min read
Written by: 
Nikolaus Hilgenfeldt

Guide to Financing for Online Sellers: Top 6 Funding Sources

For online sellers, accessing working capital is a common struggle they face. In fact, many denote this as a large challenge they must overcome when scaling up their business. Thus, finding ways to access capital to fund inventory stocking, marketing investments, and hiring efforts is a major key to unlocking further growth. 

Merchants looking to access external funding have a number of options available to them, each with its own advantages and disadvantages. 

Even still, it’s important for online sellers to do the proper research and understand all the funding routes they can pursue. This decision may have long-term implications on their debt levels, inventory stocks, cash flow, control over the business, and other crucial factors that they need to think through beforehand.

Throughout this guide, you’ll learn about some of the common financing options available to online sellers, and how you can choose the best option for your business. 

1. Equity Investment

Many large e-commerce brands take on equity investment at some point during their development. The three main types of equity financing include: 

  • Venture capital
  • Angel investing
  • Friends and family 

There’s a reason equity financing is such a popular option, as it gives merchants access to large sums of money that they can use to expand product lines, hiring efforts and more. Plus, the individual investors have a depth of knowledge and expertise in the space, so they are an added resource.

With equity financing, the borrower doesn’t have to pay back the received funds like a loan. Instead, they give away shares of the company as equity to the investors, who will then have a portion of ownership in the company.

So while equity investing does come with a wealth of benefits, there are also some drawbacks of this method that may turn away some online sellers. Equity investors will be able to impose their influence on the business, so e-commerce entrepreneurs will relinquish some of the control they have over operations.

In addition, equity investors may look to increase their stake as the business grows further, eventually getting to the point where they try to insert people onto the board and management positions. 

Equity Investment Qualifications: 

If your e-commerce business is looking for large sums of cash, and would also like to benefit from the contacts and networking opportunities that equity investors can bring, this may be a good route to pursue.

While angel investors may not look for detailed business plans or cash flow projections, venture capitalists will be looking to invest in e-commerce stores with good forecasts, a polished pitch deck, and other official documentation like audited financial reports. This gives them a better understanding of how their investment may perform and is likely part of their due diligence process as a fiduciary to their firm and clients.

Each equity investor may have varying qualifications based on the types of companies they prefer and the industries they’re involved in. So, some may be stricter than others when it comes to the criteria that e-commerce companies must meet. 

2. Bank Loan

One of the more traditional routes for securing business capital is to request a loan through a bank or credit institution. 

Using this method, e-commerce stores will need to shop around for financial institutions that are willing to lend to early-stage businesses. They may face some challenges while doing this, as many banks have strict requirements that disqualify many new e-commerce businesses, which we’ll cover below.

Upon approval, the borrower will receive a lump-sum payment of the approved amount, and the merchant can begin putting the cash to use in their business.  Repayment will typically begin the following month, at an amortized rate plus interest for a set period of time. Generally, repayment periods on business loans can last anywhere from five years and up. So, the monthly payments tend to be manageable.

While interest rates on business loans tend to be reasonable, the borrower is taking personal liability for the loan, and can face serious consequences should they fail to make repayments. 

Bank Loan Qualifications: 

Of all the financing options available to e-commerce stores, bank loans likely have the strictest qualifications. Thus, this may keep many online sellers from pursuing this route.

Banks are typically risk-averse institutions, so they don’t like to lend money when there’s little business history or a lack of credit that many new businesses will have.

For reference, many banks will consider or request the following factors when reviewing business loan applicants: 

  • Personal and business credit scores
  • Annual revenue
  • Business history
  • Industry and size
  • Business plan and loan proposal

3. Government Grants

A method of free funding for e-commerce businesses is to secure government grants. Unlike bank loans, this type of funding is specifically designed to provide free financial assistance to new businesses to support their growth.

The government doesn’t receive any equity interest or repayment for these programs; rather, they provide funding for certain industries to fuel growth in these areas and meet policy and economic goals.

Whereas the previous two financing methods we discussed give e-commerce businesses freedom and flexibility for what they can do with the funds, government grants may provide certain stipulations for what the money has to be used on–like hiring in certain areas or development of certain types of products. 

Government Grants Qualifications: 

The type, size, qualifications, and availability of government grants constantly vary based on current policies and other factors.

So, e-commerce 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. 

4. Finetrading

Finetrading is a service provided by third parties that act as an intermediary between suppliers and buyers. For e-commerce stores making orders with suppliers, they will provide the financing for the order directly to the supplier, rather than the online seller having to make the upfront investment. 

