Amazon's FBA (Fulfillment by Amazon) services are an effective way to streamline much of the heavy lifting required to operate a successful online retail business. In fact, 86% of third-party Amazon sellers prefer FBA over handling their own logistics and fulfillment. In exchange for outsourcing your inventory and shipping processes comes a host of Amazon FBA cash flow issues.
As access to cash is essentially held hostage every two weeks, Amazon sellers cannot operate at the real-time speeds eCommerce demands. This can be a significant risk to your business unless you have enough diverse revenue streams and eCommerce seller financing sources to cover the turbulent periods.
To make the most of FBA, you need to leverage the time and resources it saves to overcome its drawbacks in the form of more complex cash-management demands. Read on to learn more about Amazon FBA cash flow challenges and how more flexible financing solutions can help you meet and exceed these limitations for maximum advantage and minimum drawback.
Amazon FBA, Cash Flow, and eCommerce Seller Financing
Before we take a deep dive into the impact Amazon FBA cash flow can have on your business, it's essential to understand what it is and how it works.
What Is Amazon FBA?
When businesses sell via Amazon, they choose between two distribution methods: Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM).
With FBA, sellers ship their products in bulk directly to Amazon warehouses for storage. When a customer makes a purchase, Amazon handles shipping and related customer service. Customers can also take advantage of their Amazon Prime benefits, which is a big draw for many sellers. As a result, Amazon takes on all risks, assuming full responsibility for delivery and logistics issues. Likewise, the risks for sellers are reduced.
As a result, the following supply chain links are facilitated for a fee on the seller's behalf:
- Inventory
- Transportation
- Logistics
- Customer service
By almost wholly reducing one's involvement in these factors, sellers can optimize efficiency and focus on other aspects of their business.
With FBM, the online seller stores their inventory, ships products directly to customers, and provides customer service. This is much more labor intensive, and the merchant must heed strict standards to remain in good standing. However, the seller maintains complete control over inventory management, carrier selection, and shipping methods.
FBA is by far the more popular method. Today, approximately 73% of Amazon sellers use Fulfillment by Amazon services in some capacity to fuel their stores. While some sellers use a range of distribution and fulfillment options, many use FBA exclusively.
What Is Cash Flow?
Cash flow is a critical financial metric for any business. The Harvard Business School defines it as "the net balance of cash moving into and out of business at a specific time." This metric is critical for measuring the health of any business, and in eCommerce, it can shift on a dime.
Since businesses receive and spend money, cash flow can be positive or negative. Positive cash flow means more money comes into the business than leaves it, primarily by selling products and services or securing other financing resources. Negative cash flow signals that the company is expending more than it's taking in as it pays bills, makes payroll, purchases inventory, invests in new equipment, and meets other operating expenses.
Related: Financing Options for Amazon Sellers
Maintaining positive cash flow as often as possible is essential. However, negative cash flow doesn't mean a company is losing money in the long run or having financial problems. Nor do positive cash flow spikes always imply healthy profits. Nevertheless, thorough cash flow management is something all eCommerce SMB owners should keep at the top of their list when reviewing their financials.
To do so, eCommerce managers must keep accurate cash flow statements to reflect the business's cash movements within a specific timeframe. Automating this as much as possible is important, and it's essential to help your business overcome Amazon FBA cash flow issues.
Steadying Amazon's Inconsistencies
It's no secret that Amazon increasingly interferes with the ability of third-party sellers to operate, facing increasing antitrust scrutiny as a result. For now, seller dependency on Amazon fulfillment services subjects merchants to continually shifting business practices that are not under the merchant's control.
Still, many merchants take these conditions as one of the veritable costs of doing business in exchange for a reduction in other operating expenses. As it increasingly cuts into merchants' ROIs, many FBA merchants must contend with thinner margins (typically after they've invested considerable time and resources into it). The reasons for this are multi-faceted and perpetually in flux, which makes it hard for online retailers to plan.
Here are just some of the commonly reported issues that create Amazon FBA cash flow issues for sellers:
- Inventory storage limits
- Changing inventory limits
- General FBA rules that shift unexpectedly
- Being forced into continually securing new products (Amazon has a habit of copying and undercutting successful third-party sellers – and they have full access to FBA merchants' sales history and performance indicators)
- Amazon buying out vendor supplies before sellers can restock
- Significant delays between sales and payment receipts
The last two issues are mutual in that Amazon has control of a significant portion of FBA merchants' funds and the ability to purchase the inventory merchants rely on before most sellers can afford to do so. This makes FBA-specific financing solutions advantageous, as we'll discover later.
