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Financing Options for Amazon Sellers

Whether you’re looking to turn your Pandemic Passion into a thriving business or you’ve been dreaming of owning your own store for some time, Amazon is a platform that can’t be ignored. With revenues steadily climbing – first-quarter sales in 2021 were nearly one and a half times the first quarter of 2020 – there is a great opportunity for entrepreneurs to follow their dreams.

Establishing an online business often seems like an easy and inexpensive approach to selling products. It’s true you won’t need to hunt for a storefront, negotiate rental terms, and make payments for rent and utilities each month. 

That doesn’t mean there aren’t costs involved. You will likely need different types of financing to cover short-term, medium-term and long-term needs. For instance, short-term capital is ideal to boost cash flow to keep stock on hand, offer more options, and invest in marketing to draw in new customers. Mid-term capital is best for covering leases and purchasing equipment, and long-term capital is best suited for building mortgages.

And while seeking investors to cover your costs may be a more traditional route, you lose ownership. Similarly, typical bank products make you jmp through hoops and aren’t suited for eCommerce businesses. 

eCommerce businesses have workflows and needs that differ from traditional brick-and-mortar stores. While the need to free cash flow is universal, lenders need to adapt to the realities of eCommerce shops when setting their terms. In this article, we’ll discuss financing options for Amazon sellers to help you ensure you’re finding the right support when you need it.

Financing Options for Amazon Sellers

Starting your business as an Amazon Seller is only the beginning. Once you’ve set up your store on the Amazon Marketplace, you’ll want to market your products so you can rise above the rest. Amazon’s storefront is a competitive market, so you’ll need to fight for your spot in the search results. The investment of time and money is ongoing and can be fruitful with the right strategies.

Many business owners budget for the launch of their business, bringing in inventory and beginning to transact. We’ll cover some of the most important considerations when it comes to starting your journey as an Amazon Seller, including how to receive the financial support you require to help your business thrive.

Spoiler: that includes finding non-traditional lenders that understand your unique challenges and needs and offer financing options tailor-fit to eCommerce businesses.

eCommerce Business Challenges

In a perfect world, business would flow so smoothly. You order inventory, it arrives on time, the customers line up and take exactly what you have, and the cycle starts again with new inventory arriving on time to fill the next orders. Of course, we live in a perfectly imperfect world, and there are occasional bumps in the road.

There are some common challenges you may encounter along the way, which you should be prepared for. These elements of doing business will affect your cash flow, so planning ahead will ensure you can lessen the impact they will have on your ability to transact and to grow your business.

The Cost of Holding Inventory

The primary investment of eCommerce businesses is in inventory. You’ll need to outlay funds in order to have stock available for your customers, particularly if your products are coming from overseas. 

During the pandemic, lead times have increased, meaning companies have been caught waiting for stock longer than they anticipated. Between materials shortages and hold-ups at customs to understaffed and overworked delivery companies, it’s become more challenging to anticipate and plan for the cycling of inventory. Financing options for Amazon sellers are top of mind.

This means as a seller, you are often stocking more products, tying up cash flow. Cash flow is cited as the biggest challenge facing business owners, with more than 50% of business owners surveyed by the Better Business Bureau (BBB) saying they “didn’t have enough cash or credit to last them past 60 days.”

Shipping Rates are Going Up

In recent months, the rates for shipping have gone up. As this rate is wrapped into the cost of goods (COGS) as calculated by sellers, it has a big impact on your bottom line. There aren’t many industries that are immune. According to UNCTAD (the United Nations Conference on Trade and Development), 80% of the goods we consume are carried by ships. As global shipping rates increase, we’re reminded just how susceptible we are to the impact of shipping fluctuations.

Increased Competition

Global eCommerce trade has seen a marked increase since the start of the pandemic. Consumers stuck indoors turned to alternative ways of receiving the things they needed. Companies forced to shutter their doors moved online to meet demands. 

This movement to online fulfillment may have been accelerated by the pandemic, but it’s not set to slow any time soon. In fact, the prediction for 2021 is a nearly 18% increase in eCommerce sales in the US. The future looks bright for those looking to join the momentum.

Of course, with an increase in uptake comes an increase in competition. With more businesses moving online it will be more challenging – yet crucial – to find your niche. Setting up, maintaining, and growing your business involves a consistent investment in market research. You’ll also need to set aside a budget for marketing outreach, ensuring that you reach new customers and stand out amongst the pack.

Financing Can Help You Grow

You may have noticed a common thread amongst these challenges for eCommerce businesses: they each have a financial impact. That means none of these things are insurmountable with the right planning and financial support.

eCommerce businesses have unique needs that set them apart from brick-and-mortar retail stores, making financing options for Amazon sellers a bit more challenging. Competing in a global marketplace means pricing is always a consideration. Your margins will be in flux as you remain on par with your competition, and they will be slimmer than those who are the only shop in town. If you’re not investing in growth, you can be sure your competition is.

