Amazon’s lending perpetuates the tech giant’s control over small businesses

Amazon continues to exercise its stranglehold over small businesses. The tech firm, which has plans in the works to offer financial services to its customers, has built a lending service for small businesses on its platform which only furthers the company’s command over its marketplace sellers. Loan restrictions Introduced in 2011, Amazon Lending has provided loans to small businesses selling on the Amazon Marketplace. However, these loans come with restrictions. The company’s lending program may have a simple and fast approval process,  but it is only available by invitation. This invitation-only model runs counter to traditional lending, where borrowers apply for funds directly from lenders. By doing so, Amazon skirts any process of having to sift through applications, while designing its own metrics of how to target potential borrowers. When Amazon finally offers a loan, its terms can be restrictive. The borrower can use her loan to purchase or restock inventory being sold on the site. This creates a compounding benefit to Amazon, as sellers who obtain capital are able to purchase more inventory to sell on the marketplace, which in turn generates more revenue for Amazon. Eli Coen, chief Amazon officer at consulting firm EliCommerce, sees how such restrictions often make it harder for sellers to generate revenue from other platforms. “With Amazon’s Lending program, sellers have a lot less freedom to sell products through other sales channels and retailers,” said Coen. New borrowers can also be targeted with poor lending terms. “Some Amazon sellers that received refinancing offers complained that the new loans came with less favorable terms and rates,” said Amad Ebrahimi, CEO, and Founder of Merchant Maverick. “While some first-time borrowers say they were only given terms up to six months for their loans, borrowers who have received multiple loans reported that additional term options of nine and twelve months were made available after paying off the initial loan.” Data control With access to detailed information and data on each seller, Amazon is able to mitigate lending risk substantially. Seller metrics only available to Amazon are utilized to determine a small business’s creditworthiness. Sales history, product offerings, customer service feedback, and shipping metrics enable Amazon's lending business to have better insight into how to accurately issue loans. This allows Amazon to have an understanding of the health of each small business on its seller marketplace. Yet, Amazon has been under scrutiny for the control it exerts over its sellers, requesting detailed information about products and their performance on the site without providing sellers any useful data in return. Amazon employees in India came under investigation for leaking sales and search information to sellers on the platform. These controls allow Amazon to achieve a palpable lending advantage over its competitors, but could potentially result in a backlash against the company by its own marketplace sellers. Sellers feeling the heat Amazon wields a mighty hammer of control over its marketplace, leaving many sellers on the platform to do everything they can to keep the company happy. After recent partnerships with Apple and Nike to sell directly on Amazon, many small business sellers are left wondering if their days are numbered selling on the site. One footwear seller wishing to remain anonymous noted how Amazon booted them from the platform for no particular reason. “We felt they kicked us off the platform for no reason whatsoever, and it seemed we had little recourse,” he said. This led to an arbitration case between the seller and the tech giant, which was eventually dropped. The same seller obtained multiple loans with Amazon Lending, hoping that borrowing from the company would keep them on good footing. “We figured it would ingratiate us with Amazon,” the seller said. “Amazon would be less likely to kick us off the platform because we owed them money.” A growing program? Amazon runs a marketplace with 2.5 million sellers, 24,000 of which had more than $1 million in sales on the platform in 2018. These sellers represent the potential customer base for the company’s lending model. From this base of borrowers, Amazon has been able to reportedly lend over $1 billion in 2017, exceeding  $3 billion in total lending volume from its inception in 2011 to 2017. As for 2018, in its annual report, the company reported receivables outstanding from their lending program of $710 million, up from $692 million a year prior. Last summer the company expanded its lending program to sellers based in India. Amazon also appears to have the wheels in motion to begin small business lending in China in the coming years. To expand its lending, the company developed a partnership with Bank of America to provide loans to merchants, while reducing its own risk exposure. With name brand partnerships, Amazon seems to be changing its business model on its seller marketplace. As more brands sell directly on the site, small businesses are cut out as a result. If the number of small business sellers on Amazon starts to dwindle, so will the potential borrowers for its lending program. This begs the question of how Amazon plans to expand its lending outside the scope of its marketplace and attract other business borrowers to its growing lending program.