Of course, both Amazon and their third-party merchants are continually weighing these pressures against the fewer, albeit impactful, benefits of enduring the above difficulties, like having:
- Higher brand visibility
- Access to Amazon's immense market base
- The ability to leverage Amazon features, such as ultra-fast shipping and Prime deals
- Much less day-to-day involvement in your business operations
So, what effects do these factors have on sellers, and what are the most strategic financing methods for making the most of Amazon FBA services?
How Cash Flow Affects Your Amazon Seller Business
As a critical indicator of the health of your merchant account, it's no surprise that cash flow can significantly impact performance. A lack of funds presents significant challenges for maintaining inventory, investing in growth initiatives and new resources, and making regular payments.
Poor cash management can cause headaches and unwelcome surprises, halting growth and resulting in an unprofessional image if left unchecked. Amazon FBA cash flow issues can jeopardize your performance, including being de-platformed (or at least losing visibility amongst the competition).
Problems Paying Staff
Even before you have the luxury of focusing on your brand's market reputation, meeting payroll is essential to keeping your staff's morale high – and without consistently positive cash flow, doing so detracts from vital growth opportunities.
Payroll challenges could even press you into taking on unanticipated debts, such as merchant cash advances with notoriously one-sided terms. You're then treading water, scrambling to get your entire operation out of the red. You'll likely become habitually frustrated and less optimistic, which could easily cost you your most talented employees and strain vendor relationships. From there, it's a slippery slope to losing ground within Amazon's third-party seller ranking system or even losing your business.
Unexpected Cash Troubles
If you're a new FBA seller, you may still be learning the ropes regarding managing finances around their two-week delays in obtaining access to your earnings. Cash flow issues can also spring up out of the blue if you're not tracking your finances skillfully.
Whether it comes from unexpected expenses, a sudden loss of revenue streams, or simply volatile market conditions that make business loans hard to get, cash flow is one of the most common issues small businesses experience. In fact, 82% of businesses fail because of problems with cash flow. When you can't get the upfront cash to continue business, those operations grind to a halt.
Inability to Purchase More Inventory
Without adequate cash flow, you can't purchase the necessary inventory without going into debt, initiating a negative trend of cutting profits before you even earn them. Soliciting credit urgently and from a place of desperation inevitably results in unfavorable terms – and even if you simply accept slim margins instead, you'll lack the ability to:
- Access critical inventory during high-volume sales periods
- Take advantage of deals requiring bulk inventory purchases
- Expand your product selection
- Establish new vendor relationships
Inventory Issues Impact Sales
Sold out products can interrupt your ability to sell on Amazon and reduce customer confidence in your brand. It will also negatively impact your Amazon keyword ranking, which sellers often must cultivate for years. You'll then lose out on customer reviews, and previously loyal customers will begin purchasing from someone else – requiring significant marketing resources you don't have to regain their favor or replace them with new customers.
Less Money for Lead Generation
Marketing is essential, especially for Amazon businesses. You need to engage in a lot of marketing through Amazon's on-platform tools, including their discount options, promotions, and sponsored placements. But you also need funds for off-platform marketing: Google ads, influencers, content marketing, etc. You may even be paying a professional service to create your product descriptions and images that you use on the platform.
Related: Beyond the Alternatives: How Onramp Compares to Amazon Lending
But when you don't have the money to generate leads, it becomes much harder to secure sales. Low marketing funds can even be the start of the continuous cycle of limited marketing leading to low sales leading to even less marketing, and so on.
Impact on Regular Business Operations
Research and innovation are crucial for consistently staying on top of your market niche – but during a cash crunch, these become "extras" that are usually the first to go when margins tighten. It creates a Catch-22 where getting back on top requires loosening up funds to expand just when you are contracting.
Amazon FBA cash flow issues can motivate you to slash many first-line items that, if you could hold on, would help your business grow. Factors necessary for long- or even medium-term growth suddenly become non-essential when the short-term gain is threatened.
Putting Personal Finances at Risk
When you have a small business, the line between personal and business funds can be blurred. 78% of startup businesses rely exclusively on their own personal funds to get started, and even more might use funds from family and friends to try and grow. Considering the notoriously bad lending options from legacy institutions, the temptation to dip into your personal finances is understandable – but it needlessly jeopardizes your family's financial security. Should your business fail to right its course, family estate issues will divert focus away from your business when it needs it most.
