BlogFinance
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December 1, 2022
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8
min read
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Written by: 
Nikolaus Hilgenfeldt
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Category:
Finance

Alternatives to Bank Loans: What’s Best for Your ECommerce Business?

Did you know that the overwhelming majority (82%) of small businesses fail due to poor cash flow management?

How easy it is to spin money and invest further is one of the most important things that will determine the success of your online store.

For instance, if you have a steady income stream, you can invest in products that have already proven popular while trying out new options to expand your product offering.

Not to mention spending money on advertising, staffing, inventory, transportation, etc.

Everything mentioned helps companies expand and grow.

Still, a lack of capital is the biggest thing that can stop an ecommerce company from thriving.

This article will explain traditional financing through bank loans and why it is vital for your ecommerce strategy.

We'll also tell you about some alternatives to bank loans that you can use to fund your online store and the pros and cons of each.

Let's start!

What Is Ecommerce Financing?

Financing an ecommerce business means getting capital without giving up any of the ownership you already have.

And banks have always been an integral part of the business financing landscape.

But many new, innovative, and quickly growing ecommerce businesses may need more assets and a higher risk-reward ratio to get bank loans.

Furthermore, today's ecommerce is frequently time-sensitive, making bank loans a less ideal funding source.

Most retailers and online store owners look for alternative bank loan options in order to keep cash flow stable with as little risk as possible.

Why Do Ecommerce Businesses Request a Loan?

Short-term cash flow means that there is little room for growth or change, which can make it hard for the top sellers to grow if they don't have enough cash.

That means you need to take action to increase demand and increase inventory levels if you want your business to thrive.

For instance, stores can't invest in R&D (research and development) if they can't afford to stock best-sellers.

Once a small number of products limits a company's ability to grow, that company is highly dependent on the success of those products.

To get ahead of the competition, you'll need to find ways to work around these constraints.

Although every company is different, the following are some of the most typical uses for an ecommerce loan:

  • To cover operating expenses.
  • To meet the obligations of current debts.
  • To buy goods for contract fulfillment.
  • To keep cash on hand and grow a financial cushion.

Before we propose alternatives to bank loans, let's first define what they are, how they function, and their benefits and drawbacks.

Traditional Ecommerce Financing: Bank Loans

Traditional bank loans are a type of term loan that banks give to businesses to help them meet their long-term funding requirements.

The bank will add interest to balances that aren't paid off, and you'll have to make payments regularly.

People who want to get capital from a bank must put something up as collateral, like a car or piece of equipment.

If the borrower doesn't repay the loan, the lender can take the collateral and sell it.

How Do Traditional Bank Loans Work?

Usually, the first step in getting a bank loan is to fill out an application form and send it in with documents like your company's incorporation certificate and financial information.

When the bank has all the necessary documentation, they’re doing a credit check on your business analyzing many factors to decide whether or not to give you a loan.

These include, but are not limited to, your company's financial statements, cash flow, business plan, and asset coverage ratio.

Pros and Cons of Bank Loans

Bank Loans: Pros

✅ Clear loan conditions - Loan terms include interest rates and repayment amounts without surprises.

✅ Very low interest rates - Banks charge lower interest rates than other lenders (cash flow lending).

Bank Loans: Cons

🚫 Strict repayment terms - Fixed-amount repayments must be made on time.

🚫 Difficult application processes - There is a ton of paperwork. Examples include submitting financial statements, creating a business plan, and filling out loan applications.

🚫 Lengthy turnaround - Decisions about commercial bank loans can take months.

🚫 Collateral is necessary - Banks demand tangible security for loans.

🚫 Qualification challenges - When approving loans, bank lenders give great importance to your company's credit history (e.g. at least 2 years to apply for a loan).

🚫 Limiting agreements - To lower risk, banks may impose limitations on how you use borrowed funds.

🚫 Strict repayment terms - Bank loans are governed by set repayment terms. Cash flow could be restricted if revenue performance falls short of expectations.

Let's look at some simple alternatives to bank loans that you can use to easily grow your business.

Alternatives to Bank Loans & Why To Consider Them

1. Asset-Based Loans

Asset-based lending, also known as "inventory lending," is another alternative bank loan that provides ecommerce businesses with a term loan secured by their inventory as a form of asset financing.

As we've already said, traditional bank loans usually need equipment or real estate as collateral. Asset-based loans, on the other hand, employ products to secure payments.

For instance, if you can't make your payments, the creditor has the right to keep and sell your goods.

Examples of other assets offered up as collateral include:

  • Equipment
  • Inventory Financing

Myos, for instance, is just one of several asset-based finance providers that work with shop owners, merchants, and business owners to boost sales and expand their operations.

To provide operating capital, Myos lends between £10k and £2m at a monthly cost of 1% to 3% of the total loan amount

Moreover, full repayment flexibility for up to 24 months is available.

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Using an algorithm powered by AI and machine learning, Myos can assess the product data and estimate the financing volume without doing any further credit checks on the seller.

Furthermore, you can avoid any personal risk or guarantee by using the product as collateral.

2. Line of Credit(LOC) Loans

A line of credit (LOC) is a loan that gives a business continuous access to a certain amount of money. 

