Amazon FBA sellers have the unique ability to scale their businesses quickly using Amazon’s world-class logistics network. Because Amazon is able to handle the picking, packing, shipping, and customer service needs, sellers are able to focus on other parts of their business.
Naturally, when businesses want to scale, they need to be able to afford more inventory. In order to do this, most sellers seek outside investment to aid business growth. However, there are many pitfalls that sellers struggle with when it comes to successfully scaling their business.
One of the toughest hurdles to bounce back from occurs when sellers fail to explore all of their available financing options. This often leads to the accruement of high-cost debt, which can completely cripple a business.
In order to avoid this situation, it’s crucial for Amazon sellers to educate themselves on their best options.
An Overview of Financing Inventory as an Amazon Marketplace Seller
Amazon sellers typically choose from three different funding sources:
- Personal Savings
- Personal credit availability
- Traditional Business Financing
- Bank loans and lines of credit
- Online Lending
- Cash advances, term loans, and lines of credit
Inventory Financing for Every Scenario
There is a whole host of available financing options for Amazon sellers because every business has a different set of circumstances and needs. Given the the variety, it’s crucial for sellers to know which options are the best fit for them at each stage of growth.
Sellers who are just starting out have little to no credit built up, meaning their options are much more limited than a veteran, established seller. We’re going to walk through four different scenarios you might face as an Amazon seller as well as the best financing options for each situation.
Scenario #1: Up and Coming Amazon Seller
Sellers at this stage are looking to grow rapidly but are facing several challenges that are preventing them from their desired growth.
Growing Pains: Expanding Your Team
At this stage, sellers often find themselves understaffed for proper scalability. In order to expand, businesses have to have the capital along with basic processes and systems.
Here are some valuable steps to take when expanding your team of buyers and delegating responsibilities.
Expanding and Managing Your Network of Suppliers
Next, you’ll want to look at growing both your existing supplier relationships as well as fostering new relationships.
In order to evaluate your existing supplier relationships, try creating a table like the one below. From there, you’ll be able to pinpoint areas where you can negotiate to improve your terms.
For example, given that you’ve been doing business with Shijun’s Shoes for 5 years and generate a large amount of sales for them, you have some room to negotiate. Try asking them for lengthier payment terms or further exclusive SKUs.
Once you are confident that you have negotiated the best terms with your current suppliers, it’s a good idea to look for additional sources. One method is to create a lead matrix like the one below, and fill it out for each of your potential suppliers. This provides an easy way to objectively look at all of your suppliers and decide which ones fit best with your business needs.
For example, if you strongly value suppliers that allow Amazon, you’ll want to prioritize your prospects that have a 3 or 4 for that category.
Lastly, it’s important to assess where you want to allocate your capital. Do you want to invest more in existing products that you are carrying or try testing out new product lines?
The best strategy is to employ a healthy balance of both. If you invest in too many new products without having a safety net of existing products that are proven to sell through at a high rate, you are putting your business in a high-risk situation.
Whether investing in new or existing products, Amazon sellers must consider these four crucial factors:
- Sales Rank – Is the product ranked above 10,000? If yes, you may want to reconsider purchasing that item.
- Trending Sales History – Most products experience a natural S-curve. If you notice the popularity is decreasing or if the product doesn’t sell well during that season, avoid reordering or selling that item.
- Competition – Is the market highly saturated with other retailers selling the product? If yes, then you should consider investing elsewhere.
- Diversification – This is one of the most important points of consideration. In order to minimize risk, you’ll want to offer a diverse portfolio of SKUs. Retailers who incorporate a mix of new and existing products from multiple brands and suppliers are usually the most successful in the long run.
Financing Options: Cash on Hand or Personal Credit Cards
As we mentioned earlier, sellers that are up and coming have fewer financing options than more established sellers. At this stage in your business, your options will most likely be cash on hand or personal credit cards.
Here are the pros and cons of both of those financing options:
|Cost of capital is free for savings||Limited amount of capital to work with|
|Credit cards may be relatively inexpensive||Access to capital is unlikely to grow as quickly as potential inventory needs|
|Credit cards may have rewards (points, miles, cash back)||Does not establish or build business credit
|Opportunity to build personal credit history and score||Piling on personal debt may hurt personal credit score, limiting access to larger financing later|
Pro Tip: Pay off your credit cards as you sell your inventory. This will allow you to build a strong repayment history should you decide to seek additional financing in future months.
Scenario #2: Established but Struggling Amazon Seller
This scenario is an all too common one for Amazon sellers and may happen for a variety of reasons.
Amazon retailers, especially those selling with FBA, often have a hard time keeping track of all of their costs. These costs can include storage fees, returns, marketing expenses, lost shipments, as well as many other factors that can eat away at profits if sellers are not careful.
At Teikametrics, we’ve developed tools that help you assess your profitability at the SKU level. Having this information on hand is crucial to the success of any Amazon business and will help inform future buying decisions.
Financing Options: Merchant Cash Advance (MCA) and Short Term Loans (Daily ACH)
For sellers in the established but struggling scenario, it’s crucial to be aware of the potential pitfalls of your available financing options in order to avoid accruing even more high-cost debt.
In addition, these sellers should always retire debt used for inventory once their goods convert to cash. Those who don’t retire their debt will end up “stacking” loan debt, which will tie up your cash flow and prevent you from being able to invest in more inventory.
When Should You Utilize MCAs or Short Term Loans?
- You are in need of funds quickly.
- Your inventory has especially high profit margins.
- You can’t access cheaper capital at all or quickly enough to take advantage of a high margin sale.
Disadvantages of MCAs and Short Term Loans
- The high cost of funds will diminish your profit margins.
- Non-revolving credit (the capital is limited to your initial inventory purchase).
