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Amazon recently announced a new way for third-party sellers to get additional funding to grow and scale their businesses on the platform. It's a cash advance program that does not require credit checks and personal guarantees and to top it off, you're required to make payments only when you make sales.
How Does the Merchant Cash Advance Program Work?
Amazon is partnering with fintech company Parafin to provide additional capital to its sellers through the Merchant Cash Advance (MCA) Program. It is a sales-based financing option that allows qualified sellers to borrow capital from as low as $500 to as much as $10 million.
The MCA program does not require sellers to make minimum payments or put up collateral or even pay interest or late fees. This means that payment is required only when there are actual sales, and such payment is tied to a portion of these sales. This option is advantageous to sellers because they don’t have to provide the usual loan requirements, including a personal guarantee and undergoing a credit check.
So how do Amazon and Parafin make their money? Sellers who borrow capital through the program have to pay a fixed capital fee. Unfortunately, the amount is undisclosed in the announcement. The program provides a flexible payment schedule using a fixed percentage of the seller’s Gross Merchandise Sales.
Who Are Eligible for the Merchant Cash Advance Program Under Parafin?
According to the announcement, in order to avail additional capital from the program, you must be a seller on Amazon.com for at least 3 months. There was no mention of a minimum sales or valuation requirement.
As of writing, the MCA program is available to select sellers only, but Amazon says it will be available to more sellers in early 2023.
What Is Parafin?
Parafin is a San Francisco-based fintech company founded in 2020 by data scientists and engineers who were some of the earliest employees of Robinhood. The company was born out of the founders’ desire to help small businesses that were left behind during the pandemic.
In terms of funding, Parafin was able to raise $34 million in seed and series A financing last September 2021, led by Thrive Capital and Ribbit Capital. In August this year, it raised $60 million in series B financing, bringing its total equity fund to $94 million.
According to their website, it helps platforms retain sellers while earning revenue by taking a share of every capital advance. This makes it a good partner for Amazon whose third-party sellers are raking in more than half of retail revenue.
Other Capital Sources for Amazon Sellers
Amazon continues to offer its third-party sellers with financial solutions, including term and interest-only loans through Amazon Lending. It also partnered with Marcus by Goldman Sachs to offer Business Line of Credit to sellers.
There are also other sources of additional capital for Amazon sellers outside of Amazon. For example, AccrueMe is similar to the MCA program in that it only requires payment when the seller actually makes profits.