This is a good option for businesses that need to cover short-term cash needs like purchasing orders and new inventory. Plus, these plans generally come with flexible repayment plans that are favored by many merchants.

However, just like with bank loans, the merchant will take on personal liability, and will face financial consequences if they are unable to make repayments. 

Finetrading Qualifications: 

Finetrading providers will vet applicants based on traditional financial measures. Therefore, e-commerce businesses looking to secure this type of financing should expect credit checks and a thorough application process before being approved. 

5. Revenue-Based Financing

This is a very popular form of financing among e-commerce stores. It allows for flexibility with repayment that is proportional to the level of sales the business is generating, with no fixed terms. 

Lenders will provide an upfront lump-sum payment to merchants so they can keep inventory stocked, invest in marketing efforts, or any other growth strategy they’re employing. To pay back this loan, merchants pay a fixed percentage of their monthly sales back to the lender. This percentage can range between 5-25%.

So, the higher the sales volume in the following months, the quicker the online sellers will pay back their loan. On the other hand, if sales slow down, their repayment period could be lengthened. 

Revenue-Based Financing Qualifications: 

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. 

This isn’t to say all e-commerce businesses will easily qualify, though the application process and risk assessment may differ from other traditional financing sources. Thus, merchants can shop around among revenue-based financiers for the most attractive terms. 

6. Asset-Based Financing

Lastly, asset-based financing is one of the top-growing methods for e-commerce funding. With this route, the goods you sell and buy with the financing will serve as your security. So, the merchants themselves are not making a personal guarantee like with other financing options.

In order for the loan to be granted, the providers use the data from e-commerce platforms to assess the sales potential of your retail products. Thus, the loan is granted on the basis of your future performance, not the history of your financial operations.

In today’s fast-moving market, it’s important for e-commerce stores to always have well-stocked inventory, which is where asset-based financing can help merchants cover these large order costs.

Unlike middlemen or finetraders, asset-based lenders do not interfere or contact your suppliers or customers, leaving you in full control of your business. 

Asset-Based Financing Qualifications: 

As we briefly mentioned above, asset-based finance providers will utilize programs that analyze the goods you’re selling and their future potential to approve you for funding. 

Instead of other methods that focus on your past history and financial performance track record, asset-based financiers look ahead to how successful they expect the products to perform in the marketplace given the existing competition, supply, and demand levels.

Plus, merchants and lenders share the risk of the loan, rather than the personal liability lying completely with the online seller. 

How to Choose the Right E-Commerce Financing Option

With all these options available, it can be tricky to weigh out all the funding methods and choose the route that’s best for your business.

Even still, there are some main points to consider that could lead you in the right direction that will set you up with the financing option that’s best for the current and future state of your business. 

  • When you need the funds: some financing options don’t make lending decisions quickly, while others provide fast access to cash
  • Amount of funding needed: not all financing routes will provide you with a sizable lump sum
  • Length of business history: certain e-commerce stores in the earlier stages may not qualify for some of the more traditional financing options
  • Documentation requirements: like business history, some lenders may require detailed business plans, audited financial statements, and cash flow projections in order to approve them for funding
  • Repayment methods: some financing options will have a rigid repayment schedule, others will require equity in exchange for financing, and others are free forms of financing

By considering these points, merchants can get a better idea of which financing options they’ll be able to qualify for, and which one meets the immediate and future needs of the company. So, even if you require short-term funding to meet your cash needs, make sure the repayment schedule is reasonable and won’t put too much strain or pressure on your cash flow in the coming months.

The good news is that there is a range of options, each coming with its own set of advantages and disadvantages. Even still, many e-commerce stores today are favoring asset-based financing given the flexibility, security, and opportunity it provides. 

Do you sell your goods on Amazon? There are some other options available to you.

Access Asset-Based Financing with Myos

After considering all the financing options that e-commerce companies can choose from, many land on asset-based financing. Online sellers prefer this route for its flexibility with repayment plans, document requirements, and limited business history qualifications. 

Asset-based financing offers little downside to both lenders and borrowers, allowing this financing method to have favorable terms. Plus, merchants don’t have to give up control or shares of equity in exchange for growth capital. E-commerce stores pursuing asset-based financing can access the funds they need quickly to ramp up operations and fuel further growth

With Myos, online sellers can apply in just five minutes. Our customers enjoy favorable repayment terms and business history qualifications, in addition to lean documentation requirements. When working with Myos, merchants share the risk, giving them all the upsides that come from running an e-commerce business while being shielded from the downsides.

Expand your product lines and invest in your store growth with asset-based financing from Myos. 

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