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Third-party sellers on Amazon’s e-commerce platform are more dependent on the company than ever, as its monopoly power expands.
In recent years, a growing number of journalists, scholars, lawyers, and politicians have focused on the unstoppable e-commerce giant Amazon, scrutinizing various aspects of its business. Earlier this month, PBS aired a two-hour special about Amazon that touched upon many issues: how it treats workers, how it spies on its customers, and how it muscles out the competition. But one area that has received little attention thus far is the way in which small businesses that sell goods on Amazon’s platform—what Amazon terms “third-party sellers”—finance their operations. The reality reveals a disturbing circumstance: Amazon has trapped third-party sellers into financing with their dedicated lending unit, and this directly and indirectly boosts Amazon’s bottom line.
There was a time when the government saw small businesses like sellers on Amazon as critical to the health of our economy and our democracy. During World War II, Congress and President Roosevelt created the Smaller War Plants Corporation (SWPC) to provide direct loans to private entrepreneurs, and encourage large financial institutions to make credit available. Eisenhower, wary of the “military-industrial complex” and other concentrations of power, as president established a nondefense analogue, the Small Business Administration, to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”
The SBA started its life making direct business loans to small businesses, lending to victims of natural disasters, securing government procurement contracts for small businesses, and helping business owners with management and technical assistance and training. These days, the SBA primarily guarantees a portion of qualifying loans made by private banks, rather than lending by itself. Importantly, the SBA guarantee only benefits the lender; the borrower remains obligated under the terms of the loan. The borrower must meet certain broad eligibility requirements, including a size standard, a “for-profit” business motive, a lack of resources (business or personal) to internally finance the business, and an ability to repay.
A crucial component of these financing arrangements is that many of them are asset-based financing deals. Such lending involves a loan or a revolving line of credit, secured with the assets of a business that have an easily determined value. These types of loans allow small businesses to leverage a wide variety of assets such as collateral, including goods, equipment, and money owed to them by third parties. The lender in turn reserves the right to inspect the “asset” of the borrower and also the right to seize that asset if the borrower defaults on the loan. This arrangement is very similar to a mortgage that a private consumer might take to buy a house. And like a mortgage, a key component of the deal that keeps the annual interest rate low, at least in theory, is the fact that the lender holds an interest in a valuable asset that it might sell to a third party if the borrower defaults.
Amazon has trapped third-party sellers into financing with their dedicated lending unit, and this directly and indirectly boosts Amazon’s bottom line.
But small businesses that transact on Amazon’s e-commerce platform are unable to apply for these types of loans, and instead must rely on alternative sources of financing that are more expensive and less favorable. The reason is quite simple. Sellers that use Amazon’s fulfillment services have to ship their goods in Amazon’s warehouses, where they are stored before they are sold on the platform. After the goods are shipped into those warehouses, sellers are no longer able to access them. Amazon does not allow third-party sellers into their warehouses, nor does it allow access to any other third parties such as creditors and banks.
To make matters even worse for those sellers, Amazon also commingles those goods with the goods of other sellers who sell the same products. This makes it easier for Amazon to ship orders quickly across the country, and the company just credits the sale to whomever the customer purchased from. But it makes it impossible to classify dedicated inventory to an individual seller, the way a bank would want in an asset-based financing arrangement.
In light of this, third-party sellers that fulfill through Amazon cannot apply for asset-based financing loans in which the collateral is their goods, because they are unable to access their own assets, or grant access to lenders who can inspect and seize them if they default.
In what has come to be Amazon’s typical modus operandi, in 2011 the company introduced a solution to the problem it created—a small-business lending program. Amazon Lending offers third-party sellers on the platform a quick and accessible financing option to expand their operations. Despite the fact that the program has been around for quite some time, it is relatively secretive, and the terms of the loans are not publicly available. In addition, the services of Amazon Lending proceed on an invitation-only basis.
Nonetheless, based on several sources, including publicly available information, we know that Amazon’s credit offerings are not short-term business loans. Instead, they can be described as a form of “merchant cash advance,” a much more aggressive financial product under which Amazon provides the seller with a lump sum of cash that the seller must repay by allowing Amazon to take a chunk of their monthly sales on the platform.
The annual interest rate of these loans is typically in the double-digit range, which is significantly higher relative to traditional asset-based financing agreements.
Perhaps most crucially, these loans can be used only for one purpose: building up or restocking inventory on products sold on Amazon. Traditionally, small businesses can use short-term loans to finance any aspect of their business, be it funding payroll, updating equipment, addressing liquidity issues, and more. But Amazon’s lending business makes sellers more reliant on Amazon, by ensuring that they spend money on enhancing their product offerings on the platform, and not on bolstering their independence as a small business. This indirectly moves more money into Amazon’s pocket, since the company earns a substantial cut from every third-party sale on the marketplace.
Amazon Lending has faced some difficulty in recent years, perhaps due to internal cash flow shortages. Perhaps as a result, it has partnered with major financial institutions to further expand. In 2018, it partnered with Bank of America, and most recently it was rumored that Goldman Sachs is in negotiations to back the program.
The fact that the sellers relying on the platform for their livelihoods or supplemental income also owe money to Amazon makes the bargaining position even more precarious.
These partnerships might indicate that Amazon does not have the required capital to fully fund this lending program itself. (It had outstanding small-business loans of more than $863 million on its own balance sheet at the end of 2019.) But they also indicate that the primary motivation behind Amazon’s lending program is not short-term financial gain, but rather the corollary effects of making third-party sellers deeply indebted to Amazon.
This is consistent with how Amazon controls all aspects of its marketplace, rendering brands and sellers docile. Sellers are forced to use Fulfillment by Amazon in order to reach users on the Amazon marketplace, which gives them little recourse for borrowing other than Amazon’s own service. And the fact that the same sellers relying on the platform for their livelihoods or supplemental income also owe money to Amazon makes the bargaining position even more precarious. Sellers that owe Amazon money are incredibly hesitant to challenge Amazon’s conduct, whether it be “buy box” suppression, removal from listing, or even disputing a simple customer return. Sellers are afraid that they will win that battle but lose their ability to qualify for a future loan. In addition, the agreements contain an acceleration clause that allows Amazon to call the entire loan due in case the seller fails to make even a single payment. This provision alone means that a suspended account might spell the end of line for many sellers.
What can sellers on Amazon do for financing besides Amazon Lending? A cottage industry of fintech companies specializes in providing third-party sellers with loans. Because the loans are unsecured by any collateral, the annual interest rate is sky-high, at times more than 40 percent APR. The lack of transparency and predatory tactics that were recently observed in the field have invited the scrutiny of the Federal Reserve, which recently published a scathing report.
The financial reality that these small sellers are facing is grim. In many respects, it can be analogized to how Uber drivers are financially abused on that platform. But perhaps more importantly, this financial dependency harms our markets and our democracy. As Franklin Delano Roosevelt put it: “If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the marketplace.” Government institutions like the Small Business Administration still embody that ideology, but the growth and increasing strength of monopolies like Amazon have rendered them nearly obsolete. Government has an interest in preventing the largest online commerce marketplace from operating like a feudal lord. It needs to pay attention to this exploitation.