- If the inventory is flipped, all of the interest and fees are still payable by the borrower.
Pro Tip: Mid-prime lenders like Dealstruck have far better rates than taking a Merchant Cash Advance.
Scenario #3: Established Seller
Sellers at this stage have at least a few years of experience under their belt and are usually thriving off a broad portfolio of SKUs. Given the volume that most established sellers are doing, it can be difficult to track which SKUs are selling through quickly and which SKUs are becoming aged or unproductive.
It’s absolutely essential for sellers at this stage to have tools in place that will proactively identify aging inventory.
Tools like Amaze Analytics are able to help sellers easily identify aged inventory and spot trends at the SKU, brand, and buyer level.
Financing Options: Merchant Cash Advance, Lines of Credit, Term Loans, or Amazon Lending
Established sellers are able to choose from a wider variety of financing options. These options usually have much better rates than those available to newer sellers.
The options below are what you would find from your typical lender. Sellers should weigh the pros and cons of each option to determine which is the best fit for their individual business needs.
In addition to the three options above, many sellers choose to borrow funds from Amazon Lending. This program is invite-only and while it does offer financing at low rates, there are a few negative aspects that any seller seeking funding should be aware of.
- Amazon offers financing at low rates. To an early-stage seller, these may be some of the lowest rates available.
- Amazon Lending chooses the seller, the seller doesn’t choose it. Only select sellers are chosen for this invitation-only program.
- Amazon loans are non-revolving.
- There is an emphasis on recent sales history, which puts seasonal businesses at a disadvantage.
- Brick and mortar and non-Amazon online sales are not factored in when determining loan eligibility and terms.
- Most importantly, Amazon Lending is a highly automated business that lacks the personalized customer service you would receive from other lending options.
Marketplace Term Loans for Inventory
When Should You Utilize This Financing Option?
- If funds are needed fairly quickly (within 10 business days)
- If you are looking for an alternative to MCA/Daily ACH
- Debt can be retired as inventory turns without prepayment penalty
- There are higher qualification standards than an MCA
- Non-revolving credit
- Financing future inventory purchases would require additional term loans
Scenario #4: Inventory Expansion for Your Peak Selling Season
With seasonal inventory, it’s crucial that Amazon sellers are aware of the three phases of the inventory lifecycle. These three phases help accurately predict demand, figure out your lead time for reordering, and appropriately time your exit for seasonal inventory.
With Amaze Analytics, our customers are able to use our data-visualization tools to better inform their business decisions surrounding the inventory lifecycle.
Financing Options for Seasonal Inventory
- Funds are quickly available for last-minute inventory purchases
- The amount of funds approved is determined by recent bank statements and seasonal selling could limit the amount available.
- Interest must be paid in full, even if you pay it off early.
Marketplace Term Loans & Revolving Lines of Credit
- These have lower rates than MCAs.
- Amounts are determined by your long-term financial performance.
- These options have more stringent underwriting requirements.
- The processes of traditional banks can take a long time and funds may not be available when needed.
Lines of Credit for Inventory
- You are able to finance bulk orders and lock in volume discounting.
- Will vastly improve your cash flow so you have more capital available for growth.
- Small, initial interest-only payments.
- This is not appropriate for fixed/expansionary needs.
- LOCs can be high-cost which will diminish your profit margins.
Comparing MCAs and LOCs
|Merchant Cash Advance (MCA)||Line of Credit (LOC)|
|Inventory Cost: $50,000||Inventory Cost: $50,000|
|Total Payback: $62,500||Total Payback: $53,682|
|Revenue: $75,000*||Revenue: $75,000*|
|Gross Profit: $12,500||Gross Profit: $21,318|
Growth Tips and Metrics for Every Scenario
No matter what your source of funding is, it’s important to keep track of your true profitability to ensure that your Amazon business is on the right track for growth.
We like to tell our clients “if you can’t measure it, you can’t manage it.” It’s critical that all Amazon retailers know their metrics and pay special attention to these five key performance indicators (KPI’s):
Inventory to Sales Ratio
This key management metric covers multiple areas of your business. It indicates the overall health of your inventory and also highlights your sell through rate.
This ratio shows how many times a company’s inventory is sold and replaced over a period. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory.
Gross Margin Return on Investment (GMROI)
GMROI is a ratio used to evaluate inventory profitability. A ratio higher than 1 means you are selling the merchandise for more than the total cost it took to acquire it.
Cash to Cash Cycle
Cash to Cash Cycle measures the amount of time it takes for capital invested to go from cash, then through the production and sales process, and then converted into cash again through sales. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect cash owed, and the length of time the company is afforded to pay its bills without incurring penalties.
Days of Inventory (DOI)
This KPI will help you see the average number of days an item is held in inventory before it is sold. It’s extremely useful in determining order quantity to ensure you are not overstocking or stocking out of your inventory.
If you want to succeed at scaling your Amazon business, you must carefully choose your financing options. Sellers who fail to explore their best options often end up accruing high-cost debt and risking the future success of their business.
Ultimately, you should be choosing the best rates possible in order to lower overhead costs and maximize your profit margins. Lenders like Dealstruck are experts in funding options available to Amazon marketplace sellers and can help you select funding sources that make the most sense for your business.
Once you have your funding source in place it’s important to pay off your debt as soon as you turn your goods into cash in order to avoid “stacking” your loan debt. Sellers who practice “stacking” can end up digging themselves a hole that’s impossible to get out of.
Lastly, it’s critical to track these five KPI’s at every stage of FBA business growth in order to ensure profitability:
- Inventory to Sales Ratio
- Inventory Turns
- Gross Margin Return on Investment (GMROI)
- Cash to Cash Cycle
- Days of Inventory (DOI)