Businesses find a banker in Amazon

Amazon Lending, a program that started in late 2011, is offering itself as an alternative to banks or other traditional lenders.

By MSN Money Partner Oct 8, 2012 2:07PM

This post comes from Sarah Needleman and Greg Bensinger at partner site The Wall Street Journal.


The Wall Street Journal logoLisa Zerr urgently needed funds to upgrade the kids' merchandise carried by her business, Yankee Toy Box, for Halloween and the holiday shopping season. A bank had turned down her request for a loan.


Then she got a pitch explaining that, based on the business's selling performance, she had prequalified for a loan from Amazon Capital Services.

Rather than adding to her credit card debt, or selling her Bedford, N.H., business's accounts receivable to a factoring firm, she borrowed $38,000 from the Internet retailing giant in July and another $13,000 last month.


With its foray into commercial lending, 18-year-old is looking to help sellers obtain cash more quickly than they might otherwise from a bank or other traditional lender, an Amazon spokesman said. "Our goal is to solve a difficult problem for sellers," he said. logo © Spencer Platt/Getty ImagesHe declined to say how many merchants have been invited to participate in the Amazon Lending program, adding that it "is early" in the life span of the initiative, which began at the end of 2011. The goal of Amazon Lending, he added, is to "serve sellers of all sizes." Going forward, lending to third-party sellers based outside the U.S. "is something we'll certainly take a look at," the Amazon spokesman said.


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). Small-business credit card interest rates typically range from 13% to 19%.


Those who received an Amazon Lending pitch also characterized themselves as heavy sellers of goods through Amazon's website.


Some sellers question the logic of handing over to Amazon yet another role that's so critical to the independence of their businesses.


"When you start borrowing money from them, it's giving them more control over your business," said Ron Haislip-Hansberry of Wilbraham, Mass. The 46-year-old has been selling books, toys and other retail goods exclusively on for about five years under the name PZA Books & Toys. He expects $250,000 in sales this year.


Haislip-Hansberry doesn't have a line of credit from a bank or any outstanding business debt, but if he needed to borrow capital, he said he would try his local credit union.


Dennis Erber of Noblesville, Ind., isn't willing to borrow money for the possibility of selling more music memorabilia on this holiday season. He recently received an email from the Internet company saying he prequalified for a $1,000 loan, but he didn't bother to click on the link to learn more.


"In this environment, we don't want to stretch our budget any more than we already have," said Erber, 64, adding that his decade-old business,, sold $125,000 worth of goods last year, about half through and the rest via his company website and "Once you lock yourself into a loan with Amazon, then it may make it more difficult for you to sell elsewhere."


By lending to its own partners, Seattle-based Amazon stands to see hefty returns.


Amazon collects a commission of 6% to 15% on many sales made through its marketplace. It also charges larger sellers a monthly membership fee. If, through its lending program, Amazon can help its partners increase their sales on the marketplace, the company stands to pull in even more commission revenue, in addition to the interest it makes on the loans.


And it already processes credit card payments for most of the 2 million merchants who sell goods on its Web platform. "Amazon can really do its homework with these loans. They know exactly how much these merchants are selling, exactly how much money they are bringing in, because they control the data through the (Amazon) website," said Forrester Research analyst Andy Hoar.


Sales on the company's online marketplace comprised from 9% to 12% of Amazon's $48 billion in revenue last year, according to analyst estimates. Sellers on the marketplace accounted for 40% of Amazon's unit sales in the second quarter, compared with 36% in the first quarter, the company said. That could reach 55% within five years, according to Wells Fargo estimates.


Many merchants also pay Amazon to store, package and ship merchandise to their customers. As a result, Amazon could potentially hold the seller's inventory hostage if a borrower were to default, said Jordan Malik, the founder of, a Levittown, N.Y., product-sourcing service for merchants. "It's comparable to getting a car loan," he said. "Default on the loan and the bank can just come pick up your car."


With the busy holiday season gearing up now, more owners with Amazon seller accounts may be tempted to take up the company's pitch for prequalified loans. "Use these funds to purchase inventory and increase your sales on," the Amazon Lending email offer states.


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 the online retailer's marketplace.


One offer said that if approved, 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 said. Monthly payments then are deducted from the borrower's Amazon Seller Account.


With the economy stagnant, proprietors of many small companies continue to struggle to secure bank loans, particularly if their firms are only a few years old.


Amazon Lending faces mounting competition from a small group of alternative lenders.


PayPal this summer ran a pilot merchant cash-advance program in the U.K. to "test the appetite of businesses for cash advances, and to get feedback from them," said Rob Skinner, a spokesman for the online-payments company's U.K. division. He declined to provide details on the program, such as how many of its U.K. merchants were offered cash advances, for how much and whether a similar program might be launched in the U.S. "We are assessing the results of the pilot, and have not yet announced any future plans," he added.


Today, there are roughly 55 merchant cash-advance providers in the U.S., up from 40 two years ago, according to Janinne Dall'Orto, a senior manager at First Annapolis, a Linthicum, Md., electronic-payments consulting company. One such provider, AdvanceMe of New York, issues merchants about $400 million in capital a year, with smaller rivals issuing from $35 million to $50 million a year, she added.


Chris Williams of Orlando, Fla., started Premier Closeouts & Liquidations, an online retailer of beauty products and other consumer goods, just two years ago. He said he doesn't have much to offer a bank in the way of collateral since his home is worth about half of what he owes in mortgage payments.


The 42-year-old entrepreneur, who runs the business out of his home part time, accepted an offer late last month for a $2,000 loan from Amazon with a 13% interest rate that he plans to pay off by February. He said he does about 50% of his sales through the online marketplace and the rest via his company website. Last year, he made about $100,000 in sales, and he expects to do about the same volume of business this year.


Around the holidays, "inventory turns over a lot faster, so the additional money allows you to purchase more product," he said.


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