Tips for Using Financing to Scale Your Amazon Business

Tips for Using Financing to Scale Your Amazon Business

Amazon success stories abound. Take the Canadian flight attendant who started her Amazon business when the pandemic crippled the airline industry. Within eight months, she was making six figures. Then, there's the military veteran who grossed $225,000 in one year. As inspiring as these stories are, only 52% of Amazon sellers turn a profit with their first product launch. 

Most initial attempts fail because of poor product selection. With nearly two million Amazon third-party sellers, competition is fierce. Business owners cannot afford to choose the wrong product. Depending on their business model and practices, individuals may lack the resources to tweak existing products or look for new ones, which is another top reason eCommerce businesses fail: poor cash flow. 

After years of double-digit growth, the 2023 retail ecommerce sales growth forecast is 8.9%. That's after a nearly 20% drop within two years. Such volatility can slow sales, requiring businesses to seek financing solutions to position their companies for growth. Understanding the financial options before they're needed can ensure you select the right solution for your business.

Why Your Amazon Business May Need Financing 

While many online merchants use financing to improve cash flow, that's not the only reason to consider looking for capital. Businesses can use financing for the following:

Launching or Accelerating Marketing Campaigns

One challenge that Amazon sellers face is getting noticed. Successful entrepreneurs capitalize on PPC channels to drive awareness. They may run promotions or use social media to raise awareness and increase purchases. However, not every business has the cash flow to support marketing campaigns. The right financing can provide the money to get your product noticed without hurting your existing cash flow. 

Adding Inventory

If you need to increase your inventory to keep up with demand, financing may be the best option. Many new sellers may not have the financial resources to increase their inventory – and without inventory, there are no sales. Financing can provide the needed capital to add inventory before Cyber Monday or Prime Day so you don’t lose out on potential sales.

Lowering Expenses

Financing options may not be an obvious solution to lowering expenses. However, paying off debts that are eating away at cash flow can reduce the monthly costs of running your business. If you've used a credit card to purchase equipment or pay for a service, a lower cost financing option could shrink the monthly payment. Instead of paying between 20% and 25% interest on a credit card balance, you could pay off the balance with a lower interest option.

Related: eCommerce Seller Financing: What Works for Your Business and How to Get Started

The ways Amazon businesses use financing to scale their growth are as varied as the products they sell. What's crucial is understanding how to maximize financing to ensure long-term growth.

How to Use Financing to Scale Your Amazon Business

A well-thought-out plan for utilizing financing is a great start to growing your business. It doesn't need to be 50 pages long with charts, graphs, and spreadsheets. However, it does need to include where the company stands financially, where it should be in six months to a year, and how you plan to get there. The plan also should consist of contingencies if events don't happen as expected, such as opting for financing to get things on track.

With time, your business can collect data to help you make better decisions and extend your planning window from a year to two or three. It can help you decide what financing options might be best to help scale your business. As you plan your business growth, keep the following tips in mind.

Know Your Business

Researching your product's competition and understanding its market are the first steps in acquiring the data you need to scale your business. Determining purchasing patterns can identify fluctuations in sales volume. Seasonal businesses require careful planning to ensure consistent cash flow during the off-season. Finding the baseline for non-seasonal sales helps visualize when it's time to scale up or down to address changes in market demand. 

Knowing your business means staying current on market trends and the competition. It also requires information on how external factors, such as supply chain disruptions and inflation, can impact your bottom line. While you can anticipate changes based on your business data, you can't always predict how external events will alter operations.

For example, inflation gradually eats away at cash flow and shrinks profit margins. Would it be prudent to purchase more inventory in bulk in case inflation rises higher? Should you look for financing since conserving cash is one way to address a possible recession? The better you understand your business, the faster you can make data-driven decisions to protect your business.

Keep Financial Records

Maintaining good financial records requires more than tossing receipts and paid invoices into a shoebox to address at tax time. Good financial records are current. They can highlight potential problems before they manifest into something bigger. 

Let's look at the following scenario using Button Craze as an example. As an Amazon seller, Button Craze sells vintage buttons to consumers. It also has a business-to-business (B2B) hustle for historical organizations looking to replicate clothing. For years, Old Time Productions has been a top B2B customer for Button Craze. 

