Updated August 19, 2022
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Fully online businesses are growing more and more each year, and e-commerce business loans are a key part of making sure your company is keeping pace with that growth. According to Statista, total e-commerce sales grew nearly 17% year-over-year in 2021, accounting for about a fifth of all retail sales on earth. They also expect internet sales to rise to a full quarter of the planet’s retail market in the next few years. All of this is to say that finding the right funding solutions for your online store can help your e-commerce company take part in the growth in the digital portion of international retail.
Why Do E-Commerce Companies Need Funding?
To a traditional business owner, it might seem confusing that a fully online store would need funding at all. There’s no real estate to buy, no vehicles for deliveries. However, building, maintaining, and upgrading a fully functional online store is more expensive than you’d expect at first glance.
If your entire business is hosted and operated online, your website must be professional, functional, and kept in great shape. That’s not easy, and it isn’t cheap. There are a few significant costs associated with an e-commerce site. You’ll need to purchase and host a domain name. You’ll need to host the website, which can cost hundreds each month. Your e-commerce platform needs to be able to process payments, keep customers’ data secure, and provide the sort of data and analytics that can guide your decision-making. As your store processes more and more payments, the cost of your e-commerce platform will rise.
This may not be a problem for sole proprietorships at the start, but as your company grows, you’ll likely need to bring new staff aboard. Whether that’s an accountant to make tax season as painless and seamless as possible, a web developer to keep your store running, or a sales team that allows you to boost income, hiring the right team members will require considerable money.
You’re selling things, so you need to acquire those things. Stocking up on inventory can save you money in the aggregate, as suppliers often give discounts to companies buying in large quantities, but those large quantities can be extremely expensive. E-commerce funding can help make sure you’ve got the inventory on hand to drive sales.
You’ve got to get the word out about your business. A full-scale marketing plan can be extremely expensive, particularly if you outsource the planning to a firm specializing in digital marketing. While sometimes traditional print advertising can remain effective, there’s also digital content creation, search engine optimization, and a social media presence to maintain.
Am I Ready To Apply?
Now that you know why you need to acquire some form of financing, you should consider your creditworthiness as a borrower. Lenders aren’t underwriting any form of business financing out of the goodness of their hearts – they want to approve loans for borrowers who will be able to pay that loan back with interest.
First thing’s first: how’s your credit history? Any loan will involve the lender examining your business’s credit score and history. Your business credit score is calculated using a combination of your company’s history of making payments on debt, the length of its credit history, total debt, what percentage of available credit is currently used, and the size and industry of your company. Can you improve any of those factors before you fill out a loan application? Can you pay off a debt or reduce the usage percentage on a credit card? If you’ve got good credit, you’re likely going to be looking at the potential for larger loan amounts, smaller interest rates, and generally more favorable funding.
You should also gather the necessary documents. Any application process will involve a variety of documents. You’ll want to have your tax returns, bank statements, credit reports, balance sheets, business plans, and any future projections correct and on hand.
Part of that application process will involve knowing exactly why you want that funding, and how much funding you’re looking for. Once you’ve got all of that planned out, you’re probably ready to think about which exact financing option is best for your online store.
What Types of E-Commerce Financing are Available?
Many different forms of business funding are available to small business owners operating fully online. Your particular company’s eligibility, repayment terms, and interest rates will all depend on factors including your industry, credit scores, and particular needs. For some purposes, multiple funding options will work.
First, there are term loans. Term loans are the form of funding you think of on its most basic level. You apply for a loan, a lender determines your creditworthiness and offers a set amount of money at a set interest rate. You make monthly payments until you’ve paid back everything with interest.
There are many benefits to term loans. They’re flexible: you can use money from a term loan as working capital, to fund a hire, to buy a piece of equipment, or even to pay off another loan. If you qualify for a long-term loan, the size of that principal can range into the millions.
The biggest issue with term loans is that they can be difficult to qualify for. Lenders will be particularly careful about the companies to whom they’re lending money, as a default on the part of the borrower can be very expensive for the lender.
