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What is an Amazon FBA seller?
Amazon is the world’s largest marketplace for online shopping. In addition to providing customers with a great variety of products and reliable customer service, Amazon also has created opportunities for small business owners to benefit from their marketplace. While there are several ways to get Amazon involved in your business venture, in this article, we are exploring the ins and outs of fulfillment by Amazon (FBA).
Amazon FBA (Fulfillment by Amazon) selling allows entrepreneurs to start their own eCommerce business without having to coordinate order fulfillment. Amazon FBA sellers decide which products or services they want to sell. They then connect with a supplier and organize getting the products packaged and shipped to an Amazon warehouse. The inventory is stored by Amazon and shipped from there to buyers.
Advantages and disadvantages of an Amazon FBA business
Contrary to what you might see influencers saying on social media, there are both pros and cons to operating your own Amazon FBA business. Amazon marketplace sellers work in a unique corner of the industry where the bulk of their coordination and heavy lifting comes in spurts.
Advantages of Amazon FBA selling
Ecommerce businesses have become a lucrative option for startup entrepreneurs. Sellers may get started as a way to generate a full-time income with a business plan that includes rapid growth, or they may be individuals simply looking for some extra spending money. Whatever your goals are, there are many pros to becoming an Amazon FBA seller.
- No inventory storage required – With an Amazon FBA business, owners do not have to store any inventory in their homes, office, or leased space. This cuts costs in warehouse storage expenses and helps keep track of inventory in an organized fashion.
- No returns management – The customer support team at Amazon handles all customer service, so any returns, exchanges, and dissatisfied customers won’t create a disruption in your operations.
- Prime shipping – The Amazon Prime program works with Amazon FBA sellers and allows subscribing customers to get their merchandise for no shipping cost within two business days. Offering Amazon Prime shipping also attracts more customers.
- Multichannel fulfillment (MCF) – Amazon FBA sellers that also market and sell their products elsewhere, like their business’s website, are still able to use the Amazon fulfillment center to handle shipping.
Disadvantages of Amazon FBA selling
So far, starting a fulfillment by Amazon business seems appealing. However, when starting any new business journey, it’s important to do your research and consider the disadvantages along with the advantages.
- Inventory control – Keeping an accurate inventory count can be difficult with FBA, especially for entrepreneurs that use Amazon MCF to ship products purchased elsewhere. This creates a challenge for sellers to know when it’s time to send more products to the warehouse.
- Authenticity – In addition to never having a confirmed item count of inventory, FBA sellers also struggle to verify product authenticity. This is because if other FBA sellers are selling the same product from the same company, it gets mixed in with your inventory. There is a risk to your reputation if your company sends counterfeit merchandise, fulfilled by Amazon, to a customer.
- Costs – It’s not surprising that there are significant costs for the FBA service. The fees associated with the website’s visibility, storage, and shipping can make it difficult for a new business owner to generate a profit. The typical referral fee charged to sellers for each sale is around 15%. This fee is not charged upfront. Instead, it’s taken out of the Amazon account before profits are sent to your bank account. For inventory that is not sold within one year, long-term storage fees will be added to your ordinary storage fees. Fees are deducted monthly, so if your sales aren’t enough to cover the costs, Amazon will require a credit card payment.
- Complicated taxes – The sales tax collection guidelines are different in every state. Since Amazon has fulfillment centers in several different states, it is difficult to be sure you are charging customers and paying the Department of Revenue enough taxes.
How to get started as an Amazon FBA seller
If you’ve decided you are interested in selling products on an Amazon store, you’re probably wondering how to get started. Check out our step-by-step list of how to start earning an income on Amazon sales:
- Decide what products you want to sell – For help choosing your niche, consider reviewing the Amazon sales history of similar products through the Amazon Best Sellers Rank (BSR) tool or reviewing the sales metrics of other FBA startups.
- Source your products – Decide whether you’re going to sell custom-made products, buy from a wholesaler, or purchase items at other retail outlets and resell them.
- Create a brand name – Amazon FBA sellers are required to use a unique display name that does not include the word Amazon.
- Sign up – Visit Amazon.com to create a seller account and choose from a flat monthly fee, which starts at $39.99/mo. or per-item charge. You’ll also elect to participate in FBA services here.
- Ship inventory – After signing up for a seller’s account, you’ll get instructions on how to pack and ship your products to the Amazon warehouse.
- List your products – Create product descriptions that are accurate and attract shoppers through the use of keywords, which can be researched here. Be sure to include some high-quality photos of your product.
- Review your marketing strategy – Having your product listed on Amazon will generate sales, but many sellers also choose to market their brand via social media platforms and pay-per-click (PPC) ads.
