Amazon FBA Loans: What Amazon Sellers Need To Know (The Definitive Guide)
Updated: Aug 11, 2022
If you need cash to grow your business you've likely considered an Amazon FBA Loan. While there are a number of alternatives to FBA Loans including AccrueMe's success-based financing for Amazon Sellers, in this article we will take a deep dive into the most popular types of FBA Loans.
What Is An Amazon FBA Loan?
An FBA Loan is any type of loan made to an Amazon Seller using Amazon's FBA (Fulfilled By Amazon) network. Typically these loans are used by 3rd party Amazon Sellers to purchase more inventory to sell via FBA.
Key Terms To Consider With Amazon FBA Loans
Usually, Amazon Sellers considering taking on financing only consider which financing option has the cheapest interest rate but there are far more important terms to consider when comparing FBA Loan options including;
1. the loan payback amounts and frequency,
2. the length (term) of the loan,
3. restrictive covenants like personal guarantees or limits on how you can use the capital,
4. the amount of capital available from an FBA Loan,
5. the reputation of the lender.
Amazon FBA Loan Interest Rate
Many Amazon Sellers think the most important part of a loan is the interest rate. In fact, it is one of the least important parts of an FBA Loan!
For example, the difference between a 6% and a 15% interest rate on a $100k loan is the difference between the interest of $6k per year and $15k per year. That $9k yearly difference on a business with $200k in assets (likely doing $10k to $20k in monthly profit) is a drop in the bucket and will have a minor impact on your business compared to the other terms of most FBA loans.
Amazon FBA Loan Payback Amounts & Frequency
The payback term for an FBA loan is usually the most important thing that Amazon Sellers miss when considering an FBA loan. For example, there are Amazon Seller loans that will require equal monthly payments or bi-monthly/weekly payments as a percentage of Amazon revenue. There are also Amazon loan alternatives that require daily payments and other alternatives like AccrueMe that don't require any payments.
Because most Amazon Sellers are looking for funding to grow their businesses and solve cash flow payments making large regular payments to your lender makes no sense and has the opposite effect of the desired results for the Amazon Sellers.
For example, a common 6 Month Term Loan from Amazon for $100k will require the seller to make monthly payments of about $16.5k. For an Amazon Seller that qualifies for a $100k FBA loan like this, they are likely doing $10k-$20k in monthly profit so with these types of loans roughly 100% or more of an Amazon Seller's profit is going to repay a loan each month!
An FBA loan like the one above is usually the most cash flow and growth-friendly option for Amazon Sellers. Revenue-based loans usually require Amazon Sellers to pay 10% to 40%+ of their monthly revenue toward reducing their loan balance. For an Amazon Seller with a $100k loan, we'd estimate they are generating about $200k in monthly sales (with a $10k to $20k profit) which means that the seller would be paying $10k to $40k+ per month towards repaying their $100k FBA loan.
Making these large payments towards an FBA loan decrease your cash flow, increase a business owner's stress, and greatly decrease the value of taking on outside funding (this is why AccrueMe offers funding for profitable FBA Sellers without requiring regular payments).
Length (Term) of The FBA Loan
The length or term of the loan is very important because it will dictate how often you need to refinance or how quickly you need to repay your FBA loan.
Many Amazon Sellers ignore the term of the FBA loans they are considering because they think the length of the loan will be relatively unimportant and long-term (usually sellers think in terms of typical consumer loans like a multi-year car loan or a 30-year mortgage).
But, most FBA loans are very short-term because the lenders are making the loans based on relatively little business history and collateral. To decrease the risk for FBA lenders, nearly all FBA loans are designed to be repaid within 1 year and most in much shorter 3-6 months periods. These fast repayments periods are what result in very high monthly payments and the need for sellers to constantly refinance their loans to maintain cash flow.
Restrictive Covenants of FBA Loans
Many Amazon Sellers take on FBA loans without reading the fine print. The goal for Amason 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 FBA loan documents plus some unique covenants that Amazon Sellers often miss.
Standard FBA Loan Covenants
Almost every FBA Loan or investment will include some form of the below covenants.
Account Health Standards - Almost every FBA Loan will require that your 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 FBA Lenders 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 FBA 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 Encomburances - 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 FBA loans include; a change of business ownership, a decrease in sales, an Amazon account suspension, and more.
Unique FBA Loan Covenants
Depending on the type of financing, some FBA Loans 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 Decreased 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 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.
Amount of Capital Available
Most Amazon lenders and investors will have different criteria for determining how much they will invest in an Amazon Seller. Because Amazon Sellers are usually limited to working with one lender at a time, it's very important that Amazon Sellers make sure the lender they are working with will give them enough capital now and as they grow.
Because many FBA Loans are short-term, you will likely have to re-apply for financing frequently unless you find a long-term funding partner like AccrueMe to give you maximum capital now and a clear path to additional capital as you grow.
The Reputation of Your Lender/Investor
Because most of the lenders and investors in Amazon Sellers can be expensive, require fast repayments, and have hidden covenants and fees, many Amazon investors and lenders don't have the best reputation.
While bad reviews for Amazon Seller Loans are typically the result of a lender trying to protect their investment at the expense of a struggling Amazon seller, there are some funding sources with better online reputations than others. A good place to see real reviews for FBA loans is in the Funding & Credit section of the Seller Central app store (because it is more difficult for lenders to manipulate reviews there).
Amazon FBA Loan Guide Summary
The most important terms to consider when looking at an FBA loan are not the interest rates and instead are all of the other key terms that will impact your ability to grow as an Amazon Seller.
One of our co-founders with a background in real-estate financing famously said;
"it's more important to know what is in a bag of groceries (all the other terms of a loan) than to know how much it weighs (the interest rate)"
If you are looking for the most growth-focused, stress-free, and transparent funding solution for Amazon Sellers, check out how AccrueMe can help you with $10k to $1M in growth capital.
AccrueMe provides success-based capital for Ecommerce. With decades of experience in lending, AccrueMe's leaders have created a completely new way of providing capital, powered by a proprietary portal built around leading-edge eCommerce technology. With unprecedented line of sight into business data, AccrueMe’s portal simplifies financing for online retailers in a way that was never before possible: based entirely on sellers' success, and repaid when best for the seller, and not based upon a pre-determined schedule. Ecommerce retailers have built their businesses on the latest technology, we believe they deserve financing from a partner that's powered the same way. AccrueMe: cutting edge capital for eCommerce. Learn more at AccrueMe.com