Many FBA sellers get started with their own money, buying their initial inventory themselves and moving on from there. They don’t typically borrow from the bank to set the business up.
However, once your business is moving, it might be worth taking out some debt in order to expand more quickly. In fact Amazon offers some of its sellers finance to take their businesses forwards.
But you’ll want to be careful. Debt can help you move faster, but it can also crash your business. There’s a definite risk involved, and you need to take that on board.
The first thing we’d say is that you know what kind of person you are. If you can’t trust yourself with money, don’t trust yourself with debt. Be aware of your emotions about money. You may find that when it’s “the bank’s money” and not yours, you go a bit mad buying inventory, like a kid in a candy store. Or you may find that having debt is going to stress you out.
If on the other hand you’ve run your own business before, and you know you’re level-headed and sensible with finance, then debt funding might be a useful way to help your business growth.
If you borrow for business, you’ll want to structure your business accounts so that your business and personal money are separate. It may be the point at which you decide you want to incorporate the business so that it’s formally separated from your personal affairs.
Secondly, if you do borrow, don’t use credit cards to do it. Credit cards are expensive debt; even zero percent cards default to a high interest rate after a while. However, if you use a credit card to pay for inventory for the sake of convenience, and can pay it back in cash before you start paying interest, that’s okay. If your credit card has rewards such as air miles, you’ll be able to get the rewards without actually getting into debt!
So okay, if you’re level-headed and you’ve found a good source of debt at a reasonable interest rate, should you borrow? We’d say that first, you need to look at your FBA income. You need to see that it’s regular, that it’s not feast and famine with some great months and some months seeing almost no sales. You should also think very carefully if your business has only a couple of products; ideally, you’d have a portfolio of several different product lines before you think about borrowing.
That also means you shouldn’t be borrowing until you have been in the business a while, made your mistakes, learned your lessons, and got a good feel for what will sell profitably and what won’t.
Don’t borrow unless you have other selling channels, such as your own website. If your Amazon account is suspended there’s no way you can pay the loan back if you don’t have an alternative channel to market. If you have your own website and sell through Walmart too, you are in a much better position.
Don’t bet the bank. One of the worst sourcing mistakes we’ve ever seen nearly destroyed UK publisher Dorling Kindersley. They were sure that Star Wars: The Phantom Menace franchise was going to go gangbusters, and invested heavily in merchandise and marketing. They managed to sell only a quarter of their inventory. Ouch.
So if you borrow, ensure you spread the loan between different product lines. Suppose one item, for whatever reason, became restricted, or the paperwork wasn’t good enough, you wouldn’t lose your whole investment.
So how much should you borrow? Look at your regular level of profit per month. That’s what you have to pay yourself, your bills, and your debt servicing with. Take out your own salary and your main business bills; what you have left should cover your debt servicing at least twice, and preferably three or four times, or even more.