As an Amazon seller, growing your business can be tricky. If you are experiencing a rise in demand for your product, that’s really good news, but unfortunately you have only solved one piece of the puzzle. Being able to actually fulfill this growth in demand requires complex cash flow management and very often will also require some form of external financing.
These days, external financing becomes even more important due to the current supply chain crisis, which was caused by the pandemic, resulting in overwhelming disruptions, such as container shortages, floods, port closures, and more. A survey conducted by RBC Wealth Management found that “77% of the major ports it monitored were experiencing “abnormally long” turnaround times, and that this overall global supply chain problem was trending unequivocally worse”. This means that sellers will have to find a way to finance their inventory between the time it is purchased/manufactured and the time it is fulfilled to customers.
In this environment, maintaining the current size of your operations can be challenging enough, but it becomes much more complex if you want to grow your business. Exploring new market opportunities requires purchasing additional inventory, which you do not know whether it will sell or not. And for those items that do sell well, sellers need to prepare for the spikes in sales, such as Christmas, national days, mother’s day, etc.
In this article we will examine different ways to finance your operations and how they can help you grow your business.
Let’s look at the various options for growing your business.
Option 1 – re-investing your profits - self-sustaining growth cycle
Younger and smaller businesses unfortunately don’t often qualify for working capital. Even if you’ve been in business for several years and have a great track record of online sales, it might be hard to qualify for a traditional small business loan from a bank. For this reason, many sellers try to achieve slow growth by continuously reinvesting their profit into the business in order to buy more and more inventory.
Without considering other variables, let’s say you spend $50,000 on your first batch of inventory and it returned a $20,000 profit, for a total of $70,000. In this case, you will take that entire sum and purchase even more inventory, which may turn into a total of $100,000, and so on.
Many sellers, who use this option to grow their business, will not take any profit for themselves for a long period of time (e.g., a year or two). The advantage is that you don’t need to rely on external funding, however the growth will be limited and relatively slow and you need to go without pay for a long period of time.
And although you did not borrow from anyone, there are still risks involved. Each time you purchase inventory you don’t know for certain that you will be able to sell it at a margin, so the risk is completely on you.
Option 2 – Amazon Lending
Amazon has started to offer direct loans to Amazon sellers in the form of the Amazon Lending program. In this program, Amazon sellers can borrow working capital from Amazon at rates that are typically less than a credit card by going through a simple online application process. The loan amounts are smaller than a traditional small business loan from a bank, and the money can be available very quickly.
Amazon Lending program is an invitation-only program, in which Amazon selects the sellers (based on online sales history) that it thinks are going to be the best fit for an Amazon Lending loan. That means that even if you really want a loan and have good sales history, you can’t just go out and apply for Amazon Lending unless Amazon has invited you. If you are eligible for a loan, you will see it in your Seller Central dashboard. Sellers with a steady increase in sales may be eligible for this program.
Application
Invitation only, so you cannot apply
Credit checks
No need for elaborate credit checks, Amazon will use their own data and may review your business credit history.
Fees
No origination fees, application fees or prepayment penalties
Rates
These are short-term loans, which means the monthly payments will be high.
Approval timeframe
Fast approval (between minutes to five days)
Loan period
No origination fees, application fees or prepayment penalties.
Risk
If your sales so are stagnant or begin to decrease, you may have trouble paying down the loan. Unless you default, the risk is on you only.
Option 3 – Amazon Line of Credit
Amazon has partnered with Goldman Sachs to provide qualified sellers with a Business Line of Credit that is built specifically for Amazon sellers. The line of credit provides Amazon sellers with the flexibility to request funds when the need arises, instead of taking one large lump sum. Eligible sellers are invited to apply for lines of credit up to $1 million with APRs ranging from 6.99% to 20.99%. The arrangement is not fee-free. Borrowers who don’t use at least 30% of their available credit will be assessed a maintenance fee, and late or missed payments will also be subject to a penalty charge. It’s not uncommon to be charged a maintenance fee on a line of credit, although those fees typically are fixed and may be paid annually. The line of credit is more flexible than taking an Amazon Lending loan so you can use the cash when you need it. This program is suitable for growing Amazon businesses with a consistent increase in sales. Sellers can use these funds to cover staffing and operations costs, buy more inventory for improved cost efficiency, invest in product development and manufacturing, or expand marketing efforts to build their brands and grow their customer base.
