How To Start & Fund An Amazon Business
Have you been thinking about starting an Amazon business? If you said “yes,” and you’re not thinking about a rainforest logging company, you’re probably interested in plugging into the world’s largest e-commerce platform.
As of 2018, Amazon accounted for nearly 50 percent of eCommerce transactions (eCommerce accounts for somewhere north of 10 percent of overall retail sales). If you’re not sure how to tap into that action, you’re not alone. Below, we’ll look at both the necessary and optional steps it takes to get an Amazon business up and running.
Table of Contents
Learn How To Sell On Amazon
When people talk about “Amazon businesses,” they’re usually talking about the Fulfillment by Amazon (FBA) business model. Under an FBA arrangement, Amazon will warehouse and ship your business’s products from their own fulfillment centers. This allows you to take advantage of Amazon’s well-developed storage and shipping infrastructure and processes. It also grants you access to Amazon’s Prime customer-base, most of whom will be looking to buy products that qualify for 2-day shipping. Be aware, however, that FBA comes with both storage and fulfillment fees (which, notoriously, can change at any time), so you’ll need to do some math to figure out if you’re saving money with the service.
Already have a lot of space and want to handle the shipping costs yourself? Or are you trying a dropshipping model? You can still sell on Amazon without taking the FBA route. You can even still tap into the Prime market via Amazon’s Seller Fulfilled Prime (SFP) program. In order to qualify, your business has to:
- Offer premium shipping options
- Ship 99% of your orders on time
- Have an order cancellation rate of less than 0.5%
- Use Amazon Buy Shipping Services for at least 98.5% of orders
- Deliver orders with Amazon-supported SFP carriers
- Agree to Amazon’s Returns Policy
- Allow Amazon to deal with all customer service inquiries
- Pass a trial period to demonstrate compliance with the above, during which the Prime badge will not be displayed on your items
At the time of writing, there was a waitlist for the SFP program, so bear in mind that you may not be able to jump into it immediately.
Finally, you can simply ignore all this Prime business (and customers, potentially) and just sell products on Amazon.
Decide What You’re Going To Sell & Where You’ll Get It
This is arguably the hardest part of starting an Amazon business. There are countless products you could deal in, but far fewer you should deal in.
Your starting budget can help narrow things down a bit. You want to be able to stock enough inventory to build a brand, not just sell a couple of items and then disappear. Once you have some items in mind, you’ll need to do some research to get a sense of costs and selling prices and see if there’s a niche for that product that you could occupy.
There are numerous ways to go about this, from brute-forcing your way through Amazon’s categories and making a spreadsheet to using popular tools like JungleScout to help find and rate opportunities. Be sure to check out other sales platforms to see the price point at which they’re selling the product. If you’re in the FBA program, you can also use Amazon’s FBA calculator to help sift through data.
Figuring out where to source a product is another part of the puzzle. Do you have a hot connection that can get you products at cost? (Alibaba is a popular tool for finding suppliers, for example.) Are you going to buy popular brands when they’re on sale at retail and then sell them at a higher price point? Are making a product yourself that will compete with similar products on Amazon? Do you need to make dropshipping arrangements with a third party? Remember to think about how sustainable your sourcing method is when creating your strategy.
Finally, also consider the nature of the item you’re sending. Will it sell year-round? Can it be shipped safely without breaking? Is it efficient to ship? Are there state-specific restrictions to consider? The fewer variables you have to worry about, the better.
Determine How Much Money You’ll Need
Once you know how much money you’ll need to launch your business, you can figure out the rest of your costs.
Selling on Amazon, as you can imagine, isn’t free — but it doesn’t have to be expensive. If you’re commitment-shy and don’t have a ton of product to move, you can get by on as little as $0.99 per sale. If you’re moving more product, you’ll want to budget $39.99/mo for a Professional account (more on that later).
If you’re going the FBA route, you’ll need to account for Amazon’s fulfillment and monthly inventory fees. The former vary by the weight of the item and, at time of writing, start at $2.41. The latter vary by time of year and the size of the items, ranging from $0.48 to $2.40 per cubic foot.
You’ll probably want to also invest some money in presentation and branding to help your business stand out among competitors. How much this costs can vary depending on who you hire (unless you’re a competent graphic designer yourself), but budget between $200-$300 to get something you’ll be proud of.
Finally, if you’re doing your own fulfillment, make sure you can cover shipping costs.
Determine How You’ll Get Funding
It’s not necessarily that expensive to start an Amazon business, but what do you do if you don’t have the funds to cover your starting expenses? Here are some options:
The first place you should probably look for spare cash is your own savings. You saved up for a reason, right? Investing in your new business is as good a reason as any.
The nice thing about using your savings is that you don’t have to worry about debt or accumulated interest.
The downside? If your business is a bust, you’ve lost your savings.
Tap Your Support Network
Another option, especially if you don’t have much in personal savings, is to ask friends and family for a loan. Unlike a private lender, your support system probably isn’t trying to make a profit off of you.