High-interest, one-size-fits-all personal loans are too expensive for long-term sustainability, and they aren't made with the immediate cash flow shifts inherent to eCommerce in mind. The solution requires more advanced and modern lending strategies that correlate cash advances with real-time sales – something only possible with the automated financial reporting techniques of eCommerce.
Since eCommerce has spurred much of the finely honed, data-intensive financial strategies now widespread for businesses in general, it's only natural that these same advantages be fully leveraged for superior cash flow management among the independent online retail community. Fortunately, doing so with better eCommerce seller financing options has never been easier.
Financing for Amazon FBA Cash Flow Issues
If you're feeling a cash crunch due to your reliance on FBA and its ingrained cash-access delays, you will best serve your multifaceted needs by securing a financing arrangement that works with you, not against you. Without being dependent on central financial institutions, online merchants everywhere are maintaining their competitive edge by turning to private eCommerce lending strategies explicitly built for eCommerce business models and the most urgent needs of online sellers.
This industry-specific financing solution is an efficient and modern way to access the cash needed to function fluidly during the delays between FBA purchases and the distribution of profits. Unlike a traditional bank loan, private financing options send funds directly to your account, with repayment terms associated precisely with your actual sales performance.
This is now possible thanks to plug-and-play fintech systems that allow your financier to correlate funds allocation directly with your Amazon (or any eCommerce) account's real-time sales. This is radically distinct from traditional lenders, such as credit card companies and centralized banking institutions, because eCommerce cash advances don't require monthly payments or charge late fees. Instead, they automatically draw when the online seller makes a sale.
Using Amazon Financing
Amazon recognizes that cash flow is a major hurdle for its sellers. Without access to upfront funds for marketing, buying inventory, and paying for various administrative services, companies must either grow slowly through allocated profits or pass up growth opportunities.
Through Amazon FBA financing, however, Amazon can offer merchant advances to successful and promising stores. Eligible sellers will receive a lump sum offer, along with various terms and conditions on the use and repayment of the money, and sellers can either accept or decline. Some of the potential drawbacks of using Amazon advances as your go-to financing option include:
- An intermittent, mysterious approval process: Getting approved, let alone getting the amount you want, is a pretty opaque process. Sellers simply receive offers.
- Restricted utility: Amazon financing can only go toward on-platform purchases. Sellers can fund FBA expenses, market on the platform, and fund exchanges or return shipping. If you want to market off-site or spend on brand awareness campaigns, Amazon funds won't help.
- High repayment fees: Amazon offers different lending repayment options, including monthly interest (which may or may not go only toward the interest portion), fixed capital fees that can be approximately 9% of each sale, or more typical fixed interest rate payments.
Use Third-Party Financing Options That Evaluate All Your Stores' Potential
While Amazon funding can be a helpful option to have on hand, today's sellers often need a far more flexible alternative. Many successful eCommerce stores use a multitude of marketplaces and storefronts—Amazon, Walmart, Shopify, etc.—to make the business more stable and diversify their revenue streams. Having platform-specific financing won't help your business grow across all these distinct platforms.
Merchant advance financing and growth capital through third-party sources can be a much more flexible option because:
- You can use the funds for off-platform advertising and brand awareness campaigns instead of staying on one platform.
- Third-party options can evaluate all of your stores when determining your lump sum amount. Amazon can only look at your Amazon sales value and growth potential, but other providers can assess your activity across all channels and give you a much bigger sum that reflects your total success.
- You set the timeline for eCommerce seller financing: By working with a third party, you can determine when you request funding, and even when you ask for more. Many platform-specific financing options give offers seemingly at random, which doesn't align with your marketing, planning, or spending needs.
Securing a Better Way
Cash flow will remain a constant challenge for your growing Amazon business—in fact, it's a challenge for every business, whether they're thriving and want to grow faster or they're struggling to make sales.
At Onramp, we provide flexible growth capital that allows you to grow your marketing campaigns, pay monthly expenditures, or buy inventory ahead of the busy season. We leave the decision of what to buy in your hands because you know what's best for your business. We only make money when you make money and when repayment won't jeopardize your cash flow. Schedule a call today to start securing funds for your eCommerce store.
