What to Know Before Borrowing From Amazon

 

If you sell goods on Amazon.com, you may qualify for a loan from the online retailing giant. But before signing on the dotted line, consider the potential risks and alternatives.

Amazon late last year launched Amazon Lending, a program aimed at helping sellers obtain cash more quickly than they might otherwise from a bank or other traditional lender. Merchants need to be invited to participate. ("For more, please read "Small Businesses Are Finding An Unlikely Banker: Amazon.")

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Jason Grow for The Wall Street Journal

Kermit and Lisa Zerr, owners of Yankee Toy Box in Bedford, N.H., borrowed $38,000 from Amazon in July and another $13,000 last month.

Here's how it works, according to the company's pitch.

If approved for a loan, the funds are advanced to the seller's Amazon Seller Account within roughly five business days. After that, Amazon "initiates a disbursement" to the seller's bank account on file, the offer states. Monthly payments then are deducted from the borrower's Amazon Seller Account.

An Amazon spokesman declined to offer more details, but merchants who spoke to The Wall Street Journal said they were offered loans ranging from $1,000 to $38,000 apiece, with interest rates from less than 1% (for one of them) to 13.9% (for most who were interviewed).

Beverly Harzog, a credit analyst in Atlanta, says interest rates for small-business credit cards typically range from 13% to 19%, depending on borrowers' credit history. While Amazon's reported rates are lower, some merchants told the Journal that they were required to pay back their loans within either four or six months. By contrast, with most credit cards "you can carry your balance for as long as you want, as long as you're under your credit limit," says Ms. Harzog. Just keep in mind "you're going to pay extra interest to do that," she adds.

Merchants who borrowed funds from Amazon had differing opinions about whether the loans' terms restrict them to using the funds to buy only merchandise they'd sell through its marketplace. Several of the Amazon Lending offers reviewed by the Journal state: "Use these funds to purchase inventory and increase your sales on Amazon.com."

Meanwhile, credit cards, bank loans and many other funding options typically don't come with restrictions on how the funds they provide can be used, says Ms. Harzog.

Alternative loan providers include merchant-cash advance companies, which issue funds in exchange for a share of future sales and a fixed fee. A company's remittances are drawn from customers' debit- and credit-card purchases on a daily basis until the advance is repaid.

If you decide to borrow from Amazon, find out what penalties you might face should you default on the loan because you don't have sufficient funds in your seller's account. For example, if you rely on Amazon to store and ship your merchandise to your customers, could it hold your inventory hostage should you default on a loan? Also, look out for possible restrictions or rules that could go into effect at a future date.Other sources of alternative financinginclude factoring firms, asset-based lenders, peer-to-peer lenders and private investors.

"Just because you might be getting a good rate doesn't mean there couldn't be gotcha fees in the fine print," says Ms. Harzog. Some credit-card terms, for instance, give the provider the right to make changes to interest rates at any time. "Business owners need to take approach that they're their own advocate," she says. "Lenders want to protect themselves, too."

Another safeguard to take before borrowing money from Amazon is to estimate ahead of time the amount you'll need to pay in interest fees and include a cushion for in case you incur any penalties, advises Pat Dickson, associate professor of strategy and entrepreneurship, at Wake Forest University in Winston-Salem, N.C. If your margins are tight, you could wind up "not having any profit at the end of the day," he says. The loan "is not free money."

 

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