This is the latest installment of the Amazon Briefing, a weekly Modern Retail column about the ever-changing Amazon ecosystem. To receive it in your inbox every week, sign up here.
Amazon is expanding a new cash advance service for sellers next year, part of a growing crop of short-term financial services catering to e-commerce businesses amid a drop in venture spending.
Starting in early 2023, hundreds of thousands Amazon sellers can receive between $500 to $10 million to help cover short-term costs, like inventory. The service, launched in partnership with Parafin and rolled out in a pilot this fall, doesn’t require minimum payments. Instead, the seller makes biweekly payments of 1% to 15% of their sales that period, plus a fixed fee.
The move comes as venture financing for startups gets harder to come by. Investment sector analysts at CB Insights found that global venture funding in the third quarter dropped to $74.5 billion, a nine-quarter low and a 34% drop from the previous quarter. Overall activity is also down from the flurry of pandemic-era: the number of deals hit 7,936, the lowest level since 2020.
Laurie McCabe of SMB Group, a consulting firm for small-to-medium businesses, described the Amazon funding program as an alternative to other cash advance services, which might have a variable rate or not disclose it upfront. She also said the Amazon model may be favorable to sellers as it doesn’t require payments for periods where there aren’t any sales.
“It’s another option for these businesses to access capital, and help manage their cash flow,” McCabe said.
For Amazon, the Parafin service represents a move into the bustling financial service industry, which is quickly filling up with new options. Shopify has a merchant cash advance (or MCA) program that recoups a percent of daily sales until the amount is paid in full, plus a remittance rate. Ampla recently announced its “Ampla Pay Later” service, while seven-year-old investment firm Clearco is seeing all-time highs in advances.
“There are more products coming from companies in the fintech space,” McCabe said. “It’s just getting to be more crowded place.”
Arash Farin, managing director at investment bank The Sage Group, said an MCA might be suitable for Amazon sellers looking to front short-term costs like bulking up inventory ahead of the holidays.
“In typical Amazon fashion, they’re adding another arrow to the quiver to make it more exciting and easier to be on their platform,” he said.
The launch comes at a time when seller growth on the Amazon marketplace as slowed. Aggregators aren’t all scooping up Amazon sellers like they used to, while others seek to go into different e-commerce platforms. This potentially takes away another avenue for cash infusions, meaning sellers may feel forced to seek out alternative options — especially ones being pushed by Amazon itself.
Alternative financing structures like merchant cash advances are becoming more popular, Farin said, because it can help an e-commerce business scale at a time when it may not be able to raise venture capital at large valuations. Yet the business must ensure it can generate consistent profits before heading down nontraditional roads, Farin said.
“If things go south, if the consumer doesn’t spend as much as they have in the past, if we’re in a full-blown recession, if you’re not able to generate profitability, you’re going to have a big problem,” Farin said. “You really have to have a sustainable business model, before you take on significant amounts of debt.”
More financing options
Amazon is far from alone in getting into the advance space. Ampla Technologies in November acquired Upside Financing and launched “Ampla Pay Later.” It’s part of a suite of banking tools from the company, which also includes lines of credit.
The service will operate as a “b2b buy now, pay later” service to cover vendor payments, per Ampla’s press release. Payment terms range from 30 to 120 days with a flat, fixed repayment rate to be paid back on top of the principal.
Ampla’s Mike Grillo told Modern Retail the Ampla Pay Later product is a suitable alternative to venture capital because it provides a short-term cover for costs like inventory, rather than overhead. It’s also an alternative to traditional loans that might be more difficult to access in an inflationary environment.
“You get a brand that might have been actually able to secure a line from a JP Morgan at a really competitive rate,” Grillo said. “That threshold has just gotten a little bit further out of reach for them. We can tolerate more risk because we’re not a big bank.”
Still, whether a company can access more favorable terms from traditional banks than from alternative financing startups is a case-by-case comparison. McCabe from SMB said that cash advances may not be the right fit for all business, especially if they become more expensive based on how the repayment terms are set up. In the case of the Amazon and Shopify cash advance services, the repayment rate is dependent upon the business’s individual risk profile.
“It’s definitely a space where buyers have to do their due diligence,” she said. “Across the board, you want to read the fine print.”
An emphasis on speed
Amazon’s launch also comes at a time when it’s generally become more cash-intensive to run an Amazon business. Not only are costs of energy and some raw materials rising, but supply chain developments like inventory limits may affect how a brand can restock. In turn, more businesses may seek a quick cash infusion.
Clearco, an e-commerce investor that’s provided cash advance capital to business since 2015, has doled out more than $5 billion in advances to more than 10,000 companies. And popularity is increasing, with a 62% increase in the number of advances authorized from Clearco in the first half of 2022 compared to the year before. Advances are also up in size by 47%.
The advance can range from $10,000 all the way up to $10 million, and are secured with an online application. Approvals tend to go toward founders with more than $10,000 in monthly revenue and have been in business for at least six months.
CEO Michele Romanow said the products appeal founders in part because it’s much faster than traditional banking, or going through a pitch process.
“People are blown away that we can deploy literally millions of dollars in days,” she said. “That that never happens in a conventional fundraising process, you can never get access to capital, that quickly.”
She also said that advance products are an attractive alternative for founders who may not be in the same networks as venture capitalists. As a result, the structure allows more diversity and inclusion among recipients as anyone can access it, Romanow said.
For example, half of Clearco’s portfolio includes female-founded companies. “Because we use just data to make our decisions, our portfolio looks so much different than the average VC portfolio,” she said.
And as new players like Amazon get into alternative financing methods, Romano anticipates that demand for the product will continue. will continue.
“There’s very little funding available. Banks are not lending the same way. Interest rates are higher. We’re one of the few alternatives in the market,” Romanow said.
This holiday season is more turbulent than in years past. And Amazon sellers say the sales results aren’t as big as expected. Some of this had to do with the economy, along with an ad platform tech glitch.
Amazon is adamant about keeping expenses down as it gets ready for economic volatility, as the company anticipates that growth will not come easy. This is a significant shift for a business that valued itself on innovation and not being afraid to do things that fail. It also ushers in a period in which returns on investment will be more carefully reviewed, leaving considerably less space for error in execution.
Amid declining sales, Gap has struck a distribution deal with Amazon to boost its e-commerce growth. The company last week announced that it will offer a selection of its collection including hoodies, t-shirts and denims online in partnership with Amazon Fashion.
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