Joseph Stern, Express Trade Capital
Amazon is one of the world’s largest internet retailers by revenue and market capitalization, providing sellers and buyers with a central marketplace to conduct trade. The platform has grown so large that many financiers, including Amazon itself, have begun to market funding solutions directly to Amazon sellers.
Amazon built two web interfaces to accommodate its sellers: Seller Central and Vendor Central.
Vender Central is utilized by manufacturers and distributors to sell to Amazon in bulk. Amazon will send weekly purchase orders for shipment to various warehouses. Vendor Central customers are partnered with Amazon, who will market and sell their vendors’ products to the best of their ability. Access to the program is invite only so not all vendors can join Amazon’s Vendor Central program.
However, Amazon vendors have several alternative routes for financing. Since vendors receive purchase orders from Amazon, they are financeable through traditional factoring and purchase order (“P.O.”) funding operators. Factoring companies allow vendors to draw funds against invoices to Amazon due in the future while PO funders give them access to cash to pay for production against purchase orders issued by Amazon.
Amazon’s other program, Seller Central allows merchants to market and sell their goods directly to customers. Sellers can fulfill orders on their own or outsource fulfillment. Amazon allows sellers to enroll in a program through which orders are fulfilled by Amazon (“FBA”). In FBA arrangements, Amazon takes on their vendors’ shipping, customer service, and returns for every order.
Since sellers do not receive large purchase orders, but rather, small orders, customer by customer that must be fulfilled at once, they are not eligible for traditional PO funding operators. Depending on the vendor’s payment terms with Amazon, factoring may still be a viable option. In such cases, vendors who need further financing should seek cash lines against inventory or merchant cash advances.
Inventory financing is a type of asset-based lending where sellers use their inventory as collateral for a revolving line of credit. An amazon seller with his own inventory may assign his inventory to a financier while waiting for sales. A financier may cut a deal with Amazon to target sellers using the its FBA or other programs.
A merchant cash advance (or MCA) is a form of receivables financing where a seller takes on a cash loan by offering up a portion of future revenue until the loan and its fees are paid off. Advances are typically capped at one to two times monthly sales with a factor rate ranging from 1.14 to 1.48. In other words, a lender will take a small percentage of the merchant’s credit card revenue until 1.14-1.48 times the loan amount is paid off, depending on the MCA’s factor rate.
Amazon offers its own loan program modeled after inventory loans and merchant cash advances. With an APR of 6%-16%, an Amazon loan will be far less expensive than a merchant cash advance of similar size, which can have effective APRs above 100%. Instead of taking a percentage of sales revenue, Amazon takes fixed amounts from their sellers’ accounts over the course of twelve months or less, thus qualifying its instruments as short-term loans. By targeting only its own qualified merchants, Amazon can utilize its control of the seller’s proceeds and even inventory to ensure repayment. Amazon can also cherry pick preferred vendors based on whatever criteria Amazon believes best serves its risk appetite. In 2017 amazon issued $1 Billion in loans to its merchants.
So far, information on Amazon’s lending programs is scant. Little information is published on default rates, average funding amounts, and the programs are still young enough that available data is still in its infancy. For now, the verdict is still out on how effective the financing programs are for Amazon and its vendors.
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