Keep in mind that this comes with its own risks. You may stress your relationships, especially if you aren’t able to pay back these so-called friendly loans quickly. One way to avoid this is to formalize any agreements you make with friends and family so that everyone fully understands what they’re getting into and what the expectations are. You may even want to draw up a formal contract that outlines any expected payments and return on investment.
You’ve probably been warned about leaning too heavily on credit cards, and it’s generally not bad advice. The interest rates can be murder if you carry a balance on your card. However, for purchases that you can pay off quickly, credit cards are actually one of the best ways to buy, especially if you have a card with a reward program that matches your purchasing needs.
Just remember to pay off your credit cards every month, within the interest-free grace period. If your purchase is too large for you to be able to comfortably do that, you’ll probably want to consider another option.
Note: Avoid taking out cash advances on your cards unless absolutely necessary. They come at a very high cost.
Recommended Option: Amazon Business Prime American Express Card
Amazon Business Prime American Express Card Annual Fee: $0 Purchase APR: 16.24% – 24.24%, Variable
Amazon Business Prime American Express Card
16.24% – 24.24%, Variable
You’re going to be spending a lot of time on Amazon, and possibly buying through it, so the Amazon Business Prime American Express Card may give you the most bang for your buck.
If you have a Prime membership, you’ll earn a whopping 5 percent back on purchases made at Amazon.com, Amazon Business, AWS, and Whole Foods Market — or an extra 90 days interest-free grace period for purchases made at those places. Even if you’re not a Prime member, you’ll get 3 percent or 60 days, respectively. You’ll need to spend around $6,000 to recoup the cost of a Prime membership with points alone, but that’s without factoring in money saved through Prime’s programs (shipping, deals, etc).
Business loans can be hard to come by for new businesses, but you — the human being who owns the business — have presumably been around long enough to acquire a credit history. You can use that to your advantage by getting a personal loan for business purposes.
There are some disadvantages to taking this route, namely that you’re on the hook rather than your business, but if your credit is good, it’s not the worst option out there.
Recommended Option: Lending Club Personal Loans
Lending Club is a good option for individuals who may not have the strongest credit, but have a good debt-to-income ratio. The borrowing range is fairly narrow at $1k to $40k, but when you’re just starting out, you don’t want to go too deeply into debt anyway. You’ll have three-to-five years to pay it off, which makes it fairly manageable.
Recommended Option: Lendio
If you’re just entering the alternative loan market for the first time, it can be pretty overwhelming. Lendio takes some of that burden off of you by allowing you to effectively apply to their whole network of lenders with one application.
Need more options? Check out our feature on startup loans.
Lines Of Credit
If you anticipate needing to make a lot of smaller purchases over a long period of time, or even just want some “insurance” to fall back, you may want to consider a line of credit.
A line of credit works a bit like a credit card in that you can tap it whenever you want, in whatever amount you want, so long as your purchase doesn’t exceed your credit limit. Most lines of credit are revolving, which means that, as you pay them off, that credit becomes available for you to use again.
In contrast to credit cards, lines of credit usually have lower interest rates, making them better for the times you have to carry a balance. However, many do have annual fees and some charge a fee whenever you tap them, and they can take up to 24 hours to process your request. You also generally (there are exceptions) won’t find the generous rewards programs you’ll find with credit cards.
Recommended Option: Fundbox
Fundbox provides lines of credit up to $100,000 to U.S. businesses. There’s no minimum credit score, you just have to have annual revenue of at least $50,000.
Fundbox charges based on the amount you draw, but fees start at 4.66%. Repayments are made weekly over 12 or 24 weeks.
Vendor financing is a very specialized form of business loan where a company will lend a buyer a sum of money, which the buyer then uses to buy inventory from the vendor.
Recommended Option: Amazon Lending
Did you know Amazon offers loans to sellers on its platform? If you didn’t, you’re not alone. Amazon doesn’t really advertise the service much, and you can only access it by invitation. Knowing that it is an option, however, may be useful should it arise.
Amazon loans range between $1,000 and $750,000, and must be used to purchase inventory to sell on Amazon. Rather than being based on your credit score, Amazon loans are based on your performance on the site.
Purchase Order Financing
Another highly specialized type of financing that sellers can tap into is purchase order financing (sometimes just “purchase financing”). Basically, purchase financing is used to fill large orders that may exceed your current inventory or your ability to restock with cash on hand. A purchase financer will generally require confirmation of the order and proof that your company has experience handling orders of this size.
Recommended Option: Behalf
Behalf can offer businesses between $300 – $50,000 in purchase financing for most types of inventory. Term lengths are pretty short (1 – 6 months), and you’ll be charged 1 – 3 percent interest every month. Payments are made weekly or monthly, with weekly payers receiving a 10 percent reduction in their borrowing fees.
If you haven’t heard of Rollovers as Business Startups (ROBS), don’t feel bad. They’re extremely niche products for entrepreneurs with retirement accounts like 401(k)s.
