The online retail market has grown exponentially since COVID-19. This growth, and the relatively low barrier to entry, makes it a great time to start an ecommerce business.
It’s not surprising that entrepreneurs and small business owners are entering the ecommerce market, but it’s not easy to do, especially when it comes to securing funding. There are a dizzying amount of options and it’s difficult to know which funding option is the best one.
Here, we cover the many different ecommerce funding options available to ecommerce businesses, why these businesses struggle with finding funding, and why an ecommerce business has different needs than other types of businesses.
So, what funding options are available to ecommerce businesses?
Despite the popular belief that building and running an online business is inexpensive, running an ecommerce business can be quite costly. Most business owners require some type of ecommerce financing to build and grow their business. Ecommerce financing is a cash flow solution that provides financial support to online stores. It covers expenses such as employee salaries, marketing costs, as well as costs for inventory, storage and shipping.
Six common types of ecommerce financing
Here are the six most common types of ecommerce financing options available to business owners.
1. Business loans
Business loans are a fast, easy, and effective way to obtain financial relief. They allow a company to borrow capital from a creditor and set a timeframe for that money to be paid back with interest.
If you are looking to invest in a specific area of your business, consider a fixed-term business loan. Your business will receive a fixed amount of money and the interest rate remains the same for the entire loan term. Keep in mind these loans have a non-revolving credit limit and you will only have access to the capital once.
Alternatively, if a business needs smaller sums to manage their business, it should look into flex loans. These allow access to smaller amounts of capital and function like credit cards or overdrafts.
2. Business line of credit
A business line of credit works a lot like business loans, but businesses only pay interest on the amount they actually use. You can dip into this amount whenever needed. This will vary depending on the bank used. Lines of credit interest rates can vary, and they are typically based on a business owner’s personal credit history, income, and reliability with previous loans or credit items.
3. Investor or equity financing
Investor, or equity financing, refers to exchanging a percentage of ownership of the ecommerce business for capital investment from an individual, or venture capital (VC) firm.
This money can be spent by the business owner for any aspect of the business, including, but not limited to, inventory purchases, marketing efforts, warehousing, staff, and new product development.
Finding an investor with the experience, funds, and contacts in the specific area of business can be extremely beneficial for ecommerce business owners. At the same time, you will dilute your own investment by bringing on this support. And, if your investors don’t see a return on their investment, they could take action to replace team members or pull their funding completely.
4. Grants
While grants are essentially “free money” and are not expected to be paid back, they require a lot of time, work, and effort. Grants are offered at national and local levels as well as through corporations wanting to support emerging businesses. Businesses have access to different grants depending on the location where they founded their business.
Many grants are offered to minority groups, female founders, environmental businesses, and veterans. Business owners should do their research to ensure they meet all eligibility requirements.
5. Capital advances
Capital advances provide business owners with an “advance” of funds on upcoming sales. The regular repayment rates are often similar to bank loans, but owners should check with their providers. Some lenders take a percentage of your sales over time which will make the repayment amount vary considerably.
Applications for capital advances are pretty straightforward and the cash is readily available making them a popular ecommerce funding choice.
6. Crowdfunding
This method involves raising capital from larger groups of people on crowdfunding websites (IndieGogo, Kickstarter) in exchange for exclusive perks like free product, swag, and sometimes equity – though this is less common.
Crowdfunding is fairly low-risk as it allows businesses to test the market and see if consumers are interested in supporting their campaign, product(s), and businesses. It’s also an excellent way to attract early adopters and advocates for your brand and collect feedback in order to improve.
Be sure you are able to supply and fulfill the orders you receive in your crowdfunding campaign. Nothing could be worse than a business having a successful crowdfunding campaign and then not having the cash to pay for the inventory upfront resulting in negative opinions and reviews from current and future customers.
Why is it hard for ecommerce businesses to find funding?
A recent study article tells the story. It shared a study by U.S. Bank, which finds 82 percent of small businesses fail because of cash flow problems. Twenty-nine percent of them run out of cash.
So, why? First, many banks are hesitant to lend large amounts of capital to e-commerce businesses. Banks want to see a proven and steady cash flow and sales stream from these businesses. Second, the traditional finance sector does not take the time to understand ecommerce businesses and perceives them as high risk. Lastly, the vast majority of funding methods are built for traditional retail businesses, not ecommerce. For example, traditional funding options often do not take into account supply chain replenishment timelines, sales cycles, or inventory turnover performance.
How are ecommerce businesses different from retail?
Brick and mortar, as the name suggests, is the retail standard. These traditional retail stores are physically located in buildings. They offer services and products on-site and interact with consumers face-to-face. They typically have high initial investment costs and slow startup periods as it can take years to find investors, apply for loans, secure a location, and more. In contrast, ecommerce companies sell products, goods, and services online. They have lower (though not non-existent) startup costs, scalability, enhanced tracking capabilities and metrics, and can launch relatively quickly.
Another challenge with ecommerce? It’s extremely competitive and crowded. Its customers may be wary about buying online and sharing their personal information with unfamiliar websites and brands. Regardless, ecommerce can be an entrepreneurial dream. And funding options do exist.
What you need to know before choosing an ecommerce funding partner?
It starts with managing expectations. It can be challenging to know what type of funding is needed, where to seek it, and what business partner should be engaged. Our advice is to vet your partner, consider the pros and cons of working with them, and talk to more than one partner to see if they offer and operate this way:
• Do they focus on your success … or theirs?
• Do they offer a simple, easy approach?
• Do they offer you a suite of funding options that are best for you, such as:
- Small ecommerce business loans
- Revolving lines of credit
- Revenue-based financing
- Personal and business credit cards
- PO and invoice financing
- Inventory financing
- SBA Loans (… and more)
• Are they offering you the best rates and terms?
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