As Button Craze reviews its financial information, it notices that Old Time Productions has been paying invoices late. First, the payments were within a grace period, but recently, they have been weeks late. Delaying payments can indicate poor cash flow, which could indicate business problems. 

Rather than wait until a bill goes unpaid, Button Craze contacts Old Time to see if there's a problem. It turns out that the company is having difficulty receiving payments from customers, which impacts its cash flow. Old Time is trying to secure financing to help cover the shortfall, but it's not a speedy process.

Button Craze, having planned for such events, looks at its contingency options. It reduces non-essential expenditures and activates its financing option to help cover any gaps in monthly revenue. It flags the Old Time account for monitoring.

Unlike Old Time Productions, Button Craze was prepared for fluctuations in cash flow and had financing available to prevent disruptions. The company had a plan, knew its business, and maintained good financial records to ensure its ongoing viability.

As an Amazon business, you want to keep financial information current to avoid becoming Old Time Productions, scrambling for financing to stay afloat.

Watch Your Cash Flow

Making sales is not the same as making money. Cash flow is an indicator of that. Amazon business owners often fill multiple roles by handling purchasing, managing logistics, and monitoring marketing campaigns. Any role can become a full-time job. That's why prioritizing cash flow is so important.

As you rush to fill orders when sales increase, you're positive that you are making money. Then, you look at cash flow. Where is the money going? 

Unless you regularly check cash flow, expenses can climb. More sales mean more inventory, but prices change. If part of your product line is imported, tariffs increase, and fuel surcharges add up. Then, there are the Amazon seller fees based on volume. As your sales increase, so do your Amazon fees. If you are an FBA seller, the more inventory you have, the more Amazon charges. Add in the cost of PPC campaigns, and it doesn't take long for expenses to outpace revenue. 

Even if you consistently watch your debits and credits, you may need extra cash to purchase equipment or buy inventory. If you're short on money to buy merchandise as Prime Day approaches, you may need financing to ensure you benefit from one of Amazon's most profitable days.

Check Your Margins

Cash flow may reflect how cost-effectively your business is operating, but it doesn't tell you if it's profitable. Only the profit margin on your products can tell you if you are making money. For Amazon FBA sellers, profit margins average between 15% and 25%. Above 25% is considered excellent. Below 8% indicates a business is on the verge of failure. 

Suppose your business has a profit margin above 20%, which is within the average amount for Amazon businesses. However, supply chain disruptions have raised product costs, reducing your margins to 18%. While a 2% drop still keeps you within an acceptable margin, it indicates that such external factors may be impacting your bottom line. 

Related: Financing Options for Amazon Sellers

Net profit margins are calculated by subtracting total expenses from total revenue and dividing the result by total revenue. Multiply the result by 100 to get the margin as a percentage. Checking your margins every month can highlight eroding margins or underscore how operational changes improve profitability.

Know Your Financing Options

Several options are available to Amazon sellers when it comes to financing. Some are designed specifically for eCommerce merchants, while others target small businesses. Among the possible options are the following:

  • Business Credit Cards
  • Cash Advances
  • Lines of Credit
  • Small Business Loans
  • Amazon Lending
  • eCommerce Financing

Amazon offers its sellers financing options. Whether it's business credit cards or business loans, financing through Amazon may be convenient, but the options may not have the best terms.

If you consider financing options as part of your business plan and monitor your financial position, you can explore financial options before you need them. With time to evaluate, you can determine the right option for your needs. If you lack financial insight, you may be forced to take any available option regardless of the terms, which can hinder your business growth further.

Using Financing to Scale Your Amazon Business

You've worked hard to create your Amazon business. You don't want to see it slip toward an 8% profit margin. That's why you should know your business and your financing options. 

Have contingency plans that identify ways to access additional capital and manage your financial records so you know when to implement those plans. By watching cash flow and checking profit margins, you should have sufficient insight to find the right option at the right time to support scaling your Amazon business.Finding a financing partner is a great way to ensure that your eCommerce business thrives. Consider financing options that are tied to your sales. Instead of a fixed repayment amount, this type of business model uses a percentage of your sales. When sales are high, repayment happens faster. If sales slump, repayment amounts are lowered. This flexible approach helps Amazon sellers scale their business without jeopardizing their viability.