Originally published on November 15, 2022, updated April 12, 2023
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Cyndi Thomason of bookskeep breaks down the Amazon Lending program and shares the questions you should be asking yourself before you get started.
There are many reasons why you might be considering a loan for your business. Perhaps things are growing quickly, and you need to order inventory faster than the funds are coming in from sales. Maybe you have a great new product idea, and you want to pull the seed money from a loan instead of your existing business.
Or, unfortunately, maybe sales have stalled, you have bills to pay, and you need to bridge the gap until your product can shine in Q4.
Whatever the case, as you consider your options, Amazon Lending may be among the solutions. Let's dive in and look at Amazon's various lending offerings and when they are a good fit. We'll wrap up by discussing business conditions and how they impact your decision to borrow, and how borrowing impacts your profitability.
Currently, Amazon Lending has three products for US-based businesses: term loans, interest-only loans, and lines of credit. The term and interest-only loans can be applied for within Seller Central with a simple application, and the lines of credit can be applied for through Marcus by Goldman Sachs. Many of you may be familiar with opening Seller Central and finding a loan offer. But is it a good one?
Let's first consider the interest rate and what options there are for other sources of funding. Do your homework and understand how the Amazon Annual Percentage Rate compares to other offers. That is an important consideration.
Another key factor is the control you have in paying back the loan. With the Amazon term loan, your payment will automatically be withdrawn from your settlement before you even see it. That's convenient unless you have a more important use for that money and would like to pay your bills based on another time or priority schedule.
With the Amazon Interest-Only Loan, Amazon sets a fixed rate of interest that must be repaid over a set period. After that time, Amazon begins collecting based on the principal and interest in the same way as the term loan. This gives you a little more time before large sums may be deducted from your settlement, but it still gives Amazon control, not you.
Keep Reading: The Guide to eCommerce Funding
The Line of Credit accrues interest at a fixed rate that is locked in per the agreement for the drawn balance. If you have a line of credit but do not draw on it to create a balance, you will owe no interest.
As we discussed earlier, there are many reasons why you may be looking for a loan. If you are expanding your business because it has performed well, then your gross margin should enable you to set some funds aside for growth. The extent that you can be your own bank will generally save you money.
Interest rates are rising rapidly, so adjustable rates can end up costing you significantly. While you may need some credit to allow you to keep up with demand, look for other creative ways to reduce costs so you can operate more profitably.
For example, negotiate longer terms with your supplier, consider suppliers where you can minimize your shipping costs, and make sure your advertising dollars are being used effectively and efficiently.
If you are moving into a new product line where there is a lot of uncertainty about the market and the product's performance, then you want the most flexible terms possible for repayment. Having all your settlement taken to pay for a loan makes ordering for the future more challenging.
New products often require a shakedown period, and you will want to prioritize how you spend your money. Compare the line of credit offered by Amazon with the lines of credit you may receive from your bank or consider a Small Business Administration (SBA) loan.
If you are struggling to pay your bills because your gross margin is low (under 30%), then borrowing money may seem like your only option. In fact, it could be the option that prolongs the agony of a poorly performing business. This is a tough situation to face, but when margins are low, paying back loans from your settlements can result in little to no payouts that will contribute to paying your other bills, including inventory.
Consider other options such as price increases, a cheaper supplier, reduced advertising expenditure, or changing the mix of your product offering. Getting gross margins up would be the most prudent place to focus and, if you need credit, look for credit that gives you the most flexibility for repayment.
As you can see, business conditions have an impact on the need for loans and how they will in turn impact your business. Just because Amazon is offering loans does not mean it is a good choice for you. In addition to comparing the interest rates, compare the terms and your ability to control the payments. These factors should be considered as you manage your money based on your business needs.
If managing money isn’t your greatest skill, bookskeep is here to help! With our variety of programs, we’re here for you whether you’re just starting out or growing faster than ever. Reach out to the bookskeep team today!
Originally published on November 15, 2022, updated April 12, 2023
This post is accurate as of the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.
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