The recent Bloomberg article highlighting Amazon lending raised some questions for sellers. Since I have experience with this program, I thought it would be a good time to give my two cents about Amazon lending, how it works and the pros and cons.
When building an Amazon business through private labeling and/or wholesaling, cash flow is king. You can grow as fast or as slow as you want based on your cash flow. The number one thing I hear from experienced Amazon sellers is that cash flow is holding them back from scaling and growing their business. Banks do not understand how Amazon fully works and are resistant to give out loans. Typical Silicon Valley investors seem to not be interested in either because an Amazon account does not have the chance to become a “unicorn.” So even at 100 percent growth year over year, it is not enticing for a lender. That leaves Amazon sellers to either work with private equity firms or Amazon Lending.
Private equity firms love the Amazon business model, in large part because it is easy to show investors how the business will grow over time at a steady rate, with equally steady returns. Anytime they hear that a company can double its sales within a year if they had enough cash, their ears perk up. Also, I hear from private equity firms who have the idea of rolling up a ton of Amazon businesses, reducing overhead by putting them all under one roof, increasing efficiency by systemizing all the businesses, and injecting cash when needed to scale the businesses. Amazon’s first page for any keyword is like the limited shelf space in Target or Walmart. If they PE firms can buy up that limited shelf space now, it will be worth much more in the future and in the meantime they will be getting a nice 20% or so margin on the business in the meantime.
Most sellers do not know that private equity firms are an option, so they are stuck with Amazon Lending. Amazon knows that cash flow issues are often the only thing preventing their third party sellers from scaling. To solve this problem, Amazon introduced this program in 2011, to lend money to sellers. By looking at past sales and the amount of inventory a seller has in stock at the Amazon fulfillment centers, Amazon can instantly approve sellers for large loans without having to do a credit check or any of the other traditional background checks.
Amazon can hold a seller’s inventory at its fulfillment centers as collateral, so the more inventory a seller has in stock at Amazon, the bigger a potential loan will be. Also, as described in “The Everything Store” Amazon knows that selling on Amazon is addictive. If a seller receives a $200,000 loan from Amazon, it’s unlikely that seller would quit selling altogether once their inventory is sold. They’re more likely to reinvest those proceeds back by buying more inventory.
So by giving out loans, Amazon is helping sellers buy at larger scale, making inventory cheaper, allowing the sellers to pass on those discounts to the customers and making customers happier.
It’s worth noting that Amazon takes a 20 to 30 percent fee on all items sold on its platform. Though this is not the most profitable part of their business model, if a seller takes the $200,000 loan and sells $300,000 worth of inventory at retail price, Amazon will take between $60,000 and $90,000 in fees from those sales. And if the seller takes the $210,000 – $240,000 in profit and reinvests it in inventory Amazon makes 20 to 30 percent from those fees too. So for Amazon, this is a win- win scenario.
If you’re considering this loan program, be sure you read the terms carefully. If you default on your payments, Amazon may elect to take the balance of what you owe from any disbursements to your seller account, or could take possession of your inventory.
To be sure, this loan program is not for everyone. About a year ago, Amazon offered my brother and me an $870,000 loan. We did not take it because the way we handle the cash flow issue is by having longer payment terms with our suppliers than Amazon’s payment terms with us. It was very tempting at the time, but if you do not pay Amazon back within the initial 60 day pay period the interest rates skyrocket from around 3 percent to closer to 16 percent, depending on the seller.
Since Amazon makes so much money off the back end of the loans anyway, it would make even more sense to give large sellers interest-free loans for 90 days. They will make the money off of fees and future sales and then it would turn into an offer you can’t refuse.
So while the loans may help with cash flow problems, be sure you know what you’re getting into.