By Mark Turner
Traditional lenders should be scared, very scared. Amazon is advancing into the small loans market and that may spell seriously bad news for high street lenders.
As a leading American technology giant, Amazon carries huge stock and is busy diversifying its operations. Short-term small business lending is just the latest on its shopping list.
As reported in The Times of 29th June, Amazon Lending launched on 1st July 2015. It is to be an “invitation only” service. Positioned as a modest service to start with, banks will no doubt be feeling a trifle skittish as, who better than the world’s largest online retailer to quickly build a substantial lending business, if that is what it decides to do?
Due to the raft of data that Amazon holds on its sellers, the decision as to who is and who is not credit worthy is much easier and quicker than it is for a bank. Amazon claims that over half of its loans will be made on the same day with many being issued in seconds. As the opportunities are short term, they will move speedily as against the many weeks it can take to get a conventional loan.
The online giant has a number of advantages on its side:
- Trusted relationships with customers in most aspects of retail.
- A captive audience.
- Economies of scale coupled with huge resources.
Small companies will be offered unsecured loans from £1,000 up to hundreds of thousands, with a fixed term of between four and six months. Amazon’s reputation for keen pricing will apply equally to its small business lending service as loans will be offered at the same rate for all sellers: 5.9% plus a 1% arrangement fee. There will not be any early repayment penalty and monthly repayments will be automatically taken from sales proceeds. This makes an Amazon loan substantially cheaper for small companies looking for credit than alternatives such as invoice factoring or online peer-to-peer lending. In trying to compete, banks might start to feel as though they’re completely outgunned.
For new businesses which struggle to secure finance by conventional means, this is likely to be a real boon as a typical Amazon seller often can’t access cash to buy stock that they know they can sell. Amazon judges that loaning to these small and medium-sized companies not only allows them to buy more stock, diversify their ranges and generate more sales but in turn, it means more revenue for Amazon which charges commission of up to 15% on sales.
Amazon Lending has been operating quietly in the USA (and Japan) since 2011 with almost $1 billion of capital lent to tens of thousands of small US traders. As a cautionary note, small businesses might wish to pause for thought about how deep they want their relationship with Amazon to go. There may be some disadvantage with a business’s main sales channel also becoming its lender.
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