

Amazon now loaning capital to sellers - kapilkale
http://www.amazonstrategies.com/2012/09/amazon-lending-amazon-starts-loaning-capital-to-sellers-to-help-them-scale.html

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malandrew
Amazon has more details on every seller than any bank could hope to have. They
know what products they sell, in what volume, they probably know the
approximate margins achievable on the products sold and they know the customer
service rating of each merchant. With this information, machine learning and
the number of merchants they have, they have more than enough to be able to
make really smart loan decisions. I bet you they can keep the default rate
much lower than any bank could achieve and they can better price their loans
interest-rate wise.

TBH many of the internet giants (or any company who has grown enough to have
enough of their own cash to manage) ends up adopting features of banks. They
get the benefits of banks (easy money) with less regulation. Paypal for
example promotes the holding of cash in Paypal accounts. Paypal isn't a bank,
but all that money from users is cash that they can "loan" to the federal
government and other AAA and AA rated companies in the form of bonds.

~~~
goodcanadian
Yes, this is not a new idea by any means. For example, GMAC:
<http://en.wikipedia.org/wiki/Ally_Financial#History>

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niggler
No that's the other side of the coin. GMAC helps consumers finance their
purchase.

The GMAC equivalent would be apple's credit card (with barclays) or an amazon
credit card to finance purchases.

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bravura
A colleague of mine commented that he would not sell volume through Amazon,
and instead creates his own ecommerce sites. Why? Because, he argued, Amazon
uses volume sellers to discover new products to sell, and then Amazon
undercuts large sellers after the sellers have done all the market validation.

I don't know if this is true or not, but if it is it's bloody brilliant.

So this seems like a great strategy to improve market discovery for Amazon.

~~~
sundae79
>So this seems like a great strategy to improve market discovery for Amazon.

I am guessing if walmart does something similar, it is not brilliant, but in
fact evil. I don't understand the enthusiasm for things like this if it is a
brand that we like.

Remember walmart tried to open its own bank, guess what happened?

~~~
dbaupp
I think that "great" should be interpreted as "great-for-Amazon".

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systemtrigger
"Amazon is lending up to $800,000 to some merchants...charging some sellers
interest rates of up to 13 percent, but some other merchants are being offered
rates as low as 1 percent..."

Source: [http://www.reuters.com/article/2012/09/27/amazon-lending-
idU...](http://www.reuters.com/article/2012/09/27/amazon-lending-
idUSL1E8KRA1020120927?type=marketsNews)

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cs702
I suspect these Amazon loans are _secured, with inventory as the collateral_ ,
which in plain English means that if the borrower defaults, the lender
(Amazon) can take the inventory and sell it to payoff the outstanding balance
of the loan.

If I'm right, given that Amazon manages fulfillment for many third-party
sellers (meaning that their inventory is already stored in Amazon
warehouses[1]), these new Amazon loans appear to be virtually no-risk.

Brilliant.

\--

[1] [http://www.amazonservices.com/fulfillment-by-
amazon/benefits...](http://www.amazonservices.com/fulfillment-by-
amazon/benefits.htm)

~~~
ippisl
And this gives the incentive for sellers who don't use amazon's warehouses
incentive to use them.

Really , when you think about that ,classically sellers/wholesellers have the
following roles:

1\. Finding people/stores willing to buy stuff

2\. Financing of buying stuff from many manufacturers(until getting paid)

3\. Storing said stuff

4\. Distributing said stuff to stores, online stores and users

5\. Prediciting demand

6\. Marketing to users/stores.

It seems that amazon is attacking/replacing all those roles, and probably
doing a better job. The end game seems simple: To skip the sellers(for
products sold online), and deal directly with manufacturers(like their doing
with ebooks).

It's not unique to them, walmart already did it. But amazon sells almost
everything.

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kunle
Huge. Period. If you didnt already do volume on Amazon, now you will try.
Looking back at the start of AWS a few years back, i shudder to think what
this does for small businesses nationwide 5 - 10 years from now. Amazon's
underwriting the internet with AWS, underwriting small ecommerce cos with its
seller programs, and now underwriting the financing side with this lending
program.

Wonder what their protections are/how they will deal with defaults?

~~~
softbuilder
I take a completely different view. If these sellers are only lacking capital
in order to see growth, wouldn't they be getting it from others by now, even
in a tight lending market? I look at the wording: "pre-qualified for a loan up
to <XXX see below>" and then "If approved, the funds will be advanced" and it
reads just like every junk mail credit application ever. You are "pre-
qualified" because you made it onto the suckers list, and you'll be approved
if you're gold plated. Here comes the internet lending bubble?

