E-commerce is a very popular business segment today due to lower operating costs and high customer demand. Customers are attracted to this business for the convenience of shopping from home, 24/7 accessibility, and easy price comparisons. However, running an e-commerce business can be challenging as you will often find a gap between your demand and supply. The reason you can’t meet the demand is that you don’t have enough funds to improve your supply. For example, you come across a bulk inventory offer getting which may improve your margin significantly. However, you don’t have the funds to buy the inventory at the moment. This is when e-commerce business loans can help your business move forward. With this loan, you can get access to the capital you need.
Reasons For E-Commerce Financing
You may need e-commerce financing to pay for business expenses, expansions, and operations. The financing will support your digital storefront to run smoothly at times when you are struggling with your own cash flow. Sometimes, a gap may occur between paying suppliers and receiving customer payments. In such a case, e-commerce business loans also come in handy.
If you run out of stock, you can lose customers, which will eventually damage your reputation. You need funds to maintain sufficient inventory all the time, especially during peak season. You can take a business loan to buy inventory in advance and in bulk to get discount from suppliers. These savings from bulk purchase can improve your margin.
To stay competitive, you need to constantly update your e-commerce platform. You may require a loan for implementing new inventory management software or improving cybersecurity. It is better not to wait to make these enhancements, as you will be losing customers. With the right technology, you can stay ahead of the competition.
For your e-commerce business to be successful, you must invest in marketing. Search engine optimization, Facebook marketing, hiring influencers, and other online marketing tactics can generate significant returns. If you have a timely marketing push that is funded by an e-commerce business loan, then people will recognize your brand quickly, thus you will have more customer base. You can carry out seasonal campaigns without putting stress on your operating budget.
You can apply for a loan to keep as an emergency fund for your business. Sometimes, shipping expense and other costs may increase, or you may face extreme competition for which you have to go for aggressive marketing campaigns. You can keep your business in track even in such uncertain or complicated situations.
Different Types Of E-Commerce Business Loans
In the case of an e-commerce business, you don’t have to wait for months to get a business loan from banks. There are several modern financing options available to meet your immediate needs.
☑️ Revenue-Based Financing (RBF)
This type of financing provides capital to businesses in exchange for a percentage of future sales till the entire loan amount is paid off. It has a flexible repayment option. If your sales go up, you pay back more amount and if sales slowdown, you pay less. As e-commerce businesses can have fluctuating revenues, RBF is a very popular financing option. No collateral or credit check is needed here, and the loan approval time is also faster. However, the cost of this type of loan is higher than that of traditional loans. So, RBF is appropriate for businesses with high margins to cover the fees.
☑️ Merchant Cash Advances (MCA)
This loan is similar to RBF, but the repayment method is a bit different. You will repay the loan from your daily or weekly sales. That means the repayment schedule will be more frequent and automatic. Like RBF, the repayment amount will be adjusted to your daily or weekly sales volume. Approval of this loan is very fast, so it’s a perfect solution for immediate funding needs. Credit score is not a barrier here. The disadvantage of this loan is that it has a high APR.
☑️ Business Term Loans
Here, you will borrow a specific amount of money and repay the loan within a specific amount of time, along with interest. You will pay in the form of monthly payments. You can get this loan from banks or other online banking lenders. They offer lower interest rates. You may need collateral and extensive documentation to get this loan.
☑️ Small Business Administration (SBA) Loans
In this type of loan, you will get the best terms as the government guarantees these loans partly. So, you will pay longer repayment periods and lower interest rates. However, it takes a long time to get these loans approved. Also, you need to put personal assets as collateral.
☑️ Business Line Of Credit
This loan gives better control of money. You will be approved for a maximum amount, but you will only borrow the amount that you need. The interest will be only on the amount you will borrow, not your maximum limit. Once you repay the portion of the loan you had taken, the same amount of fund will be added to the balance again. This way, you will always have credit available as long as you repay it. It’s a great option for managing unexpected expenses. However, the interest rates can be variable, and the fees may increase.
☑️ Inventory Financing
This loan is particularly given to businesses that need the money to purchase products for selling. Here, the inventory acts as the collateral. You may find this loan helpful during bulk purchases or seasonal needs. The risk with this type of loan is that if your inventory doesn’t sell, you won’t be able to make the loan payments. If you default, then the lender can take away your inventory.
☑️ Invoice Or Accounts Receivable Financing
The lender will provide you loan on the basis of your customer invoices. You will receive 70% to 90% of the invoice amount as a loan. The good thing about this loan is that you will get it fast, and so you will be able to meet your needs right away. The drawback of this loan is that you may incur extra fees. Also, in case the customers don’t pay, you will be held liable for the payments by the lender.
☑️ Business Credit Cards
You can apply for business credit cards to meet your short-term needs and smaller expenses. Apart from getting a loan, you get other perks like travel points and cashback. This type of loan can help you build a strong business credit history. The interest rate is a bit high, often more than 20%. Also, the credit limit is low compared to the other types of loans.
☑️ Shopify Capital
Unlike traditional loans, you can get fast access to funds with Shopify Capital. However, it is only applicable to e-commerce businesses that are using Shopify to operate businesses in the US, UK, Canada, and Australia. You can apply for up to $5 million. Shopify usually provides the money in the form of merchant cash advances (MCAs). It gets a fixed percentage of sales daily. It also offers funding in the traditional line of credit, where you pay a monthly payment to Shopify.
☑️ Amazon Lending
If you are an Amazon seller, then you can take this loan. It is a performance-based business loan. You need to provide 12 months of sales history showing more than $10,000 in revenue. The loan is useful for increasing inventory and improving cash flow.
Other Forms Of E-Commerce Financing
There are ways to fund your e-commerce business other than taking loans. You can invite people to have shares of your business and provide capital in return. Here are some of the non-loan financing options you can choose from.
☑️ Equity Financing (Angel Investors And Venture Capitalists)
If you need a substantial amount of money, then you can go for equity financing. Here, you will sell ownership stakes to get more capital for your business. People who buy these stakes are angel investors and venture capitalists. Angel investors provide funding, usually from personal assets, for start-ups that are in the early stage of development. The venture capitalists, on the other hand, offer funds by pooling money from different sources to back up companies in the later stage of their development. Along with providing money, they also offer then expertise and connection which will help the business to grow. With this type of financing, you won’t have to worry about paying off debt. However, you won’t have complete ownership of the company, and the fundraising process might take a long time.
☑️ Crowdfunding
It is also a way of raising capital without taking any debt. You can use different online platforms to take a small amount of money from many people. The investors get to pre-order products along with getting small stakes in the company. To raise funds this way, you will need an intensive marketing effort.
☑️ Grants
Government grants are ‘free money’ offered to promising businesses. There are various private organizations, too who provide grants to small businesses and smaller market segments, like women, veterans, or minorities, to create a strong social impact. However, these grants are extremely competitive.
Conclusion
Without e-commerce business loans, you may lose important business opportunities and fall behind your competitors. This financing can also help your business pull through difficult times. Before applying for an e-commerce loan, you should determine your business objectives. You may need the funds for expanding product lines, improving technology, enhancing marketing efforts, or entering new markets. Depending on why you need fund, you must decide on the type of loan that is right for you.
