This is the second in a series of five installments about types of Amazon Marketplace Sellers and the financing options they have.

Amazon has become a household name for online shopping.  The Amazon Marketplace, which allows third party sellers to market their wares, has motivated scores of entrepreneurs to start their own businesses and provides an additional sales outlet for existing retailers and manufacturers.

In 2014, Amazon’ two million sellers worldwide sold an estimated $37 billion – $40 billion in sales, which represents just under 40% of Amazon’s total marketplace sales. That’s a lot.

Amazon has become an important sales channel for small business and the empowerment of entrepreneurs. But Amazon is a highly competitive, efficient ecosystem that requires sellers to be focused, disciplined and, at the same time, flexible. Of course money management plays a vital role in the equation and it is a variable that can drive success – or failure.

As Amazon sellers continue to expand their existing operations by joining the Marketplace, inventory must be purchased with growing consistency.  The sellers’ circumstances will determine whether they can fund this inventory on their own or whether they should seek out some form of financing.   According to Jason Fleming, Director of Sales at online lender Dealstruck, there are five basic types of categories that Amazon Marketplace Sellers fit into, each with its own financing options.  This post is about the second category; more experienced and growing sellers.

Scenario 2: A seller with two years of experience that has had good growth, is profitable and looking to expand its inventory.

Amazon sellers in this category will have more options ranging from daily debit loans/merchant cash advances (MCAs), revolving lines of credit (LOCs), and marketplace loans from online lenders.  On some occasions, businesses in this category may qualify for an SBA loan with a traditional bank.

  • Daily ACH/MCA
    • Pros: Daily debit loans are available in minutes and for a wide spectrum of credit risks.
    • Cons: The cost of funds often exceeds the seller’s margin.  As Jason explains, “If you sell $1 of inventory for $1.25 but it costs you $0.30 to finance the inventory, you’ve lost money on the deal.”  In addition, daily debit/MCAs are non-revolving credit, so if you need to finance more inventory just one month after taking an advance, you may have to “stack” or take another loan before paying off the first.  It is easy to take on more debt than you can afford quickly and without realizing it.
  • Amazon Financing
    • Pros: Amazon offers financing to some sellers at very low rates, often maxing out at 12% APR.  These rates are likely the lowest available to an early-stage seller and come in meaningfully large amounts.
    • Cons: Only select sellers are chosen by Amazon for financing.  You aren’t able to apply.  “And, these are one-time infusions of cash with no guarantee of future availability,” explains Fleming.  “If you depend on this financing, but then grow your business markedly and have to buy another large inventory shipment, you may not have the ability to get more cash.”
  • Revolving Lines of Credit
    • Pros: Most revolving lines of credit offer cost effective rates (ranging from conventional bank rates of 4-8% APR, to credit card rates of 9.99%-29.99% APR) which should leave plenty of margin after the inventory sale. Revolving credit also allows you to pay down your balances as the inventory turns and to re-borrow for continuous access to capital. You can take money on an as-needed basis and pay interest only on what you owe.  This is one of the largest benefits of taking a line of credit.
    • Cons: It is difficult to qualify for a line of credit with traditional lenders, and lines are not appropriate for long-term expansionary investments (i.e. equipment, additional locations, leasehold improvements, etc).  Lines can be costly with certain online lenders which can eat away at margins.  Jason adds, “And like MCAs, many of these online lenders don’t offer an annual interest rate, so it’s tough to tell what you are paying for your financing.”
    • Tip:  When seeking a line of credit from an online lender, ask them to share the APR equivalent, to help you understand the true cost of your line of credit.
  • Marketplace Term Loans
    • Pros: Online term loans can be quite cost effective. “If the inventory turns slowly (maybe you are launching a new line that you feel confident about but it doesn’t fly off the shelves),” Fleming suggests, “the long term payment structure means you can comfortably make the payments.” This can be an effective way to finance inventory if you are disciplined about retiring debt with earnings.
    • Cons: You run into the same issue of non-revolving credit here as you do with MCAs and Amazon financing. The irony is that the better your inventory sells, the faster you need to access more capital to keep the momentum. However, with a marketplace term loan, that would require applying for another loan, paying another origination fee, and potentially going through another underwriting process that could cause delay and lost opportunities. Also, if you use term financing largely or exclusively for inventory and do not pay back the loan as the inventory converts to cash, additional term loans will add leverage to the business. Most marketplace lenders also have rules on how quickly an existing customer can access more financing.
    • Tip:  Apply for a term loan to refinance other high-cost financing you may have taken early on, but then also apply for a line of credit for your ongoing inventory needs.

Conventional or SBA financing may be possible but it is likely to be difficult without substantial outside collateral (banks are often hesitant to lend to young businesses or to eCommerce businesses).  In addition, it could take up to 6 months to get approved and funded.