Amazon Lending Has Funded 20,000 Businesses

Amazon last week promoted its Amazon Lending program with a press release announcing that it has surpassed $3 billion in loans to small businesses since the its launch in 2011.

Amazon Lending provides funds to businesses that sell through Amazon marketplaces, with the loans repaid from the proceeds of products sold through Amazon.
Amazon Lending

The concept is a good one; businesses gain the working capital to fund more inventory of popular products, that generates more sales, those businesses grow, and Amazon's overall revenue grows accordingly.

The accounting implications

It's the accounting for these Amazon loans that can catch out Amazon sellers, especially those who might have been taking shortcuts when it comes to accounting for their Amazon sales.

Amazon Lending transactions flow through the seller's Amazon merchant account. This means the amount borrowed and the subsequent repayments are included in the calculation of the cash amounts disbursed to Amazon seller through the Amazon settlement process.

Some Amazon merchants take a shortcut in their accounting, treating the net disbursement received from regular Amazon settlements as their revenue.

When their only transactions with Amazon are sales and associated commissions, this simple 'net revenue' cash accounting approach can seem like a good idea. After all, it's quick and easy and it sidesteps the need to wade through the complexity of the underlying revenue and expense line items.

But it falls down when non-revenue, non-expense transactions appear in the merchant account, and Amazon Lending transactions are one example. A $100,000 loan from Amazon is not $100,000 revenue, and neither is a $20,000 repayment per month an expense for accounting purposes. The shortcut cash accounting approach fails.

There are other strong reasons businesses should not take these simplistic accounting shortcuts when it comes to their Amazon sales.

Using net settlement amount fails to account for the true revenue, and the associated selling expenses.

Furthermore, it doesn't support accrual accounting, which is the fundamental accounting principle of matching revenue and expenses in the same period. A sale made in March should be reported in the March financial month, even if the cash disbursement isn't received until April.

In contrast, an Amazon seller using accrual accounting for the transactions flowing through their Amazon merchant account, using a tool such as A2X for example, will have accurate monthly financials, and should have few problems with the Amazon lending transactions.

What are the Amazon Lending transactions?

The cash loan amount shows up as a credit to the merchant account, and triggers an immediate settlement. The amount disbursed is calculated by Amazon as the amount accumulated from sales net of fees at that time, plus the amount of the loan.

Loan repayments are deducted from the merchant account balance, reducing the cash amount settled. The frequency depends upon the loan offer. Sometimes repayments are monthly, which means every second disbursement will be significantly less than the net sales amount. Other times repayments are deducted from every settlement until the loan is repaid.

These loan amounts and their repayments are asset and liability transactions rather than revenue and fees.

It also means that the settlements can't be assumed to be a regular two-week cycle, there can be extra settlements triggered by Amazon Lending merchant loans, and the settlement cycle can be re-set.