Many small businesses hungry for capital during economic downturns turn to merchant cash advance operators who lend money based on future earnings, and during the pandemic many entrepreneurs got burned.
Amazon's entry into the market, through a partnership with the San Francisco-based fintech Parafin, could help restore trust and legitimacy to this category of lending.
Federal and state law enforcement agencies this year
"Some of the cons of merchant cash advance have been that they're too expensive when compared to other kinds of loans and that contract terms are very confusing," said Laurie McCabe, co-founder and partner with Boston-based SMB Group, which advises small businesses. She noted that Amazon aims to provide more upfront transparency into costs while keeping repayments fixed at a percentage of revenues from sales even during periods of slow or no sales. Amazon already offers sellers a range of traditional loans.
Amazon's cash advance program — offering loans ranging from $500 up to $10 million — takes repayments as a portion of sellers' future sales for a fixed capital fee, with no minimum payments and no credit checks, Amazon said in a press release.
Unlike merchant cash advance providers that have drawn fire from law enforcement, Amazon's version of these loans do not require a personal guarantee of collateral, and borrowers are only required to repay loans during periods when a seller has made sales, the release said.
"Amazon is committed to providing convenient and flexible access to capital for our sellers, regardless of their size," said Tai Koottatep, director and general manager of Amazon's WW B2B payments and lending, in the release.
Industry observers say such cash advances can be lucrative because of the high risks of providing funding with no guarantee of repayment.
Through Parafin, Amazon sets a fixed capital fee when sellers receive a cash advance which is combined into a single receivable. It's calculated by multiplying the amount of the advance by a factor rate that varies by the cash offer's size, duration and seller's business sales performance. Factor rates are 1.05-1.13.
Amazon sellers pay the total advance amount, including fees, at payment rates ranging from 1% to 15% biweekly, based on sales performance.
The partnership stands a good chance of succeeding because through Amazon, Parafin will have insight into Amazon.com sellers' history to gauge how much money to safely advance, observers said.
Amazon's entrance into merchant cash advance could be a welcome development for cash-strapped proprietors heading into recession conditions with limited borrowing options, said Eric Benzenberg, senior associate attorney with The Basile Law Firm of Jericho, N.Y., which has handled many lawsuits for small businesses suing merchant cash advance operators.
"After the 2008 downturn and during the pandemic, we saw a lot of small businesses that couldn't get financing elsewhere turn to merchant cash advance providers with misleading contracts causing them to lose a lot of money," Benzenberg said.
The worst examples were merchant cash advance providers who required a fixed repayment amount even when borrowers made no sales, he said.
"In the last couple of years, the Federal Trade Commission and the states are policing merchant cash advance operators more closely — but demand for these services are still high, which means there's opportunity for a variety of players to get into this and play by clearer rules," Benzenberg said.
Other fintechs that use merchants' online sales data to extend funds are also stepping up services. Last month, Amsterdam-based
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