Amazon and Etsy return some funds to sellers amid late payment row

Amazon and Etsy have reduced the amount of money being withheld from merchants in an effort to avoid an all-out seller strike.

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Helena Young

Amazon and Etsy have partially relented following backlash over their fund-withholding policies, after thousands of merchants reported they could go bust as a result of the new rules.

As two of the world’s online retail megaliths, Amazon and Etsy host millions of small business storefronts. However, both platforms have faced mounting criticism over the impact of their ‘reserve system’ policy, which has resulted in near-fatal payment delays for SMEs.

Small businesses that sell on Amazon or own an Etsy shop have been left in limbo, as they grapple with how to finance their operating costs while their funds are being held.

Last month, an SME insights report by Simply Business found that 1.5m UK entrepreneurs are considering using their personal savings to prop up their businesses, in the face of rapidly diminished cash reserves.

What is Amazon’s and Etsy’s controversial ‘reserve system’ policy?

The reserve system policy was first introduced to Etsy in 2021. It allows the platform to withhold up to 75% of sales revenue from merchants, for up to 90 days. Etsy argued this was in order to ensure sellers have enough funds in the bank to cover potential customer returns and claims.

Meanwhile, Amazon’s policy update in May enables the ecommerce giant to withhold £5,000 from vendors for up to one week after the expected delivery date.

SMEs tell of significant financial impact

Both platforms notified affected vendors three months in advance of the policies. However, NerdWallet’s business finance expert Connor Campbell says the warning was “too short notice for them to be able to implement any countermeasures to protect their finances.”

“Businesses depend on a consistent stream of income in order to be able to manage their financial obligations and pay staff wages,” Campbell adds.

Affected business owners wrote in the Facebook group, Etsy Sellers Support Community, about how the reserve system had impacted them.

Some said they were now struggling to pay bills. Many more had lost faith in the platform, after spending hours speaking to chatbots about why their funds had been placed on reserve, without success.

Etsy rolled back its policy last week following the social media backlash, saying it would be  “substantially decreasing” the amount of sellers’ funds held in reserve.

This week, Amazon has also relented following a similar row, confirming it will give some sale proceeds back to sellers. However, Campbell argues both platforms should remove the policy entirely.

“If this policy isn’t overturned, this is sadly likely to lead to many businesses having to cease operation as they are no longer able to depend on income from sales to cover their operation costs,” he states.

“Late payments could send SMEs to the wall”, says commissioner

The reserve system has been in place for years. However, both Etsy and Amazon have ramped up their policies in the past few months, contributing to severe payment delays and interrupting cash flow at an already strained financial situation for SMEs.

Supply chain issues are exacerbating the problem. As inflation hits partners end-to-end, manufacturers and suppliers alike are struggling to pay for the increasing costs of doing business, creating longer wait times for their SME customers.

Liz Barclay is the UK’s Small Business Commissioner, a role that was originally set up in 2016 to help stamp out poor payment practices.

Speaking to Startups, Barclays says that large corporations like Etsy and Amazon might have valid reasons to hold cash in reserve, and simply aren’t aware of the harmful impact this can have on small businesses.

“We’re trying to make their bigger customers understand small businesses better, and to get them to realise that a small business owed £100 for a week longer than expected could go to the wall,” she explains.

How to protect your firm from late fees

While the issue of late payments has plagued small businesses for decades, Barclay says there are steps that SMEs can take to fortify their balance sheet against the impact.

Offering tips to Startups, she advises that SMEs invest in best possible invoicing and cash flow management systems, to avoid having to spend valuable time chasing up payments in the supply chain.

“We are working on getting better information to startups to help them get effective processes in place,” says Barclay. “They need negotiating skills to get better payment terms before signing up to contracts, or verbally accepting long payment terms of 90 or 120 days.

“It does no one any good to lose good suppliers because they can’t afford to carry on trading because of overdue invoices or long payment terms.”

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Written by:
Helena Young
Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.

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