How to get a loan from Amazon, and should you borrow money from them?

Back when I ran my mobile accessories business, I had a offer from Amazon.com asking me if I wanted to borrow money for my business. If you did not know, Amazon started their lending program back in late 2012 to companies that sold products on their platform. Amazon has the most complete data that a lender could ask for. They had all my sales for the past couple years, they could see how well my inventory was, if I was growing at a good rate, how my customer service was, shipping time, etc. That is more information then my bank would ever have. I think that is why Amazon got into the lending business. They have a huge database of potential borrows and all the data to make the decisions.

I first got the offer for a loan from Amazon back in May of 2013. I ignored them the first time they asked me, but then a few months later I got a email asking again if I wanted the loan again. I was approved for $50,000, so I decided to go ahead and apply for the loan. Since they had all my history, the approved me within a few hours for 50k. In order to qualify and get a loan from Amazon, you must have your inventory stored in their FBA warehouses and have around a year of sales data. While Amazon was the first company to start lending to the sellers on its platform , companies like eBay and Square have followed and made their own loan programs.
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One thing you may want to know

You are not borrowing money from Amazon, they are lending it to you. It is not the typical money loan, where in the event you default, you may still have to pay. Amazon lets you borrow money against your inventory and future sales. So if you do not make the payments, they will just take your inventory in FBA, and take any money you make until you pay off the amount you owe. So if you do not feel like you can pay back your loan, do not borrow as Amazon will  just take your income.

What to consider when choosing a loan amount

One of the biggest questions I asked myself after getting the loan was what to buy with it. In the terms, you can only use the money for business purposes. I had no other desire anyways. The average cell phone case costs around $1 wholesale. So I could buy 50,000 more cell phone cases. That was great as the holiday season was coming up, and if you do not know, that season accounts for 50% of revenue for the average retail business. The rest of the year is just a warm up.

I decided to buy 35,000 cell phone cases with the loan. My suppliers were quite happy that week I placed all my new orders with them. The other 15k I paid back early as I had no use for it. The holiday season was great. I made a little over 100k for the two months November and December. So paying back the loan was easy. I really do not know if it helped me though. Since I had so much money to buy cases with, and such little time as the loan only was for 6 months, I rushed when I was buying new designs from my suppliers. This was evident as when I was doing my accounting for the month of December, I realized that a lot of my designs that I bought using the loan money did not do so good. It was around a 50/50. Around half of the designs I bought were good, the other half did not sell very good. You have to remember my MOQ was 25 cases per design. So even if one sold, I was still stuck with 24 cases, and I pay rent on each one as they are stored in Amazon’s warehouses.  This happens all the time in the retail business. Companies like Walmart get inventory they think will sell good, only to find out they are duds.
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Be careful with how much you spend

One of the major reasons new companies fail is that they raise to much money from investors. The company that could have gotten by on only a 500k investment got a $5 million one. Now the founders are wasting money on things they never wanted to do. Marketing budgets are higher, but still not producing results. Whats another 10k wasted? The same thing can happen with a loan, as I found out myself. Since I had more money then I needed to reinvest, I wasted a lot of cases I knew were a maybe. If I had only taken 10k, I would have been a lot tighter with my budget. Byt since I had 50k, and had to repay it within 6 months, I acted fast and wasted a lot. This happens to retail businesses all the time, and I am glad I got the lesson while the money was small. If the loan duration was 2 years, the 50k would have been a great blessing, as I could spend a few thousand a month extra on inventory and find out what works. Hell, I could even move my manufacturing here to the US if I wanted.

Those are the two things you want to consider when taking a loan from Amazon. Remember the loan maturity is around 6 months, so are you able to take advantage of that and pay it back without it hurting your business? Will you spend the money thoughtfully or waste it since you have so much?

The APR was around 12%. Pretty high, but not bad considering I was still considered a small business by my bank and Amazon. The IRS considers a small business as a company that has less then $10 in assets. So I had to pay around $2,500 in interest. Beating that 12% is easy in the retail business. If you buy a product with the intent to sell and you can’t beat a 12% APR, you are in the wrong business.
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What happens if I default or can’t pay back the loan? 

In the terms of the loan, which you should read before signing states that if you cannot pay back the amount owed, Amazon will take control of your inventory and income until you do not owe them money. They can sell your items much lower then you want thus killing the profit margin. This means they will sell much more inventory then needed. As I wrote before in this article, this is not a typical bank loan. Amazon cannot collect from you. They can only take sales and inventory.

If you can’t payback their monthly amount, can your business withstand the cash flow loss? That is a important question to ask when taking a loan from them. If Amazon takes control of your account for one month, and you have no income to your bank account, can you still pay bills? If you can’t, a loan may not be right for you.

What do I recommend?

I would personally pass on the deal offered by Amazon. Their loan term is only for 6 months. I found myself just thinking what could I sell fast and pay back the loan in such a short time frame. Now FBA loans are only meant for seasonal selling like the Christmas shopping season. So that is why Amazon put the maturity of the loan so short. The bank I go through gave me a $5,000 line of credit during my first year of selling back in 2011. The year after they offered me 50k unsecured and 100k in secured line of credits. So if Amazon will offer you money chances are your bank will too, however they won’t demand you pay it back in full within 6 months. Try your bank first before accepting a loan from Amazon.

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