7 Most Common Restrictive Covenants of Financing for Amazon Sellers
Financing for Amazon Sellers comes in many shapes and forms but across the dozen or so specialized Amazon Seller Financing options, there are common restrictions applied to Amazon Sellers taking outside financing to grow their businesses.
Many Amazon Sellers take on FBA loans without reading the fine print. The goal for Amazon Seller lenders is to minimize their risk while maximizing their return and portfolio size. To minimize risk, there are many standard restrictive covenants that are included in Amazon Seller Financing documents plus some unique covenants that Amazon Sellers often miss.
Standard Amazon Seller Financing Covenants
Almost every Amazon FBA Loan or investment will include some form of the below covenants.
Account Health Standards - Almost every Financing for Amazon Sellers will require that the Seller Account maintain good standing with Amazon and require that you repay your loan if your account is suspended for an extended period of time.
Lock Box/Transaction Account - Nearly every e-commerce lender will require that they receive or control Amazon deposits before you are able to unilaterally direct the funds. Most Amazon Seller Investors will do this by requiring you to set your Amazon deposit method to an Account the lender controls but some will either control your Amazon funds before they are even deposited (like Amazon) or require irrevocable direct access to your business account to withdraw funds from your bank accounts at will (a method used by some specialty Amazon Seller lenders).
Data Access - Amazon Seller Loans are usually made primarily based on the history and performance of a seller so lenders always require the ability to see sales and inventory data from sellers' Amazon Selling Accounts.
User Permissions/Access - In addition, to secure data feed from seller central, most FBA Lenders will also require a seller to provide admin access to most features in Seller Central via user permissions.
Minimum Sales Volume - Many lenders will require that sellers maintain a minimum sales volume (usually at least 50% of your sales during the month prior to funding) so the lender can be confident that the seller will generate enough cash flow to repay their FBA loan quickly.
Other Loans or Encumbrances - Nearly every lender will require that sellers do not have other loans or liens on their business assets (although some lenders are more flexible on these clauses than others)
Defaults/Breaches - All funding documents will list events of default or breach. Typical defaults for Amazon FBA loans include; a change of business ownership, a decrease in sales, an Amazon account suspension, and more.
Unique Amazon Seller Financing Covenants
Depending on the type of financing, some Amazon Seller Financings will require these somewhat popular covenants.
Personal Guarantees - Many FBA loans will require an Amazon Seller to personally guarantee that the loan will be repaid. If the FBA loan is not repaid, the borrower can be required to personally repay the loan. Personal guarantees will often require a credit check and can have a negative impact on your personal credit.
Penalties For Decreases Sales - Many FBA loans will accelerate the payback schedule or become due in full if the Amazon Seller's sales decrease.
Use of Funds - Many FBA loans will limit what sellers can use loan proceeds for (typically limiting the use of proceeds to the purchase of inventory only).
Pre-Payment Penalty/Lock Up - Some Amazon FBA loans will require Amazon Sellers to pay a penalty to repay a loan early and/or even require 30-day advanced notice to repay a loan which can make it a challenge to switch to a new lender or leave an existing lender.
When entering into an Amazon Seller Financing agreement, it is important to understand these covenants and also understand that these covenants exist across the Amazon Seller Financing industry. While some lenders may not address these covenants explicitly, they are almost always buried in the fine print of financing agreements for Amazon Sellers.
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