It is not uncommon for online retailers to have trouble getting their hands on working capital.
As a matter of fact, many entrepreneurs identify this as a significant obstacle to expanding their operations.
And there are various options for retailers seeking external funding, each with its own set of benefits and drawbacks.
However, online merchants still need to do their homework and become familiar with all the available funding options.
In this article, we'll go over the most popular financing sources for online sellers to help you pick the one that's right for you.
Asset-based financing is one of the most rapidly expanding forms of financing for online businesses.
Using this method, the merchandise you sell and the purchase will serve as collateral for the loan.
However, unlike other forms of funding, asset-based financing doesn't require business owners or merchants to put in any personal guarantee when applying.
Instead, providers will evaluate the retail potential of your products using data from online marketplaces before approving a loan.
As a result, asset-based lenders don't need to look at your credit history but rather your ability to repay in a specific time frame.
Asset-based financing can assist online retailers in meeting the high costs of fulfilling large orders, which is essential in today's competitive market.
In addition, asset-based lenders do not act as middlemen or fine traders, so they will not contact your business's suppliers or customers.
Asset-based lenders may be more interested in working with businesses that have the following qualifications:
💰 Valuable assets — An asset-based lender will only provide funding to businesses with valuable assets to pledge as collateral. As the quality of your goods increases, so does the likelihood that you will be approved for a loan.
💰 Good collateral management practices — If you want to secure asset-based financing, you need to ensure that your collateral is being managed and tracked effectively.
A form of business financing known as an "equity investment loan" involves a lender providing funds to a company in exchange for an ownership interest in the company.
Many large ecommerce brands take on equity investment at some point during their development. The three main types of equity financing include:
Furthermore, there are 3 primary reasons why equity financing is such a popular option:
🎯 Monetary value — It gives businesses access to large amounts of money, which they can use to expand their product line, workforce, etc.
🎯 Expertise and understanding — Each individual investor brings a wealth of experience and insight to the table.
🎯 A stock share — Equity financing doesn't require repayment, unlike loans. Instead, they issue stock to investors, who become partial owners.
While there are many positive aspects of equity investing, some online vendors may be put off by the risks involved.
For instance, ecommerce business owners may need to give up some control over operations because equity investors can influence the company.
In addition, as a company grows, equity investors may try to increase their holdings, at which point they may attempt to appoint members to key leadership positions.
In order to qualify for an equity investment loan, a business must meet certain requirements, which may vary depending on the nature of the investor and the industry in which the business operates. Common basic requirements often include:
💰 Strong growth potential — Companies with high growth potential are what most investors seek out.
💰 Experienced management team — Many investors are more likely to put money into a company if its leadership has extensive experience in the field.
💰 Scalable business model — Many investors seek out businesses with a model that can be rapidly expanded to seize a larger portion of the market.
💰 Competitive advantage — Investors may place more value on a company that has something that sets it apart from the competition.
💰 Clear business plan — Attracting equity investment requires a clear and well-defined business plan that details the company's objectives, strategies, and financial projections.
💰 Solid financials — Investors are more likely to put money into a company that has a proven track record of financial success.
💰 Legal and regulatory compliance — Investors are more likely to put their money into a company if they know it is in full compliance with all relevant laws and regulations.
Here is an example of portfolio characteristics for the Health Sciences Opportunity fund on BlackRock.
An increasingly common form of financing for online retailers is revenue-based financing, where lenders make an initial lump sum payment to merchants to help them:
Repayment terms are flexible and can be adjusted based on the company's sales performance.
In other words, revenue-based financing loans are based on a predetermined percentage of the borrower's monthly gross revenue (between 5% and 25%).
Therefore, the faster the online merchants can pay off their loan, the higher their expected sales volume in the subsequent months will be.
However, if sales slow down, their repayment period might be extended.
Each lender will have its own qualifications for merchants to apply.
However, many lenders won’t require a formal pitch deck, business plan, or long business history in order to approve them for funding.
Although the application process and risk assessment may be different from more conventional sources of funding, this does not mean that all ecommerce businesses will automatically qualify.
This allows business owners to compare rates and terms from various revenue-based lenders.
One of the more traditional routes for securing business capital is to request a loan through a bank or credit institution.
In order to use this approach, online merchants will have to seek out banks and other lending institutions that are open to working with startups.
As we'll discuss below, this could prove difficult, as many banks have stringent requirements that rule out many startup ecommerce businesses.
After the loan is approved, the merchant receives a single payment in the full amount.
Normal repayment begins the following month, at an amortized rate plus interest for a specified number of months.
