What Amazon’s New Merchant Cash Advance Program is Going to Cost You

Amazon US recently announced its new financing program to help their online sellers expand their businesses. (Or so they say). 🤔

The sales-based merchant cash advance program offers eligible Amazon sellers access to capital—from $500 to $10 million-–that they can use for:

• Business-related activities
• Marketing and promotions
• Product research and development
• Recruitment
• Payroll
• Procurement 

The program is being offered in partnership with Parafin, a US-based capital financing provider that enables marketplaces and platforms to extend capital to their sellers. 

According to Amazon, sellers with approved cash advances only need to pay Parafin a fixed capital fee: there are no interest charges or late payment fees.

As this is a sales-based funding program, the payment for the cash advance is tied to a part of the seller’s future sales. They will also enjoy a flexible repayment schedule that is pre-arranged according to a forecast of the sellers’ Gross Merchandise Sales (GMS).

Unlike other loans, this program does not involve credit checks, tedious paperwork, minimum payments, and personal collateral and guarantees. 

Currently, this program is available to those who have been selling on Amazon’s online store for a minimum of three months. The e-commerce giant is targeting to make this program accessible to more than a hundred thousand Amazon sellers by 2023.

The Catch With Merchant Cash Advance

Any seasoned Amazon seller knows that every time the company launches something new that sounds too good to be true, 99.9% of the time, it really is.

⚠️ Amazon and Parafin’s merchant cash advance program is no different.

A closer inspection of the details of this program revealed what we suspected: Amazon is not necessarily offering this program purely out of goodwill, but because they are also getting something out of it.

Parafin’s website clearly states that companies and platforms that choose to partner with them can earn additional revenue by getting a portion of every successful capital advance.

But the real question on many sellers’ minds is this: given that nothing is free in this world (and certainly not in the world of Amazon), what are the real, hidden costs of getting approved for this cash advance?

A couple of sellers pointed out a screenshot on Parafin’s website that shows a 12% repayment rate calculated against the seller’s daily sales.

Another seller awaiting his cash advance approval shared that, while the program is positioned as a “no interest” funding solution, repaying the advance within one year is equivalent to paying a high-interest charge, adding that it goes higher the sooner a seller pays for the advance in full.

One thing sellers should remember: merchant cash advance is not the same as a loan.

The amount of the cash advance is determined by the cash flow and volume of sales of the business and not by the credit score of the merchant. The payment for a merchant cash advance can also be taken against the future sales of the business. This helps explain why Amazon and Parafin’s program is marketed as a “no interest” financing solution, as merchant cash advances, by their nature, do not come with interest. 

Instead, they use a flat capital fee, so, holding the money longer means you are paying less for that borrowed money. The faster you pay it off, the more that money technically costs you when stacked up with a traditional loan with interest rates. With traditional loans, you are able to reduce the total interest paid by paying the loan off early. With flat capital fees, you have no incentive for early repayment, yet, with this program, you’ll be locked into just that with this if you do better in your business. 

Now, this may work out better for some sellers who take out loans with monthly payments that are much larger than what the repayment structure of this loan would be, or sellers who see their sales volume drop within the life of the loan who would have gone out of business if they had to make such large monthly payments. But those business owners should use great caution as any loan taken out puts them in a precarious position as the business itself needs more stability and a loan could worsen the risk.

For sellers who wish to proceed in applying for this program, make sure you count the cost before accepting the offer.

Consider evaluating whether the fixed capital fee is a fair amount in your best-case scenario and if you’ll be able to sustain your business against it in a worst-case scenario. Then make the decision that is best for you and your business according to your profit and cash flow goals and risk tolerance.

Get To Know Parafin First

Amazon sellers who are considering applying for this program may want to investigate further before filling up the online application form. After all, responsible borrowers take the time to scrutinize their lenders, and eligible sellers should do the same too.

As a fintech startup (Parafin was founded only in 2020), the company still has a lot to prove in terms of its sustainability.

Despite its young age, however, the company has had significant success in terms of raising funds for its cause, which is to help platforms, marketplaces and vertical SaaS providers, among others, offer embedded financial services to their sellers and to small businesses.

Last August, Parafin was able to raise $60 million during its Series B financing round, which drew participation from former and new investors.

Financing Options for Amazon Sellers

Now, if you think a merchant cash advance is not for you—and taking out a business loan is also off the table—don’t worry!

There are many types of alternative funding available to online sellers in particular. You may want to consider Amazon inventory financing or check out the other products under Amazon Lending. 

Of course, it’s worth emphasizing that just because you can borrow, doesn’t always mean you should and that every business should consider the pros and cons and analyze the best and the worst of what’s possible with any funds they borrow.

The right funding at the right time can mean huge things for your business so long as you are strategic about it and go in with your eyes wide open.