Does Amazon Lending Make Sense for Your Small Business?

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You can find almost anything your business needs on Amazon, from office supplies to specialized equipment. It’s one of the world’s largest and most successful retail companies.

Did you know that Amazon also offers business loans?

Amazon Lending provides loan options to businesses that sell products on the e-commerce 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.

Getting an Amazon loan offer could be an easy way to finance inventory for your Amazon business, but it’s not your only option. Let’s take a look at how the program works as well as some alternative forms of funding. Knowing all of your options allows you to weigh the different programs 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 seeking funds 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 internally-tracked data points.

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, Forbes notes that they are usually lower than most credit cards. Currently, according to a CreditCards.com survey, the average credit card rate is 17.30 percent.

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, a loan for Amazon business owners provides quick approval and funding. The delivery of loan funds takes about 24 hours. Funds are advanced into the business owner’s Amazon seller account where they can be withdrawn and used.

Amazon 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?

Only certain Amazon sellers receive an Amazon loan offer. To identify potential loan candidates, Amazon monitors your sales history, inventory maintenance and customer service ratings.

They then select businesses that demonstrate a strong product category as well as good business practices. This includes managing your account correctly, such as paying your Amazon seller repay fees. By selecting pre-qualified applicants, Amazon streamlines their loan process.

How Can You Apply?

Loans from Amazon are different than other programs because they’re issued by invitation only. Most lenders provide loan applications for any business owners who wish to apply. With a loan for Amazon business owners, you have to be specifically chosen by Amazon.

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?

Using your Amazon loan funds is vastly different than other funding sources. Where most business loans allow you to use the funds how you wish, Amazon loans only allow you to purchase inventory you’ll sell on the Amazon platform. 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. Since your business information has already been collected and approved by Amazon, you don’t have to fill out a lengthy application. Amazon has access to your sales history and keeps your personal information on file. That saves you time and energy because your loan approval is based on Amazon’s own internal algorithms.

In addition, if you have been rejected for a regular business loan, you may find it easier to get 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 through the company with which you already have a business relationship.

Depending on your credit score and other factors, Amazon Lending may offer lower interest rates than other types of loans. 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 if you pay off your loan early. These amounts can add up, which means an Amazon loan might offer you savings.

Getting follow-up funding can be easier through Amazon as well. If you repay your first loan on time and with no issues, you may be offered 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?

The Amazon Lending program provides streamlined funding and pre-approval, but it’s not perfect. The main concern for 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. You won’t be able to use funds to cover other 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, 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 to repay the loan. There’s no option to adjust your payment based on your current sales volume.

When you’re selling a lot of inventory, this probably isn’t a huge problem. However, you’re already paying fees on each sale, so Amazon will be taking a larger cut. This reduces 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 requires close monitoring of your sales and balances so you can make your payment each month. You could be put in a sticky overdraft situation if you’re not mindful of the pending Amazon seller repay for your loan. The Amazon loan also won’t be able to support you financially during a cash flow crunch like a typical business loan.

Another drawback of 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. The pre-approved amount may not be what you really need.

You could easily end up taking the offer from Amazon and wind up with more than you need as well. You’re then on the hook to repay a loan that’s too big for your business. 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, 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, 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 lender to determine equipment financing and leasing options, instead of having to develop a new relationship with unique lenders each time you need funding.

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.

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. The application process for an online business loan is simple and quick. You typically need one year of business history, $100,000 in gross sales and three months of bank statements proving your earnings to qualify.

An online loan is especially a good option if you have less than perfect credit. Online lenders are 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, 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. There’s a lot of overlap between the benefits of Amazon and alternative lenders. What sets alternative lenders apart, however, is the flexibility and a humanized, personalized experience. In a competitive business world, that can be priceless.

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, whether for a business loan or Amazon loan.

Amazon is an excellent platform to start and run a business. It gives you the ability to test product ideas and get your merchandise in front of thousands of people every day. However, it’s not the best platform for building a personalized brand. Funding from a non-Amazon loan allows you to branch out from the restraints of Amazon and expand beyond the platform to grow your business how you see fit.

 

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