s program has benefits for sellers, there are several drawbacks to consider, as well. The main concern for several business owners is the fact that it limits how you can use the funds. Most lenders allow you to use short-term business loans in any way you need to fund your business. Loans from Amazon can only be used to build or restock inventory on the products you sell on Amazon. Even if your business solely sells on Amazon, that stipulation might be a problem, taking money away from other necessary expenses, such as marketing or staff, or the purchase of necessary equipment.

If you accept the loan and don’t add inventory to your account, Amazon can call in the loan for breaking the agreement. Plus, adding more inventory doesn’t necessarily mean you’ll sell it. You’ll still need to invest in marketing tactics, like pay-per-click ads, and other strategies to improve your sales and make the loan worth it.

Another downside with Amazon Lending is that it deducts fixed amounts from your seller account each month for your repayment instead of an adjustable amount that is based on your sales. Since you’re already paying fees on each sale, Amazon will be taking a larger cut, reducing the amount of money you keep per sale. If your sales slow down, which is a natural part of a retail business, your bank account could quickly become drained. Taking an Amazon loan will require you to monitor your sales and balances more closely. If you have a slow month and your Amazon sales payout won’t cover the payment, you could be put in a sticky overdraft situation if you’re not mindful of the pending withdrawal. The Amazon loan also won’t be able to support you financially during this cash flow crunch like a typical small business loan could.

Another drawback with Amazon Lending is the inability to request the amount you need. The program states that it makes loan offers as high as $750,000, but you will need strong sales to qualify for a large amount. While you can accept lower than what Amazon offers you, you’re still stuck with the range they find acceptable instead of what you really need, and may even end up with more than you need. This is when it’s beneficial to work with a lender who can personalize a loan to your specific needs, and won’t offer you a loan you can’t afford to pay back.

Another downside to this financing arrangement is that Amazon Lending offers an asset-based loan, with your inventory being used as collateral. If you default on your loan and use Fulfillment By Amazon (FBA), Amazon can hold your inventory until you make your payment. It can also seize and sell your assets to recoup the debt. If you fulfill orders yourself, Amazon will recover missed payments by withholding your future sales distribution. With Amazon controlling your inventory, your ability to make necessary sales to repay the debt disappears.

Finally, small business owners who are looking for a one-stop financing solution won’t find it with Amazon. Businesses are multifaceted and you probably don’t want to have to seek out one lender for inventory and another for equipment and another for cash flow. This could be a time-consuming process, adding extra steps when it comes to managing your small business finances.

What Are the Alternatives to Amazon Loans?

If you need money for expenses outside of inventory or if you don’t want to have your entire business tied up with Amazon, you might consider other options. A great place to start is to apply for small business loans through an alternative lender. With amounts typically up to $500,000, you can put this money toward daily operations, business expansion or whatever needs are most pressing at the time. Another common business concern that an Amazon loan can’t solve for is the need for new or upgraded equipment. You may be able to work with the same alternative lender to determine equipment financing and leasing options, instead of having to outsource those needs to a separate company.

These alternative lenders offer many of the same advantages that Amazon loans offer. While you have to apply for the loan instead of receiving an offer in an email, the approval can be just as quick as Amazon’s system. These online applications could be processed and your small business loan funded in as soon as 24 hours, which is similar to the timeline with Amazon Lending. Unlike traditional lenders that require a lot of documentation, the application is painless. You typically need one year of business history, $100,000 in gross sales and three months of bank statements proving your earnings to qualify.

These lenders are also often willing to look past a bad credit score, as loan specialists get to know you and your business personally to make a more holistic assessment of your company. Even if online inventory is your main reason for seeking financing, the personal touch an alternative lender can offer may be reason enough to explore your options. And if you work to pay back your loan ahead of schedule, you often won’t be charged a prepayment penalty either.

How Can You Decide Which Lending Option Is Best for You?

While Amazon Lending is an interesting option, its focus is very narrow and restricting, and will only truly help in building out inventory. If your primary focus of business is selling products on Amazon and you don’t want to bother with traditional lenders’ application processes, it might be a good choice. Being invited and getting funding simply by choosing to accept will leave you plenty of time to grow your business instead of filling out forms and finding documentation.

If you value freedom, however, then you might want to consider other options. While there may be overlap between the benefits from Amazon and the alternative lenders’ benefits, the feature that sets alternative lenders apart is flexibility and a humanized, personalized experience. In a competitive business world, that can be priceless.

Having Amazon decide what you can spend the money on, as well as the amount of your future earnings, might feel like too much control. You probably went into business to be your own boss. Do you want a lender to have a lot of say about the decisions you make and the way you spend your money? Maybe. Or maybe not. That’s a decision you need to make.

Whichever route you choose, know that the best time to seek funding is before you need it, not when you’re in a cash flow crunch. By putting financing in place, you can easily handle whatever challenges or expansion opportunities come your way. Make sure you compare all of the terms and requirements before signing on the dotted line. Having money in place can help you grow your business to the next level. While Amazon is a great way to start and run a business, and test product ideas, it’s not the best place to build your own brand. Maybe your success will encourage you to venture out and expand your business beyond its platform. When you have the funding you need in place, you’ll have the freedom to choose how you want to grow.

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