You can withdraw funds up to the credit limit and only pay interest on the funds used

Then, when you repay a loan, the refunded funds are immediately accessible for re-borrowing.

Furthermore, depending on your qualifications, the APR for a line of credit can range from 3% to 80%, and lenders may allow you to borrow up to $500,000.

LOC Loans: Pros

✅ Loan flexibility - A line of credit is a form of bank or credit card that allows you to borrow money regularly rather than just when you need extra cash.

✅ Boosting credibility status - It helps your company get loans, lower interest rates, and better payment terms.

LOC Loans: Cons

🚫 Fees and additional expenses - You may be charged account set-up fees, annual fees, transaction fees, late payment fees, etc. on your business line of credit.

🚫 Complex application procedures - There's a lot of paperwork to submit, such as your company's historical financial statements, tax returns, business plans, etc.

🚫 Slow response - Approval may take months.

🚫 Challenging to qualify - Sometimes your company has to be in business for at least 2 years to qualify for a business line of credit.

3. Micro Financing

Today, financial institutions are hesitant to extend loans to business owners with annual revenues of less than $50,000.

Microfinance, or microlending, is an alternative to bank loans that gives small loans to ecommerce startups and small businesses to help them meet their financial needs.

In other words, you can use this type of loan to purchase merchandise, supplies, furniture, fixtures, machinery, equipment, etc.

However, you can't apply for a microloan to buy a home or pay off multiple debts.

Ecommerce businesses can get a microloan from financial institutions such as nonprofit organizations, traditional banks, and credit unions. 

The average amount with microfinancing ranges between $10 to $25,000.

Micro Financing Loans: Pros

✅ Low rates - Microloans offer quite low-interest rates. An average microloan rate is 7% to 8%. For example, SBA microloans' average interest is 6.5%.

✅ No collateral - Microloans require little or no collateral.

✅ Quick financing - Microloans provide fast funding. Most lenders will approve your application within two weeks if you meet the requirements.

Micro Financing Loans: Cons

🚫 Small loan amounts - Microloan size is capped at $50,000, while traditional loans can exceed $1 million.

🚫 Short payback terms - While traditional loans have 5-year repayment terms, microloans usually have a one-year repayment term.

🚫 Restrictions - The lender may require specific use or prohibit other uses of the loan.

4. Merchant Cash Advances(MCA)

An MCA is a loan that a business gets in exchange for giving up a portion of its future credit card sales. 

Within 24 hours of submitting an application, an owner of an online store can receive funding from an MCA.

The MCA funding requires an analysis of the company's daily credit card sales to make sure that ecommerce businesses can afford to pay back the loan.

The amount of money provided by an MCA can vary from $2,500 to $1,000,000, with the average amount between $5,000 and $500,000.

In addition, the interest rate on an MCA may also be much higher than the interest rate on a personal loan.

MCA Loans: Pros

✅ No collateral - As its name implies, this loan is based on a cash flow, not assets. Therefore, a cash flow loan is unsecured.

✅ Less focus on the history - Your company's ability to generate future cash flows determines loan approval.

✅ Quick funding - Cash flow loans have a faster approval time than traditional bank loans.

MCA Loans: Cons

🚫 Scheduled repayments - Fixed-amount repayments are due at predetermined intervals.

🚫 High-interest rates - Companies with poor credit or few assets seek MCA loans. Higher interest rates would compensate for higher default risks.

🚫 Automatic repayment - Some lenders may require automatic payments to cover their risk. Repayments may be taken from your bank, PayPal, or merchant account.

Wrapping Up

If you want your business to keep growing steadily, you need to find other ways to bring in money.

This is especially important for new businesses, which must overcome many problems before they can be successful.

We hope these alternatives to bank loans will help you develop long-term plans for your company's growth, which will address some of your primary concerns.

However, if you are unsure which one is the best for you, we suggest considering Myos’ asset-based funding for your future investments.

Myos offers you 3 different types of financing:

  • Purchase finance - Myos can handle your deposit or balance payment while you place manufacturer orders. Working capital helps you develop and stay flexible.
  • Stock finance - Use the inventory to acquire rapid expansion funding. Myos will analyze your items using AI to utilize your products as collateral. Therefore no personal guarantees are required.
  • Cross finance - Large client payments might affect cash flow. In this case, Myos lends you money using your merchandise as collateral without ever contacting your consumers or manufacturers.

How Does Myos Work?

We utilize an AI system to evaluate your goods against basic criteria:

  • A 60-day sales history.
  • At least 2 years of viable goods.
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You’ll pay only once you produce a turnover. 

For instance, if the project lasts for 24 months, you can pay back some of the finance in the 1st quarter, some in the 2nd, and the full sum at the conclusion. 

Furthermore, you can always check to see whether any fees are owed and how much financing is still available.

What Are the Benefits of Utilizing Myos Funding?

Myos enables risk-free growth that includes:

  • Financing greater quantities with reduced risk, 
  • No personal guarantee or obligation, 
  • Using only goods as collateral, and 
  • Product-related risk analysis to reduce your production and shipping expenses.

Tempting, right?

Get a free quote immediately and discover a new, risk-free, refreshing perspective for your business expansion.

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