Application
Invitation only, so you cannot apply
Credit checks
No need for elaborate credit checks, Amazon will use their own data and may review your business credit history. Amazon will share your merchant data with Goldman, which will then use business revenue data to underwrite your line of credit.
Fees
maintenance fee if you don’t use at least 30% of the credit line; There are late-payment fees.
Rates
Ranging from 6.99% to 20.99% APR.
Approval timeframe
The application process is fully digital and can be done in minutes (most customers will get an answer in real time).
Loan period
Revolving credit; use and pay off as needed.
Risk
If your sales so are stagnant or begin to decrease, you may have trouble paying down the loan. Unless you default, the risk is on you only.
Option 4 – Merchant Cash Advance
Merchant cash advance funding provides funds to sellers in exchange for a percentage of the seller’s daily credit card income, directly from the processor that clears and settles the credit card payment. There are no regular fixed payments with merchant cash advances, but the lender will collect a set percentage of your daily credit card sales. Oftentimes, this type of funding doesn’t have a fixed interest rate, but it can still be expensive in terms of the overall cost to borrow. Typically, the overall cost of an MCA loan is higher because it is based on a factor rate instead of a specific period interest rate. This type of business cash advance is generally a short-term loan to get quick short-term working capital. Because the daily repayment schedule can cause cash-flow problems, it can make it difficult to repay without refinancing. If you have had strong sales but struggle with too little credit, less-than-perfect credit, or a bad credit score, a merchant cash advance may be a good option for your business.
Application
you can apply to this type of funding.
Credit checks
Your business typically will not qualify for a merchant service cash advance if you have a prior bankruptcy on file, if your business has been in existence for less than one year or if you do not process credit card payments for your customers currently.
Fees
varies between providers.
Rates
merchant cash advance transactions are not subject to state usury laws that limit lenders from charging high-interest rates.
Approval timeframe
these advances are processed quicker than a typical loan, giving borrowers quicker access to capital.
Loan period
short term loan period that is paid off directly from the daily credit card income.
Risk
the risk is completely on the seller's side. Since the loan is paid off directly from the processor that clears and settles the credit card payment, the daily repayment schedule can cause cash-flow problems in itself.
Option 5 – Spott Inventory Financing Solution
Spott offers a new risk-free solution for qualified Amazon sellers. As part of the solution, Spott analyzes the sellers products and historical performance, and finances the purchase of additional inventory for qualified sellers, without charging any upfront fees or requesting any securities. With this revolutionary growth model, the seller pays back the funds only once this inventory was sold. In addition to a small service fee that is calculated from the sales that were generated by the financed inventory only – Spott will have no claim towards profits generated by any other inventory, which was not financed by the company.
This model allows sellers to increase their revenues and ROI without taking on any risk. You only pay Spott back if and when the inventory was sold – If it doesn’t sell, you don’t have to pay anything – the risk is completely shifted to Spott.
Application
any Amazon seller can apply to this program at: Spott's inventory boost
Credit checks
Spott will need access to your sales data and will select sellers that have the potential to succeed in this program.
Fees
No fees
Rates
No interest rates as this is not a loan
Approval timeframe
The application process is fully digital and can be done within 15 minutes.
Loan period
since this is not a loan there is no need to repay the financing of the inventory.
Risk
this is truly a risk-free program for the seller. If the additional inventory is successfully sold, Spott will take a small percentage of the profit; if the additional inventory is not sold, only Spott bares the risk.
