Considering a loan for your ecommerce business? There are several compelling reasons you might find yourself contemplating this financial step. Perhaps your business is experiencing rapid growth, demanding faster inventory restocking than your sales can accommodate. Maybe you’ve got an exciting new product idea, but prefer to finance it separate from your existing business operations. Or it could be that sales have temporarily stalled, leaving you with bills to cover while you await a Q4 resurgence.
In this blog, we’ll explore Amazon Lending’s various offerings and determine when they might be a suitable fit for your business needs. We’ll also delve into the significance of business conditions, highlighting how your decision to borrow can impact profitability.
Your Lending Options
Currently, Amazon extends three lending options to US-based businesses: term loans, interest-only loans, and lines of credit. Applying for term and interest-only loans is a straightforward process within Seller Central, while lines of credit can be obtained through Marcus by Goldman Sachs. Many of you may have encountered loan offers within Seller Central. However, the key question is: are these offers truly advantageous?
Let’s begin by examining the interest rates and exploring alternative funding sources. Doing your due diligence and understanding how Amazon’s Annual Percentage Rate compares to other options is critical.
Another pivotal consideration is the degree of control you retain over loan repayments. With an Amazon term loan, your payments are automatically deducted from your settlement before you receive the funds. While this can be convenient, it might not align with your preferred payment schedule or priorities.
The Amazon Interest-Only Loan stipulates a fixed interest amount payable over a set period. After this duration, repayments commence on both principal and interest, akin to a term loan. While it provides a bit more time before significant deductions occur, Amazon maintains control over the repayment schedule.
In contrast, a Line of Credit accrues interest at a fixed rate based on the drawn balance. If you don’t draw on it to create a balance, you won’t incur any interest charges.
Is a Loan Truly Necessary?
As discussed earlier, there are various motivations for seeking a loan. If your business is expanding due to strong performance, your healthy gross margin should enable you to allocate funds for growth. Self-financing to the extent possible can save you money, particularly in the face of rising interest rates. While some credit might be necessary to meet growing demand, explore creative cost-cutting strategies to enhance profitability. Negotiate longer terms with suppliers, minimize shipping expenses, and ensure your advertising budget is utilized efficiently.
In cases where you’re venturing into a new product line marked by market uncertainty, opt for the most flexible repayment terms. Having all your settlements siphoned off for loan repayment can complicate future orders, especially when new products often require a bedding-in period. Compare Amazon’s line of credit with offerings from traditional banks or consider an SBA loan.
For businesses struggling to cover bills due to a low gross margin (below 30%), borrowing money may seem like the only lifeline. However, it could prolong the agony of a struggling business. In such scenarios, explore alternative options like price adjustments, seeking cheaper suppliers, reducing advertising expenses, or reshaping your product mix. Elevating gross margins should be a primary focus, and if you do need credit, seek flexible repayment terms.
It’s crucial to recognize that business conditions significantly impact the necessity for loans and how they influence your business. The mere availability of Amazon loans doesn’t automatically make them the best choice for your specific circumstances. In addition to comparing interest rates, carefully assess loan terms and your ability to manage payments. These factors should be integral to your financial decisions, tailored to your business’s unique needs.
If you need help understanding credits you have, or whether or not you can afford a loan to being with, we are here for you! Reach out to the bookskeep Team today!