~~~
quaunaut
Thing is, Amazon is in a different game than your normal lending agency.
Proper lending agencies make their money from the interest, and thusly, they
have a desire to make your interest higher. Amazon on the other hand makes
money from direct sales- they might have interest there to discourage people
from borrowing without reason, but they can also chance it at a lower rate
because of the possibility of making more money via real sales.

~~~
InclinedPlane
It's more than that actually.

Let's say that Amazon lends money to a high volume seller. And we know that
Amazon is going to take a cut of sales. But, let's say, hypothetically, that
all of this is a wash, in the end it ends up netting Amazon zero direct
profit. Has Amazon lost money on this effort then?

Consider the indirect benefits to Amazon. By increasing the amount of business
flowing through the site they further cement their brand and they increase the
network effect of using the site. They bring more customers to the table who
then become repeat customers due to a good experience on the site. Or they
bring additional business as people buy related or unrelated merchandise on
the site, perhaps in the same order. And they increase the potential customer
base for buying Amazon gift certs. All of these things tie together and help
bring Amazon more business.

Now, in reality Amazon is going to make sure it makes money on these loans and
on direct sales as well, but it doesn't have to make a very high margin on
such things because of the indirect effects I mentioned which provide
additional margin.

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patio11
Google has a similar thing for middling successful AdWords advertisers
(including me): they've got a deal with a bank for a subsidized AdWords credit
card. 8% interest, credit limit is your yearly AdWords spending, works only on
AdWords.

I was thinking they could go one step further beyond just peeking at my
AdWords data and conclude my Internet footprint justifies a $500k limit at 4%.
(I.e. Now they're underwriting) And one step further than that would be "Make
sure you pay your bill on time, because we wouldn't want anything to happen to
those rankings." That strikes me as unGoogley but you never know.

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adrinavarro
Hm. I really don't know the specifics of this move or its market, but: I
believe there are two ways for amazon of getting a benefit out of this, in
some way.

The first one is setting a reasonable interest rate (13% in this case) and
make a benefit out of it (they have spare cash, and a very good interest rate,
plus a fairly secure investment).

The second one is actually investing at a lower rate (how about 5%) in their
mid-sized, strong sellers, to create some growth (long-term) and increase
amazon revenue (as I said, that's thinking long-term and sometimes loans won't
be administered properly). Amazon can probably estimate the risk of each
seller (they have a lot of information about their sellers' sales and
additional information about almost everything else too!), so that would be
clever for them.

It sort of surprises me that amazon is putting such an interest rate, as the
only benefit I can see this way (instead of other ways of getting a
traditional loan) are probably 'amazon benefits' (if any), as it might be
faster / more flexible / less painful than a different kind of capital loan.
And for Amazon, it's more of a way to get some easy money out of a pile of
cash (which I presume they have), and not another creative way to keep
strengthening their business.

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OldSchool
Cant' blame Amazon for taking advantage of an opportunity to lend money at 13%
but I question the need for anyone with a truly self-sustaining business to
borrow funds at such a high rate. If your margins are low and you need the
capital to factor your receivables, the interest rate is going to be painful
or destructive to you long term. On the other hand, if your margins are high
like in software and subscriptions/services you probably get paid quickly and
don't really have a need to borrow. The only businesses I've seen use borrowed
money for payroll are failing businesses. Admittedly I'm a big believer in
bootstrapping.

If you're young and have nothing to lose, I think it's a lot more effective to
obsessively work on your business and just run up your credit cards than waste
time with investors and lenders.

~~~
JumpCrisscross
13% is not that high a cost of capital for a business - venture capital is
_far_ more expensive yet still a smart choice for many companies. To put it in
perspective the cost of equity for the S&P 500 has historically been at least
around 13%.

~~~
aristidb
That's the ex-post return on equity, not the cost of equity. You could argue
that the former is an approximation of the latter, but they are not
necessarily the same.

Anyways, it's not really relevant for a small Amazon Seller who may get a
_loan_ at which rate a huge S&P 500 business can get _capital_ (if a S&P 500
business wants a loan, I doubt it would typically even pay 5% these days).

~~~
JumpCrisscross
That's CAPM cost of equity assuming a market of rich and emerging market
stocks and bonds and a risk-free rate of gilts or Treasuries, whichever
cheaper; the average ex-post return of the S&P 500 for the period (1926-2012)
is closer to 10.5%.

Regarding VC one plugs in expectations; VC is modern portfolio mechanics at
its most vivid.

This is relevant because 13%, as a cost of capital, is not intrinsically high
when even Bank of America today would pay that if it raised equity (it has)
and could assume a long-run return on its stock of at least 7.3% (below its
targeted ROE). A quick bond search shows that several S&P 500 members, BofA
included, paying over 13% on at least _some_ of their bonds (no doubt the
riskier ones).

Therefore 13% isn't usurious and probably a fair cost of capital for a small
business.

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johnrgrace
I wouldn't be suprised if they started making these sorts of loans to AUTHORS
soon.

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lazugod
Are you being sarcastic?

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fiatmoney
It's common for publishers to give authors an advance on sales of a book -
effectively a loan, paid back via royalties. If Amazon gets deeper into
traditional publishing it wouldn't be crazy for them to do some version of the
same.

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confluence
This reminds me of an interesting little fact I learned about how Sony makes
money: Life insurance and personal finance!

Source: <http://www.splatf.com/2011/11/sony-profits/>

Consumer electronics still generate most of its revenues (about half) - but
just like GE, Sony appears to make a lot more profit financing the acquistion
of their goods rather than from the goods themselves (GE makes more financing
hydro-turbines for governments than from the turbines themselves).

Curious to think that the entire PlayStation line might not just be a loss
leader for games, but also for the entire Sony financing arm.

~~~
objclxt
Not just Sony: many Asian consumer electronics companies are really part of
much larger conglomerates. Samsung is the largest provider of life insurance
in South Korea, and they also run a large ad agency (Cheil) as well a other
service based subsidiaries.

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katanca
Man, I wish that Amazon would run the health care system. They are so smart.
They always beat the system.

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mtgx
Don't sellers make like 6-8% from their Amazon sales? How does that work with
a 13% interest?

~~~
dmitriy_ko
13% ANNUALLY. If their margin is 6.5% they will still make profit as long as
they keep their stock less than half a year on average.