However, if you’ve got good credit and a variety of business needs, a term loan is a great choice.
SBA loans are guaranteed by taxpayer dollars through the U.S. Small Business Administration, or SBA. There are a few particular types of SBA loans (most commonly SBA 7(a) or microloans), but they all have the same basic premise: the money that a financial institution lends to the borrower is guaranteed by the federal government.
Because that money is guaranteed by Uncle Sam, lenders have very limited risk and are able to offer much lower interest rates than they would on a term loan of the same size and repayment term. They can also be substantial: the maximum size of an SBA 7(a) loan is $5 million, while they also offer microloans of up to $50,000.
The big downside to SBA loans is also their biggest advantage: the taxpayer guarantee. Because taxpayer dollars are used to guarantee these loans, the SBA is very careful about the companies that receive them. The application process is long and vigorous, you’ll need to show exactly how you’re spending the money, and some industries aren’t eligible. If you are eligible, qualified, and able to receive an SBA loan, though, they can be an affordable option for any e-commerce business.
Revolving Credit: Credit Cards and Lines of Credit
Business credit cards and business lines of credit are both forms of what is known as revolving credit. That is, they function with a credit limit and you’re able to borrow again once you’ve paid down your debt.
Business credit cards function just like a personal credit cards. The issuing company gives the cardholder a particular credit limit. The cardholder then only needs to make payments (and pay interest) on money spent under that limit. There are often rewards for spending a particular amount, but interest can be quite high on a business credit card.
Lines of credit work similarly, but when you draw on a line of credit, you receive actual cash to your bank account. So while a business line of credit can be used to pay an employee or make a monthly payment on another debt, for example, your business credit card must be directly used to make purchases.
Both forms are great for rainy day funds in particular. You can have a high credit limit ready to be spent when the time is right. If you run a restaurant and your range breaks, for example, you can quickly have it repaired or replaced without having to apply for additional financing. In e-commerce, you can have a line of credit available so that if a supplier offers a massive discount on a large amount of inventory, you can easily step in and take advantage.
Inventory financing involves receiving financing while using inventory as collateral. If you’re looking to bridge a gap in cash flow, upgrade equipment, or stock up on inventory for a busy period, inventory financing can be a helpful option. The lender can take possession of your inventory in the event that you’re unable to pay the loan, which protects the lender from financial loss.
Inventory financing is particularly helpful for companies with a ton of inventory. If your e-commerce company deals with smaller amounts of inventory on hand, lenders may not be interested in this form of lending.
Merchant Cash Advances
Merchant cash advances are a form of small business financing in which a cash advance provider purchases a percentage of your future debit and credit card sales. Merchant cash advances are by definition not loans: you won’t receive an interest rate and won’t make monthly payments. Instead, cash advances come with what’s called a factor rate. Factor rates are typically between 1 and 2, and when multiplied by the size of the advance, generate the total amount that the borrower will pay back. If you take out an MCA of $8,000 at a factor rate of 1.1, you’ll pay back $8,800.
That fixed payback amount is why MCAs can have a higher APR than other forms of financing. You might be able to pay back that MCA in two months: but you’ll still pay back $8,800. If you pay back a term loan that quickly, you’ll barely pay any interest at all. And you’ll pay that back in a different form from other types of financing. Each day, a certain percentage of your total credit card transactions will go toward repayment of your MCA.
That’s not to say there aren’t huge advantages to cash advances: they’re very fast-moving and can hit your bank account mere hours after you apply. They also don’t take your credit score into account, so if your company is a startup or experiencing a period of poor credit, you’ll still likely qualify for an MCA.
E-Commerce Companies Need Small Business Loans Too
Even though there’s not a physical footprint for many e-commerce businesses, the expenses associated with running a fully online store mean that there is any number of loan products that can help an e-commerce business thrive. Look at your credit, your needs, and your ability to repay a new loan, then decide how an e-commerce business loan can help you set your company up for the future.