The cost of shipping and packing materials is also something to take into account as your products will need to reach the hands of your customers who are either national or global. You’ll also need to cover the insurance of shipping products in case they are lost or damaged.

Oftentimes, Amazon sellers opening their own store are smaller businesses. These vendors benefit from the availability of an online marketplace to give them an avenue to offer their goods, but they need all the practical support they can get. In fact, studies show that small and newer businesses are at the highest risk when it comes to cash flow challenges.

When cash flow is tight and often wrapped up in inventory, how can you ensure you can afford to market your products and increase the breadth of your product offering when the time is right?

The Perfect Fit: A Financing Model for Your Business Model

There is no shortage of financing options for businesses out there. While traditional business models have myriad opportunities to apply for financial support, owners of eCommerce stores should take care to find a partner that understands their needs. The financing options for Amazon sellers are similar to other businesses, but there are non-traditional options becoming popular.

The first step to aligning financing to business needs is to determine what asset your cash will be used for, and then align short-term, mid-term and long-term finance products based on that asset. Inventory is a short-term asset and requires a short-term finance solution. Equipment is a mid-term asset and demands mid-term financing. Real estate is a long-term asset that a long-term loan should cover.

Let’s take a deeper look at some of these options.

Business Credit Cards 

Perhaps the easiest short-term financing option is a business credit card. They are plentiful and easy to apply for, often taking a matter of minutes via online application forms. These cards have flexibility, allowing you to leverage credit for payments to vendors and partners. 

Credit cards can be perfect for day-to-day purchases, like office supplies and incidentals. But if you’re trying to use them for inventory, for example, they don’t always match with your cash conversion cycle, which is typically 90-120 days. If the bank requires repayment every 30 days, you can see how easy it is to go into the red. They charge interest if the balance isn’t paid in full each month, meaning they can end up costing a lot more in the long run. They also charge late fees and other penalties that drive the cost much higher than the interest rate alone. 

With credit limits, merchants often can’t cover all of their expenses with a single card. This means taking out multiple cards, which will impact your credit score. Managing multiple cards increases the risk of missed payments and cash crunches when minimum payments are due – especially if sales aren’t aligned with payment cycles.

They’re also at risk for fraud in the same way personal cards are. Should your card be exposed to fraud it will be frozen while the investigation takes place, impacting your ability to do business.

Cash Advances and Lines of Credit

Another short-term financing option is a cash advance. You can apply for a cash advance from a bank, but again, the application requirements and advance terms are not suited for eCommerce businesses. They don’t understand the risks associated with an eCommerce business. 

But you do have another option by working with a non-traditional lender who take eCommerce business models into account. Advances offered by these financiers have more flexibility, taking a percentage of actual sales rather than a hard-and-fast monthly repayment amount. They are better aligned with your cash conversion cycle, allowing you to repay the advance only as you sell product. 

Because they’re not locked in to “the old way,” they’re able to look with fresh eyes at how they support eCommerce businesses and adapt their offering to ensure you’re supported. The application process typically involves providing basic information and connecting your online store, and you’ll receive a transfer within days. This is the most tailor-fit financing option for Amazon sellers, as the lending is aligned with your sales and the market fluctuations that affect eCommerce businesses.

Once you establish your business and are bringing in enough revenue that proves to the bank that you are profitable, you can apply for a bank line of credit. 

Small Business Loans

A longer-term financing option are loans. Small business loans from traditional banks and credit unions offer to help with extra cash to reinvest in your business. But it’s important to understand that these loans are long-term, anywhere from one to multiple years, and are intended for larger purchases. If you use a loan to purchase inventory that sells in 90-120 days, you continue to pay off that loan way past 120 days. You may not have the cash you need to purchase the next round of inventory, but you will still be required to make loan payments, even if you aren’t selling products to cover those payments. 

These loans are often presented at lower rates, but be aware that the approval process is more extensive and time-consuming than that of credit cards. It’s estimated that the average bank loan application requires 26 hours or more to gather documents and complete, plus another three to eight weeks to even determine if you’ll be approved. The world of eCommerce moves faster than that.

Loans demand monthly repayments and don’t account for sell-through and income. While loan terms may seem manageable when your business is at a high point, the world of eCommerce can be unpredictable. eCommerce businesses need a bit of flexibility which banks and credit unions don’t offer. Banks are simply not made for eCommerce sellers. The turbulence of eCommerce requires flexibility to support the ebbs and flows

Amazon Lending

Amazon Lending began in 2012 and offers short-term loans of 6 to 12 months to Amazon sellers. The application process is easy and interest rates range from introductory rates at 9% to established rates from 18% to 25%. 

