Amazon still isn’t a bank, and maybe doesn’t need to be. The financing options for companies that sell their goods on the ecommerce giant’s site just keep growing. The latest addition to sellers’ financing choices is a merchant cash advance program built on a new partnership between Amazon and Parafin, a fintech that offers financing to companies doing business on ecommerce platforms.
Third-party sellers represented 58% of sales on Amazon globally in the third quarter of 2022 — the highest level ever. The big tech has millions of sellers using its system to sell and deliver goods. Most are small and medium-sized businesses.
Technically merchant cash advances are not loans, but an advance on future sales that are paid back at an agreed-on speed. Payments happen as sales happen, in other words.
Parafin started in summer 2020 in response to the growing rate of small business formation during the pandemic, much of it online, according to Vineet Goel, Co-Founder. It obtains its capital for making merchant cash advances through equity financing and debt facilities with large banks. The relationship with Amazon is a partnership. Goel could not disclose the financial details of that partnership.
Where Amazon Merchant Advances Fit In
The new program joins other Amazon Lending programs listed on the company’s site, with most details contained in a portal available only to sellers. In the past, some financing has been available only by invitation. A key element of all of the programs is that Amazon and its lending partner have a degree of insight that other lenders don’t. In operating the sales platform, Amazon knows precisely how much and how frequently the third party seller is making sales.
Options already available include:
- Term loans for sellers from Amazon. These are non-revolving loans provided in a lump sum. Equal monthly principal and interest repayment is mandatory. Some of this is provided by Amazon alone. Some is offered in partnership with Lendistry, a minority-led community development financial institution, for financing small firms in socially and economically distressed communities.
- Interest-only loans. These are terms loans from Amazon that require only interest payment until an agreed-on date. After that, the loan must be amortized through equal payments of principal and interest.
- Business lines of credit. These have been provided by Marcus by Goldman Sachs. An Amazon spokesperson indicated that Goldman will be continuing its participation.
How Amazon/Parafin Merchant Cash Advances Will Work
The new merchant cash advance program carries a fixed capital fee and is not interest bearing. The program was to be rolled out starting in November 2022 and be offered to hundreds of thousands of firms by early 2023.
Amazon provided an illustration of the program using an advance of $10,000 as an example.
- The capital fee is the fee sellers pay to receive a cash advance through this program.
- The fee is combined with the seller’s advance amount into a single receivable. The total receivable is calculated by multiplying the amount of the advance (e.g. $10,000) by the “factor rate” (say 1.09%).
“This transparent, fixed fee is the only fee sellers will pay with this program,” according to Amazon, “and it will not change after a seller has accepted the advance. The factor rate varies by offer size, duration and business sales performance.”
The program is designed to accommodate trends in sales. If sales slow down, repayment slows down, at no additional cost to the merchant. Payments are intended to synch with sales. There is no fixed term, as there is in Amazon’s term-loan options, and no late fees.
One restriction: Merchants participating in the Amazon/Parafin program will not be able to tap other business credit until the merchant advance has been paid off.
To use the program, merchants must have been selling for three months. Amounts accessed via the program can range from $500 to $10 million.