Amazon: Lending & Banking

Small business lending: A direct, data-driven source of financing

Amazon took its first steps into commercial loans back in 2011, when the company began offering small-business loans to merchants participating in its Amazon Marketplace via its new Amazon Lending arm. At that time, conditions were well-suited for Amazon’s entry into the commercial lending sector: the global financial crisis of 2008 had shaken confidence in even the largest commercial banks, initiated a credit crunch, and left millions of small businesses struggling to secure the capital they needed to survive.

But seizing that lending opportunity wasn’t an isolated move. Over the last decade, Amazon has taken significant steps into the payments space, credit cards, business checking, and various other financial functions — in other words, doing everything a bank does short of actually applying for a license to become a bank.

Of all these functions, however, Jeff Bezos has been the most bold about his plans in the lending space. And considering Amazon’s thousands of third party merchants, that’s not surprising.

Amazon has a vast number of independent merchants that use its platform, information on the financial health of those businesses, and the customer-first culture to build a compelling lending platform.



Over the last two decades, the percentage of Amazon sales completed by third-party merchants has increased from 3% to 58%. These SMBs have succeeded on the Amazon marketplace in part because Amazon has, in Bezos’ words, invested in and given them “the very best selling tools we could imagine and build.” Among those selling tools today is small business financing.

Data from the US Small Business Administration states that, as of 2018, there were more than 30M small businesses across the US employing almost 59M people (or just under 50% of the American workforce).

Giving out loans to Amazon merchants in this growing space makes sense for Amazon: if the company can give its third party merchants loans that go back into selling products on Amazon, it’s a win for both sides. Amazon gets the increased business, plus the interest from the loans; the merchant gets the capital they need to grow.

Unlike traditional small business loans, Amazon can automate its payback process, meaning a certain percentage of a merchant’s revenue is taken out to pay back loans. And its streamlined application system — which is based on pulling metrics from a merchant’s Amazon account — makes it easier for small businesses to access financing.

Even though small business owners still turn to banks more than other lenders for loans, according to Finder, the process by which banks assess loan applications puts small businesses at a natural disadvantage — research from a group of state-level federal reserve banks shows that in 2016, 60% of small business applicants received less financing than they applied for.

Often, the aims of large financial institutions stands at odds with those of small businesses. It costs a bank a similar amount of money to process a $50K loan as it does to process a $1M loan, but the expected ROI of the smaller loan pales in comparison to the return on the larger one. Given that credit needs for small businesses tends to be for smaller amounts, banks can see them as being less profitable opportunities.

Another challenge facing small businesses seeking capital from commercial banks is a lack of suitable collateral. Banks prefer to lend to businesses with assets, such as property or specialized equipment, that can be used to secure the loan. This puts small, online businesses at a distinct disadvantage, as these companies are much less likely to possess the kind of tangible collateral that mainstream banks often seek.

These challenges make small business loans an attractive market for Amazon to disrupt.

Amazon already has huge amounts of data on the lendees that use its platform — and subsequently doesn’t need the kind of extensive documentation required by many commercial banks. Whereas banks often rely upon credit scores and personal financial documentation to determine the risk associated with lending to a given business, Amazon already has information such as revenue history and future earnings projections, inventory data, and sales data.

The company also possesses a wealth of tertiary data about prospective borrowers, such as a business’ relative popularity within its vertical and its standard of customer service based upon Amazon user reviews — information no financial institution has. With all of this information, Amazon may be able to make better-informed lending decisions than the average commercial bank — and, as the approval system would be data driven, likely process them faster.



Today, Amazon Lending offers small business loans ranging from $1,000 to $750,000 to qualifying merchants over repayment periods of 12 months. It makes money by charging interest on the loans. Though Amazon hasn’t publicly disclosed its interest rates, existing Amazon borrowers have reportedly cited low rates and quick approval times as their prime reasons for borrowing from Amazon.

“We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success.” — Peeyush Nahar, former Vice President, Amazon Marketplace. As one might expect from Amazon, the e-commerce giant adopted an unorthodox approach to its small-business loan product.

Merchants who wish to participate in the Amazon Lending program must be invited to do so, meaning that not every Amazon Marketplace merchant can apply for a loan. Amazon extends these invitations based on an algorithmic evaluation of a merchant’s business, from the popularity of their merchandise to their inventory cycles, among other factors — a critical calculation that helps Amazon mitigate its lending risk.

The advantage of this exclusivity is that Amazon can offer loans quickly: unlike traditional lenders that rely upon extensive documentation typically furnished by the borrower, Amazon Lending typically approves loan applications within just 24 hours. Amazon also does not charge borrowers origination fees or penalize them for prepayments.

Despite only offering short-term loans to prequalified merchants, Amazon’s small business loans have proven to be popular. Between the official launch of Amazon Lending in 2011 and 2017, Amazon loaned more than $3B in short-term loans to merchants in the United States, United Kingdom, and Japan — including over $1B loaned between just 2016 and 2017.