Amazon requires fixed monthly payments that don’t always align with your sales volumes. The term of the Amazon loan doesn’t line up with inventory turnover cycles, providing more money than needed to turnover inventory in a quarter. This front loading increases your overall interest expenses and monthly payments, creating a misalignment between payments and sales performance. 

Amazon Lending is an invitation-only program. Amazon determines eligibility and invites sellers to accept a predetermined loan offer. They typically only offer the choice of equal monthly payments across the term, or the first three months with interest only payments. 

Amazon often invites existing borrowers to refinance outstanding loans, rolling over existing balances into a new loan at a higher interest rate. Given the invitation-only nature of Amazon Lending, you don’t know if you’ll be invited again if you decline future offers. And those invitations may not align with the timing of your specific cash flow needs.  

Amazon Lending offers are based on your Amazon store performance. This can be a big downside if you’re amongst the 80% of sellers who also leverage other platforms to get your product out there. If you struggle to sell the inventory you’ve brought in, Amazon will continue to collect repayments from your Seller Central account and reserves the right to place a hold on your inventory.

Tips for Getting Started

We’ve given you a guide to considering the financial implications of starting an Amazon business and understanding the financing options for Amazon sellers. But that’s not all there is to know to ensure your success. We have a few tips on how to start on the right foot.

What Is Fulfillment by Amazon (FBA)?

FBA is an approach to selling on the Amazon Marketplace. It essentially means that Amazon will store your products in their inventory, fulfill orders, and offer customer service to your customers on your behalf. In order to join FBA, you’ll create an Amazon Seller account and add FBA.

You’ll create your product listings or integrate your inventory into the online portal. Prepare your products so they’re ready to ship, and have them delivered to the Amazon warehouse. When a customer order comes in, Amazon will dispatch the products and provide tracking and information to the customer directly. 

They also provide 24/7 customer service for both you and your customer. This all saves you the hassle of processing orders and picking and dispatching products.

You’ll also qualify for free shipping offers and have the opportunity to join the Amazon Prime program, giving your customers free 2-day shipping. Products eligible for Amazon Prime enjoy stronger sales performance making Amazon FBA an important consideration when maximizing your sales on Amazon.

Start with a Business Plan

Do yourself a favor, and create a business plan. This is an essential step for those who haven’t yet started selling on Amazon. But, if you’ve already begun, it’s not too late. If you don’t have a business plan, put one together. It will give you a framework to follow and to keep your business on track.

Your business plan should include your mission statement, objectives, market analysis, an overview of your products and services, and plans for marketing, advertising, and finances. Don’t let this step overwhelm you – it’s meant to give you a good overview of your business and goals, and to help you to see places where you would benefit from more research or understanding.

Find Your Niche

The Amazon Marketplace is a giant platform, with a seemingly endless variety of products available. To ensure your success, you’ll want to start with finding your niche.

Having a product you’d like to sell doesn’t ensure that people will buy it. If you want to be profitable in this endeavor, spend some time finding the niche that your product fits into and do your research. 

Understand the market trend for your product, including its practical value and recognition. Look at how it’s positioned in the market and see if you can turn that on its head. Is there a new selling point you could adopt to freshen up the messaging and set yourself apart?

Research the Market

“Know yourself, know your enemy. A hundred battles, a hundred victories.”

Okay, this quote from The Art of War sounds a bit dramatic, but this is the importance of market research. Knowing yourself means understanding your strengths and your weaknesses. Knowing your enemy – your competition – means understanding theirs as well.

Enter the market with optimism, but be well informed. Track your competitors to get a realistic view of the market you’re entering. See whether pricing and availability are stable, and where fluctuation happens. This is the best way to be armed with understanding and better prepared for victory.

Research Suppliers

This step also requires some due diligence. It’s not as simple as ordering a product as a consumer. You’ll have a lot more riding on your orders to suppliers, and the success of your business will rely upon their ability to fulfill. 

Contact multiple suppliers if you can, comparing prices and ways of doing business. Make sure you spend some time interacting with them, seeing how responsive they are, and weeding out scammers.

Get a good understanding of their products, price structure, and minimum order quantities. It is also crucial to have a clear picture of their payment options and terms. Order samples to review quality and packaging. Narrow down your options based on these key factors.

Respond to Customer Reviews

Amazon Sellers thrive based, in part, on customer reviews. Word-of-mouth is the best marketing tool and in this day in age, that most often happens online. Testimonials are social proof that your products and services are beloved by your customers.

Solicit customer feedback through emails and social platforms. Respond to online feedback to show that you’re present, reading testimonials, and playing an active role in the sales process.

When you’re beginning your journey as an Amazon Seller, determine what you need cash for and work with the right lender to right-fit a financial product to that need. Onramp is an expert at eCommerce financing and can get you short-term capital that’s aligned with your business. Get prequalified in minutes with zero risk today.