Financing options for Amazon FBA sellers
The costs of starting an Amazon FBA business can be intimidating, but there are startup costs with every new business. If you’re interested in becoming an Amazon seller, you may want to consider one of the following types of Amazon seller financing programs or third-party lending options.
The Amazon lending programs are one-way many FBA sellers choose to fund their online businesses. Amazon seller loans are invite-only and available to small to medium businesses operating in the United States. To apply for an Amazon loan, the seller must have a pending loan offer when they log into their Amazon Seller Central platforms. To be invited, sellers must already have an active Seller Central account, be in good standing, pass Amazon’s credit checks, have a positive customer track record, and show a steady increase in sales. Once invited, borrowers can benefit from an easy online application and a fast approval process. Some borrowers are even eligible to participate in more than one type of Amazon lending program, like a term loan and a line of credit.
Amazon lending offers multiple financing solutions and has recently partnered with third-party financial institutions to offer even more business financing options, including:
- Amazon Lending Term loan – A traditional business loan where the borrower receives a lump sum upfront for the approved maximum credit limit and repays the loan with monthly payments. The minimum loan amount for this FBA small business loan is $1,000, with a maximum of $750,000. Repayment terms are typically one to three years and may include a prepayment penalty, so the monthly payment can be high. The loans can range between three months to one year with fixed monthly payments. Available to invited sellers through Amazon Lending or their partner, Lendistry, a minority-led Community Development Financial Institution (CDFI).
- Goldman Sachs line of credit – The business line of credit through Amazon is seller funding available through Marcus by Goldman Sachs for invited entrepreneurs. The line of credit is revolving credit, where the borrower is approved for a maximum credit limit and can then request funds to accommodate business needs. The interest rates are fixed and only accrue on the amount of funds the seller has withdrawn.
- Parafin Merchant Cash Advance – Amazon partners with Parafin, a small business financing provider, to offer a merchant cash advance (MCA) for sellers to receive an advance on future sales. Merchant Cash Advances have higher borrowing costs than other types of loans because they include an origination fee and a factor rate. The payments are typically calculated as a percentage of sales, so if the business is slow, payments will be low.
Business line of credit
Similar to the Amazon credit line, a business line of credit is a type of revolving credit available to borrowers at traditional lenders, like banks and credit unions, and through alternative lenders, like Biz2Credit. Lines of credit work like business credit cards, where borrowers are approved for a maximum credit limit that they can draw on anytime. When the balance is paid down, the funds become available for use again. There are many benefits for Amazon FBA sellers that choose to get a line of credit with a third-party lender (not affiliated with Amazon), including the option to choose between a secured line of credit and an unsecured line of credit. Secured lines of credit are a great loan option for startup entrepreneurs or business owners with less-than-perfect credit scores because they can secure the financing by providing a personal or business asset as collateral.
Business term loan
While Amazon Lending offers business loans to invited Amazon sellers, the short-term business loans and high interest rates deter some borrowers from starting the application process. The good news is that term loans are also available through third-party lenders and typically offer more affordable financing costs and longer repayment terms. A term loan is a traditional type of business loan where the approved borrower receives a lump sum payment upfront and then repays the loan according to a predetermined payment schedule. Term loans can be unsecured or secured, where they require the seller to pledge collateral or provide a personal guarantee. Term loans can be used for startup costs, inventory, marketing expenses, or to conserve monthly cash flow in the business’s early months.
Peer-to-peer (P2P) financing options for eCommerce stores are different than traditional business loan options because the provided capital comes from investors. The P2P financing process works when a small business owner reaches out to a P2P provider to facilitate investment offers. The funds provided by the investor are then paid back by the seller with monthly payments that include interest. Just like traditional bank loans, peer-to-peer financing comes with eligibility requirements that may include a good credit score, a significant amount of time in business, and a solid business plan.
Alternative lender financing
In addition to Amazon Lending and traditional small business loans, many online lenders, like Biz2Credit, offer working capital loans, like merchant cash advances, invoice financing, and invoice factoring. Other loan options at an alternative lender include SBA loans, Microloans, and equipment financing. For some new business owners that have not established any positive business credit history, they may also choose to work with a lender to secure a personal consumer loan. Personal loans can be used to get the business up and running and can always be refinanced in the business name later.
If you are considering becoming an FBA seller on the world’s largest marketplace of online shoppers, congratulations. Before getting started, be sure to weigh the pros and cons of an ecommerce business. Amazon sellers can open their stores after creating a seller account and sending products to the Amazon fulfillment center. The costs of starting an FBA business can be significant, but there are several funding options available, like an Amazon lending term loan or an eCommerce business loan with Biz2Credit. Reach out to a loan specialist today to learn about Amazon FBA seller financing or ask them to share the story of how they were able to secure funding for startup entrepreneur Maryam Zadeh