I Took a Loan from Amazon and It Was Exactly What I Needed

This past Quarter 4, my available cash reserves were running seriously low.  I was faced with a situation where I would either have to borrow money or stop purchasing items in late October or early November.  Considering how much I was planning on purchasing in November and December this was not tenable.  I looked into a lot of different funding options but decided that an Amazon loan was my best option currently.  At the end, I will go through some other options that are available that might fit better for your personal situations.

My Requirements

I needed short term financing.  My plan was to borrow the money in October and pay it back in January after my first payment (that didn't happen because of a tax situation requiring me to start a new company due to living overseas which is a post for another time).  Had I needed long term financing I would not have taken an Amazon loan as I will show.

I wanted at least $100,000 and I wanted to do it as cheaply as possible.

Advantages for an Amazon Loan (Amazon Capital Services)

No origination fee - that means that Amazon has no one time fees for approving the loan.  This is not available through every lender

No annual fee - as opposed to many small business lines of credit there is no annual fee which is helpful if you think there are years that you might not need to take a loan at all.  Bank of America and Chase lines of credit had lower rates but they came with a $150 annual fee which is the cost of having access to the money whenever you would like.  Considering I was hoping that I wouldn't need a new loan long time this was a significant factor for me.

No prepayment penalties - This was probably the most important factor for me.  The interest rate was high but I was only going to pay the entire interest rate if I kept the loan for the duration of the 12 month term. If I paid it back early I would end up paying much less in interest.

Ease of approval - amazon has your inventory as collateral for the loan so the approval process was very quick.  The whole thing only took a few minutes and I never had to talk to anyone on the phone.  They also automatically take loan payments out of the payments that they owe you so they have a very easy way to collect.

Ease of Payment - it is quite easy to make extra payments.  You just click a few buttons from within your Amazon account and you can make extra payments besides the monthly (or bi-monthly) payments you have to make.

Disadvantages

Amazon loans are not perfect and they shouldn't be the first choice for every situation.  Here are some of the reasons why.

Interest fees - The interest rate was 10.22%.  That's quite high compared to other loans.  For this reason it is not a great long term financing option for me.

Technical Difficulties - There were multiple times that I tried to make payments and I was not able due to a glitch on Amazon's side. That cost me a little bit in terms of interest but nothing significant.

New approval every time - since it isn't a line of credit, if you ever need a new loan you will have to be approved every time but to be honest that's not a big process at all.

Alternatives

Line of credit -  Most traditional banks offer small business lines of credit that allow you to access that money.  This usually comes with either an origination fee, an annual fee, or both.  However, the interest rate is usually lower.  Here is a link to Bank of America for reference.

Small Business Loan - rather than a line of credit which you don't paid interest on unless you use it, you can get a traditional small business loan from a bank.  Usually the biggest issue here is a prepayment penalty.  If you have to pay the full interest of the loan regardless of whether you are able to pay it off early you might be paying a lot more in interest in the end than a higher interest loan without a prepayment penalty.

Financing via Credit Card - Many credit cards like Chase Slate and others offer 0% financing for a limited time.  This can be a good way to finance a short term loan but can have a negative effect on your credit to hold a balance.

401(k) lending - this can be a great option.  You can borrow from your 401(k). The biggest issues are that there are limits to the funding.  You can borrow up to $50,000 or 50% of your vested amount, whichever is greater so if you need more than $50k you have a problem.  The nice benefit is that the interest payments go to your retirement.  I believe as well that this can't be used every year even if paid back but not positive about that.  Whenever you are dealing with your 401(k) it's best to seek some professional help before you mess with it.

Outside investment - You can seek funds from investors which can be a way to earn money on other people's risk. For example, if something costs $10,000, you can invest $5,000 and your investor invests $5,000 and you get 75% of the profit for doing all the work and you only risk $5,000 and not $10,000.  Obviously, exact details of how to break up the profits are up to you and your investors. 

My Loan Results

I borrowed $151,000 on October 20, 2018 and I ended up using only about $100,000 of it but I couldn't have been comfortable spending that much on current deals I knew that if something else comes across I have enough money to jump on it. I paid back a total of $154,271.64 on February 5th.  That's a total of $3271.64.  That's 2.167% of the original $151,000 loan and an APR of 7.53% (Click here to learn how to calculate APR) but I don't think I could have gotten a better rate on something without an annual fee.  If I kept the money for the full 12 months, I would have paid a total of $8,489.48 which is 5.62% of the original loan which had an APR of 10.22%. 

If I need short term money again, I will certainly consider another Amazon Loan.  What have others used for financing?  Am I missing something?

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