Amazon “Conquers” the SME Lending Market: Is There Still a Place for Banks and Small Players?
Armada Labs reviews the renowned Amazon Lending program to define if Amazon is a dominant alternative lender by now. Can other lenders offer something to compete with it?
How did it all start?
It may seem surprising, but we will start the topic with another “whale in the ocean” — PayPal. For the last five years or so, PayPal has been viewed as an influencing player in consumer lending. The same way as Square, Venmo, and other alternative lenders, it grows rapidly in the same direction.
According to PayPal’s VP, after the first two years in lending, the company managed to make $1bn in total profits. Yes, the demand was intense, perhaps, due to the renowned name. Remarkably, in the last five years, PayPal earned over $10bn from small business lending due to an established international network of loan originators.
Why do we talk about PayPal so much? Well, for its prominent place among small business lenders — the one that Amazon is claiming right now. And the same way as PayPal, Amazon has moderately evolved into lending, besides the initial service offerings.
In 2011, Amazon launched a program, Amazon Lending, that offered short-term loans (for a period of up to a year) for top-tier businesses. At the time, the cases to apply for loans were restricted to inventory sales on Amazon. Still, later, consumers could ask for those to invest in other activities like new products, promotions, and more, that they perform on Amazon. Shortly after that, Amazon started offering loans to small businesses selling on Amazon.
In 2018, Amazon’s success in digital lending was hard to miss.
Amazon reports that SMEs constitute the major part of its sales, which makes it a real competitor to PayPal, Kabbage, OnDeck, and other alternative lenders in that list. Meanwhile, traditional ones breathe down their neck with reported drastically growing assets under management and origination volumes.
The question that runs through the article like a red thread is: is there still a place for small players, both alternative and “offline” ones? Well, it should be your call, follow the story we tell, and you will see it yourself.
What is going on Right Now?
Several benefits characterize the current status of the Amazon Lending program.
No Credit Checks
Unlike an absolute majority of lenders that lift your credit history and FICO scoring, Amazon doesn’t evaluate your credit when applying for a loan. Moreover, the company doesn’t use any financial data to determine whether you can qualify for it. Thus, Amazon loans can be a good fit for lenders who can’t get loans from other lenders because of credit issues. Yet, there are other requirements you must comply with.
Security-first Application Requirements
Businesses can participate in Amazon’s lending program only through invites. However, an invitation isn’t equal to a loan; you still have to apply and provide info like finances, customer service, sales reports, and more. Typically, you get a response within five business days.
In order to become eligible for Amazon’s invitation, applicants should comply at least with the following criteria:
- Positive customer metrics that demonstrate steady growth in sales;
- The minimum total profit for the last 12 months must be not less than $10,000;
- No copyright or trademark violation issues.
Flexible Payment Terms for Short-term Loans
Amazon provides short-term loans for 12 months with automated payouts scheduled between regular time spans. If the consumer doesn’t have sufficient funds on the account for another regular charge, that past-due sum will be deducted in addition to the regular amount on the next due date.
Partnerships and Promising Perspectives
It seems like Amazon wants to retake the top-tier segment, judged from its recent partnership with Marcus by Goldman Sachs. Per Amazon’s announcement, its sellers will benefit from fixed interest rates and more flexible loan offers. As in the case with Amazon loans, consumers can apply for Marcus’ ones upon receiving the invitation.
Amazon loans are relatively easy to qualify for and are provided at low-interest rates and with no extra fees. For some businesses, these perks are convincing enough to apply for an Amazon program, beyond other alternatives, not to mention the ones offered by smaller, less popular lenders.
But is it all so shiny with Amazon loans? Do these ensure undeniable, undisputable advantages over small alternative lenders and traditional banks? The last part of our article should answer these questions.
Is Amazon An Unequivocal Leader Among Alternative Lenders?
At some point, companies that sell on Amazon find themselves struggling to maintain their own brand. Well, this the price for attractive loan terms; Amazon focuses its advertising on the product you sell rather than your business. And it works; buyers remember that they bought the products on Amazon but less likely that they purchased those from you. Getting a loan from Amazon will only weaken your control over the brand.
However, other alternative lenders, such as Kabbage or Fundbox, and even some banks demonstrate that there can be a “way-round” option. While Amazon gives you funds and provides you a marketplace for selling your products — in essence, under its name — these bind you only as lenders, meaning that your selling rests independently of other brands and trademarks.
Another point of concern is the use cases. Lenders, both alternative and incumbent ones, offer loans to cover various needs, such as payroll maintenance, equipment updates, handling cash flows, and more. Yet with Amazon loans, this is not the case whatsoever; you can only use those to replenish stocks of the products you sell on Amazon.
Even without loans, Amazon charges you interest from each sale that you made on its platform. Moreover, large sellers are obliged to pay a monthly fee for membership. By now, you should get the idea; once you obtain a loan, Amazon cuts more off your sales, with automatic monthly pay-offs added. No matter how well you perform on the marketplace, you still have to pay the same fees. However, when dealing with Square Capital or Stripe Capital, for instance, you pay only a percentage from daily sales.
Nevertheless, when you make up your mind about taking the Amazon loan, your inventory becomes the collateral. And if you default, most likely, Amazon will claim your assets to close the debt. Adversely, Amazon may hold your inventory until you repay the debt or even sell out your items to cover it.
At any rate, even if you initiate sellout yourself, your sales will go directly to Amazon instead of your sales account.
Afterword
No doubt, Amazon Lending remains a unique lending option and very specific at the same time. Here, Amazon doesn’t take the market from other lenders; rather, it sets the scene for those who operate mostly or entirely on its marketplace.
Outside the Amazon marketplace, other lenders still have their piece of the pie. There, Amazon offering is not viable, and smaller lenders have enough opportunities to play on the same field with banks and even large alternative lenders.
