Is it time for you to grow or expand your inventory?
Every FBA seller who wants to scale up will reach this point, but one of the challenges they then face is how they are going to finance that inventory expansion.
For many, they’ll look to debt options in order to scale more quickly, but this can lead to levels of debt that are potentially crippling for the business, especially if interest rates are high. This is why it’s important to understand all potential options for financing first.
What should sellers know about inventory financing? We’ve got a few tips:
#1. Understand your stage
There will be different options open to you depending on the stage you are at with your business. This tends to be based on the relative risk to any external financiers. Generally speaking, we see three different stages that most FBA sellers will fall under:
The scaling, young business – When we say “young” we’re thinking of the up-and-coming business that has seen some success and is ready to expand. This often might mean going from a one-man-band operation to having team members.
Common challenges for people in this situation who want to grow might include that they don’t have systems or infrastructure set up yet to handle growth. FBA can easily scale the fulfillment side of the business, but what about all the parts you need to do? Things like customer service, supplier management and inventory management are all things that ramp up with a business expansion.
For businesses at this stage, it’s important to develop systems and processes which allow you to scale easily. It’s also important that you are carefully monitoring your profitability. This can help you to be a more attractive proposition for any external finance and generally open up a few more financing options.
The established, but struggling seller – This one largely speaks for itself and is, unfortunately, a common scenario. There may be factors such as competition that come into the situation, but more often it’s likely that the seller hasn’t been paying as close attention to those important sales and performance metrics as they should.
There are all sorts of factors that come into winning the buy box or improving best seller rank, for example, and it takes work to keep it up. Of course, having a good grasp over critical metrics on margins and profitability is also important, so if that’s not done well it can explain the struggle.
Potential pitfalls in financing may include being limited to higher interest debt options. A key is to close any debt you’ve used for inventory once you’ve sold your stock. When your loan debt “stacks” it can tie up your cash and prevent you from further investment in inventory.
The thriving established seller – This is the best position of all to be in, but it tends to take a few years to get there. Sellers in this group usually already have a fairly broad range of performing products and they definitely have the infrastructure in place to scale.
A pitfall at this stage can be losing track of inventory. When you’ve got so much on your plate, it can be difficult to monitor every change or understand which inventory has been sitting too long.
A bonus for established sellers is that they should have plenty of financing options, particularly if they can show a good plan and balance sheet.
Which type of seller are you? This is not to try and limit your options, but to help sellers understand that there will be pitfalls to look out for with each.
#2. Have a plan for allocating capital
It’s always a good idea to have clearly defined plans for allocating capital, but if you’re going to be looking for external financing, it will be compulsory (along with projections of sales and repaying any debt).
These are the sorts of questions your plan should answer:
- How much money do you need?
- Are you looking to expand into new product lines or invest more in current, performing products? (A bit of both is often a good idea).
- Will you need any financing for infrastructure or systems? (Such as hiring help or buying software).
Consider risk-related decisions on products, such as whether it has been trending upwards over time or whether it helps you to diversify your product range.
#3. Explore financing options
There are typically six types of funding that Amazon sellers choose from, personal savings, traditional business lending, credit cards, Amazon lending, vendor credit or online lending, although there are other possible ways to get financing too. Let’s briefly look at the six mentioned:
- Personal savings – Sellers who have the capital available in their own savings might choose to fund their inventory expansion that way. It’s quick and easy, although shouldn’t involve any less planning for funds allocation.
- Traditional business lending – By “traditional” we’re talking about bank loans or lines of credit. These tend to have stringent lending criteria attached so may only be available to experienced, thriving sellers, but shouldn’t be ruled out by others.
- Business or personal credit cards – Some sellers with credit available will use credit cards to finance their inventory. This tends to work out better for those who can pay them back quickly – that interest is a killer.
- Amazon lending – It’s not really surprising that Amazon has also extended into offering lending to small businesses. The catch here is that you can’t apply – you must wait to be offered, which is based upon what Amazon can see from your data. Only active sellers will be offered the opportunity and they tend to be short-term only.
- Vendor credit – If you’ve developed a good relationship and reputation with vendors you may be able to get a credit deal for inventory. These will usually involve credit terms which are for payment within 30, 60 or 90 days.
- Online lending – There have been a number of avenues pop up online for small business lending, with companies such as Lendvo or Lending Tree. They tend to have higher interest rates than a loan through a traditional bank.
- Daily Amazon payouts – Having Amazon hold your payments for two weeks inhibits growth. Payability gives you the option to receive next-day payouts, allowing you to turn inventory more frequently.
#4. Be aware of pros and cons of each option
Each option has its pros and cons and, depending on the stage your business is at, you may not have access to all options. We created a table below to compare some of the relative pros and cons of each:
#5. Track your true profitability
No matter what type of financing you use, the way to success in your Amazon business is to always be measuring, monitoring and improving on those vital metrics.
How profitable is each product line? Do the margins make sense? Are you monitoring cash flow and days of inventory? Staying on top of your numbers will help you to be proactive and make timely decisions.
Where you’ve financed, you also want to be ensuring that the cost of that finance isn’t taking too much from your profitability.
If you’re looking at how to finance an expansion of your FBA business, consider each possible option carefully, weighing up the pros and cons. You don’t want to become dragged down by high interest options that you can’t repay quickly enough to avoid impacting your profitability.
Once you have funding in place, repay any debt finance as quickly as possible to avoid “stacking” it.
Use careful planning for the allocation of funds and monitor your important metrics carefully. A finance injection can be a real turning point for your business.