The typical loan term for a business is 5 years, but it could be longer. Thus, the installments are typically affordable.
And although the interest rates on business loans are typically fair, the borrower is taking personal responsibility for the debt and could be subject to harsh penalties if they fail to make payments.
Ecommerce businesses may find that bank loans have the most stringent requirements compared to other forms of financing.
Since this is the case, it may discourage many online merchants from taking advantage of this opportunity.
Banks are risk-averse organizations, so they are reluctant to lend money to new businesses due to their lack of established credit or business track record.
For reference, many banks will consider or request the following factors when reviewing business loan applicants:
Securing government grants is one way for ecommerce companies to receive excess capital.
In contrast to bank loans, this type of funding intends to give new businesses free money to support their expansion.
Instead of receiving equity, interest, or repayment for these programs, the government merely funds specific industries to promote their development and achieve economic and policy objectives.
Government grants may have specific requirements for what the company can use the money for, such as hiring in particular areas or developing certain types of products.
The type, size, qualifications, and availability of government grants constantly vary based on current policies and other factors.
So, ecommerce businesses can monitor the Small Business Administration (SBA) site for the latest information available on small business grants.
As a reminder, each grant will have its own set of qualifications and stipulations that recipients will need to abide by, so keep this in mind as you’re applying.
It’s important to note that applying for government grants will likely be time-consuming and require much paperwork and documentation.
Plus, they typically do not make funding decisions quickly so it could be a few months before you hear back on the status of your application.
A service offered by third parties that serve as a middleman between suppliers and buyers is known as finetrading.
Instead of the online seller having to make the initial investment, ecommerce stores will finance orders placed with suppliers directly through the supplier.
This is a good option for companies that need to cover short-term cash requirements like purchase orders and new inventory.
Additionally, many merchants prefer the flexible repayment options that are typically included with these plans.
The merchant will, however, assume personal responsibility and risk financial penalties if they cannot make payments, just like with bank loans.
Finetrading providers will vet applicants based on traditional financial measures.
Thus, online merchants seeking this type of financing can anticipate rigorous credit checks and an extensive application process.
It can be difficult to determine which of the many potential financing sources is best for your business.
Nonetheless, there are a few key considerations that may point you in the direction of the financing option that is best for your business's current and future needs.
✔️ Determine your financing needs — Identifying your precise financing requirements is the first step in selecting an appropriate financing option. Think about how much money you'll need, how long the loan will be for, and when you'll be able to afford to start making payments.
✔️ How fast do you need the funds — While some forms of financing take their time making lending decisions, others can get you your money quickly.
✔️ Consider your credit score — Your credit score may have an impact on the financing options you have. Before requesting financing, you might need to look into alternative financing options or take steps to raise your credit score.
✔️ Documentation requirements — In addition to looking at the company's track record, a lender may want to see your business plan, audited financials, and cash flow projections before they give you any money.
✔️ Evaluate the cost of financing — Think about the full financing price, including interest, fees, and any other hidden costs. Examine the rates of interest and fees associated with each type of financing to find the one that best fits your company's budget.
✔️ Review the application process — Determine how long it takes to get funding and what paperwork is needed by reviewing the application processes for each financing option. Pick a financing option that has a simple and streamlined application process.
✔️ Repayment methods — There are a variety of ways to get money, and some of them have strict repayment schedules, while others require collateral or don't cost anything at all.
By taking into account these factors, merchants can better determine which financing options they will be able to qualify for and which one suits the company's immediate and long-term needs.
Therefore, even if you need quick cash, make sure the repayment plan is reasonable and won't put undue pressure on your cash flow in the near future.
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👍 Once the loan is approved, your goods are the only collateral we need.
👍 We require no personal guarantees.
👍 Applications review takes about 72 hours.
👍 Set your repayment terms however you like within 24 months.
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The three most common financing sources for online sellers are:
1. Asset-based Financing — Asset-based financing involves a lender lending money based on a borrower's assets. Real estate, accounts receivable, inventory, equipment, and others are examples. This financing can be used for inventory, expansion, and other business expenses.
2. Revenue-based Financing — Online sellers receive revenue-based financing based on current and future revenue. Online sellers like this financing because it doesn't require a large upfront investment and can be tailored to business growth.
3. Bank Loans —Online sellers often borrow money from banks to grow their business. Bank loans may have higher interest rates and require collateral like real estate.
Yes, a lot of banks provide financing for business startups.
The loan may be secured or unsecured and call for collateral or a personal guarantee depending on the type of business and the borrower's particular needs.
When determining whether to approve the loan, the bank may also take into account the borrower's credit standing, business plan, and other financial details.