This is the fifth 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 last category; highly successful sellers.
Scenario 5: A thriving veteran Amazon business selling more than $10 million per year.
The financing options open up quite a bit for sellers in this category. Possibilities include daily ACH/MCA, marketplace term loans, and revolving LOCs (from either online lenders or traditional banks). Conventional financing can sometimes still be elusive without a brick and mortar storefront as banks fear lending to eCommerce businesses that they believe could fold up overnight without a trace.
All the other pros and cons listed above also apply to a business like this. By the time you, as an Amazon seller, are this successful and established, you likely can finance inventory out of your own cash flow. It might be time to explore financing that will allow you to build your own fulfillment capabilities (warehousing, logistics, etc) or to sell through your own web presence. The greater control that you have over your sales, marketing, and supply chain, the better margins you will enjoy. Remember, Amazon takes upwards of a 30% cut for fulfillment and listing services. As long as you rely on Amazon to fulfill orders and list your products, there is a cap on your revenue.
There are a number of mistakes small business owners make when taking financing for their inventory needs, but two rise to the top.
- Leverage, leverage, leverage (also called stacking)
- When companies do not retire the debt used to finance inventory as the inventory converts to cash, but rather still seek additional debt for future purchases, the company finds itself stacking, or over-leveraging — placing a higher debt burden on the business than it can afford.
- Poor margin management
- Jason warns, “I often see thin or negative margins as a result of financing inventory with high-cost debt, or even using relatively low-cost financing if you’re already in a thin margin industry.”
- Be careful not to use financing to purchase inventory that you are not adequately prepared to market, price, and sell.
- You may venture away from what you are good at selling and into inventory that eventually is sold at a loss or may take a very long time to turn
With proper planning and some research under your belt, you should be able to grow your business in a sustainable and profitable manner. Proper debt management will help you build your business credit, enabling better rates on financing as your company and your capital needs grow. Amazon is a wide open frontier and now is the time to grab the bull by the horns and make it work for you.