This is the third in a series of five installments about types of Amazon Marketplace Sellers and the financing options available.
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 third category; sellers who are looking to expand inventory buying power.
Scenario 3: A seller looking to purchase extra inventory just before its peak selling season, during which time profit margins are significantly higher.
Short-term needs like these should typically be undertaken with short-term financing and the options will include daily ACH/MCA, marketplace term loans, and revolving LOCs from online lenders.
- Daily ACH/MCA
- Pros: As mentioned previously, funds are quickly available for last-minute inventory purchases, and significant margin should make cost of funds relatively palatable.
- Cons: Underwriting for MCAs is often driven by recent behavior in company bank statements and merchant accounts, which could limit the amount of funding available. And because you have to pay the full interest on an MCA whether you pay the loan off early or not, there is little incentive to pay early, creating a tendency to stack.
- Marketplace Term Loans and Revolving LOCs
- Pros: The rates are typically much lower than an MCA. All things being equal, a company financing inventory through a marketplace lender will enjoy higher net margins. Online marketplace lenders also look at the borrower’s historical financial performance, not just the most recent 3-6 month period. This often allows borrowers with demonstrated seasonality in sales to have more funding made available than through a traditional bank with more stringent underwriting processes. Also, some lines of credit also offer an interest-only period which gives sellers additional time to sell their products.
- Cons: It is more difficult to qualify for a marketplace loan or credit line than an MCA. Without a some planning, funds might not be available as quickly as you need.
- Tip: To maximize margin during heavy selling seasons, plan in advance and secure a line of credit or term loan 90 days before you need to purchase inventory for your peak.