For a fee, a ROBS provider allows you to use money from your retirement account to pay for startup costs without incurring the tax penalty you normally would by tapping those funds early.
As is the case with personal savings, you are risking your own money.
ROBS will be overkill for most new businesses, but if your startup costs look like they’re going to pile up, keep them in mind.
Recommended Option: Guidant Financial
If you’re in the market for a ROBS, it’s worth checking out Guidant Financial. If your retirement account has at least $40k in it, you can roll over up to 100 percent of your funds.
Need more options? Check out our feature on startup loans.
Register Your Business
If you don’t want to be selling products under your birth name, you’ll probably want to register your business.
This part is technically optional, but if you’re planning to build your business into more than an occasional source of freelance income, you should probably register your business.
If you do nothing at all, your business will default to a sole proprietorship (or a partnership, if you’re starting it with someone else). This essentially means that you’ve started a business with your own name. If you want to change it to something else, you can file a DBA (Doing Business As), which will protect your new business name and allow you to–you guessed it–do business under that name.
Sole proprietorships have the advantage of being cheap and easy to start. Your taxes will also be easier to file (and lower) than they would generally be with other forms of incorporation. Keep in mind, however, that for liability purposes, sole proprietorships and the individuals behind them are essentially one and the same.
Other forms of incorporation will require a bit more work and come with their own advantages and disadvantages.
Here are the most popular ways to incorporate:
- Limited Liability Corporations (LLCs): If you’ve seen LLC after a corporation’s name, you’re dealing with this type of company. LLCs offer limited liability protection for their owners without the full complexity of a corporation. Each state has its own rules for how to start and maintain an LLC, and you don’t necessarily have to register your LLC in the state where you’re doing business (although you’ll generally want to). LLC owners report their business earnings and losses on their personal taxes.
- C-Corp: This is the “basic,” default form of incorporation. Shareholders are considered the owner(s) of the company and receive limited liability protection; however, the business decisions are made by corporate officers who may or may not be shareholders. The corporation is taxed separately and shareholders pay income tax on dividends. To form a C-corp, you’ll file articles of incorporation with your state.
- S-Corp: S-corps are similar to C-corps in most ways, but come with a few additional restrictions: you have to have fewer than 100 shareholders and they have to all be U.S. citizens or residents. Unlike C-corps, profits and losses are reported on personal taxes, not unlike an LLC. In addition to filing articles of incorporation, you’ll also need to file IRS Form 2553.
Get Business Insurance
Depending on where you incorporate, business insurance may be optional or mandatory, but since you’re going to be dealing with a lot of tangible goods shipped through the postal service to remote customers, you’ll probably want to consider it.
General liability insurance can protect you in the case of lawsuits or accidents, including property damage and personal injury claims against your business. It can also make your business seem more professional to prospective clients.
There are other, more specialized types of insurance you may want to consider depending on what you’re selling and to whom. These include:
- Property Insurance: Protects the property needed to run your business.
- Business Interruption: Covers costs related to unforeseen events that make your business unable to function.
- Professional Liability (Error and Omissions): Covers the costs of defending your company in lawsuits in cases where your business caused a financial loss.
Create An Amazon Seller Account
Access to the platform is pretty straightforward and involves creating an Amazon account if you don’t already have one. You’ll be asked for information about your business, tax information, product information, billing and deposit accounts, and compliance with the Amazon Services Business Solutions Agreement.
Amazon offers two plans:
- Professional: $39.99/month, grants access to order reports and order-related fees, selling in multiple categories, and the ability to customize shipping rates
- Individual: $0.99 per sale closing fee on each item you sell on Amazon.
If you plan on doing more than just the occasional sale, you’ll probably want to choose Professional.
List Your Inventory
Now that you’re ready to go, you just need your potential customers to be able to see your product.
From your Amazons Seller account, under the inventory tab, you can add a product. You can then either search Amazon’s catalog to see if that product is already listed or create a new listing. If your product category is restricted, it will need to be approved before you can get beyond this stage, so if possible, try to find a rationale to categorize it into an unrestricted one.
At this point, you can either make your product go live (if you have the inventory ready to be shipped) or simply list it if you need to send your inventory to Amazon (in the case of FBAs). You can then fill in the information about your product. If you need a UPC code, you can buy one online.
There are a number of different strategies for getting your products to stand out on Amazon. Search engine optimization (SEO) strategies will serve you well here, so be sure to identify useful keywords that will help customers find your products. Another critical element is taking good pictures of your products so they’ll look appealing on the site. If you aren’t confident that you can take quality pictures yourself, you may want to spring for some professional ones.
A lot of other things can also affect your ranking, from conversion rates to customer reviews, pricing, time spent by customers on your page, bounce rate, and more, but the guiding rule is this: Amazon likes sellers who make them money, and will promote the ones they feel most reliably turn queries into sales and create satisfied and returning customers.
Amazon has changed the way many people shop, but it has also has provided sellers with a potentially low-cost way to get tangible products to customers. Competition is intense on the platform, but shrewd salespersons can still take advantage of its unparalleled convenience.