As an eCommerce seller, often all that stands between you and a successful online business is cash—after all, you’ve got inventory, marketing, fulfillment, and warehousing costs to pay before you can look at expansion projects.
You may have even invested your savings and still come up short.
Luckily, funding options for eCommerce businesses have improved over the years. These days, you can choose from traditional bank loans or more flexible options like those offered by the SBA.
But the question is: are eCommerce business loans right for you?
Let’s dive deeper into the world of eCommerce funding to find out.
It can be tough to know which funding option is right for you. Don’t go it alone. Speak with a SellersFi expert today.
Everything You Need to Know About E-commerce Business Loans
- What Is an E-commerce Business Loan?
- What Can I Use an E-commerce Business Loan For?
- The Ultimate E-commerce Business Loan FAQ
- E-commerce Business Loans: Know Your Options
- Invoice factoring (a.k.a. debt factoring)
- SBA loans
- Business lines of credit
- Business cash advances
- Working capital loans
- Bonus: Credit cards
- 3 Quickfire Tips to Choose the Right E-commerce Business Loan
- Secure External Capital for Enviable Business Growth
What Is an E-commerce Business Loan?
An eCommerce business loan is a funding option designed to help online stores launch, operate, or grow. Some loans can help you do all three, while others have more narrow usage guidelines like only taking out the loan if you intend to buy real estate.
E-commerce is on the up and up. In the UK alone, online sales grew by 36% in 2020—the highest growth rate in 13 years. Even characteristically slow months have picked up: in January 2021, eCommerce sales rocketed by a whopping 74%.
With eCommerce sales accelerating at such an astounding level, it’s the perfect time to lay down strong operational roots—to help you accommodate more sales, showcase your brand, and cast your eCommerce net even wider.
There’s just one problem: Capital. Or should we say, lack of.
Cash flow issues are common in eCommerce—not surprising when you consider 64.4% of eCommerce businesses use the owner’s or their family’s resources to get started, compared to just 16.5% that secure bank loans.
Yet eCommerce business loans vary in flexibility, affordability, speed, and repayment terms. So, it pays to research which one (if any) is right for you.
What Can I Use an E-commerce Business Loan for?
E-commerce business loans have come a long way since their inception.
These days there’s a loan to suit nearly every eCommerce activity, including:
- Launching your startup
- Organizing working capital
- Sales and marketing initiatives
- Paying for business expenses, i.e. payroll, inventory, marketing
- Buying real estate
- Expanding into new territories
- Restructuring or refinancing debts
- Implementing an omnichannel selling strategy
- Increasing your product range
- Covering payroll
- Purchasing supplies
- Securing or renewing licenses and permits
- Paying taxes
The Ultimate E-commerce Business Loan FAQ
How much do I need, and can I afford it?
If you still need a loan after eliminating every other option, it’s time to calculate how much money you’ll actually need.
Note: Do not skip this step! It helps you protect your most precious resource: time. Plus, it helps to evaluate whether a loan will be affordable before you spend your precious time filling in applications.
So, tally up your costs, add a buffer for unplanned expenses, and then use these sums to work out whether external funding will be manageable for you:
- Net Operating Income: This formula is a great way to figure out the profitability of your business activities. Note it doesn’t take into account any other funding sources, i.e. existing lines of credit.
Net Operating Income = Revenue – Cost of Goods Sold (COGS) – Operating Expenses
- Debt Service Coverage Ratio (DSCR): This formula is what lenders use to assess whether you can pay back the loan.
DSCR = Net Operating Income / Annual Debt Obligation
How quickly can I pay it back?
This is a critical question if you intend to take out a long-term loan.
First off, figure out whether:
- You can repay the loan early, and if any early repayment fees apply.
- There are any lump sum payments required in the loan term.
Then, assess your future projects and plans. Will you have any additional capital coming in that you can contribute? If so, keep a note of how much and when. It may help reduce the loan amount you take out too.
E-commerce Business Loans: Know Your Options (and Alternatives)
Aside from borrowing from friends and family, there are five main funding options for eCommerce stores—and some of them don’t look anything like a traditional loan.
Let’s run through them (plus a sneaky bonus 😉):
#1. Invoice factoring (a.k.a. debt factoring)
With this funding option, you sell your due invoices to a factoring company at a discounted rate.
Your fees will include a service fee charge and discount rate. These often vary and reduce as your revenue increases.
Invoice factoring is a safe and flexible funding option that offers a quick way to unlock capital stuck in unpaid invoices.
👍 Invoice factoring is great for:
- Companies with an accounts receivable arm. If you have an online wholesale eCommerce store that bills clients after their order (i.e. 30-90 days post) this could work for you.
👎 Try to look elsewhere if:
- Your invoice value and quantity are small.
- Your customers have poor credit, i.e. you serve new or less established businesses with bad to no credit.
#2. SBA loans
SBA loans are in place to help small businesses launch, run, and scale.
Consequently, they have a wide range of short-term and long-term options, from Working Capital Lines of Credit to real estate loans.
Excluding credit lines, many SBA loan options are amortized loans that spread out the cost over the entire loan term. This setup reduces the loan’s book value but results in a fixed repayment schedule and amount—leaving you with little flexibility.
Many of the loans come with reasonable fees and interest rates, and you can pay most of them early. But it can take months to complete the application process and there’s no guarantee you’ll succeed in getting approval.
Also, SBA loans are quite traditional in their requirements which makes them unsuitable for many eCommerce businesses.
For example, most of their loans require you to have:
- Access to sufficient personal collateral.
- Relevant management expertise.
- Good credit (680+) and character.
- A business that’s turning a profit.
- Used up alternative funding options.
- A business or intended to do business in the US or its territories.
👍 SBA loans are great if you:
- Have an excellent track record running a successful business in the past — i.e. if you run a chain of established retail stores before switching to eCommerce.
- Have good business and personal credit and collateral — i.e., you own a home and have business assets like equipment and a storage unit.
- Aren’t in a rush to secure funding — i.e., your business is profitable.
- Own a business that needs capital to thrive, not survive — i.e., cash flow is sometimes low because of increasing demand for your products clashing with your merchant platform’s unpredictable payout schedule.
- Looking into a long-term investment that you’ll pay over time (excluding business lines of credit).
- Have a documented business plan and strategy.
Note: Experienced business owners looking to boost their company’s stability will have better chances of securing a loan than a newbie.
👎 Try to look elsewhere if you:
- Don’t have time on your side.
- Can’t meet the minimum requirements.
- Want to use the loan for something outside of its usage limits.
- Prefer to ‘wing it’ and don’t have a solid business plan or strategy.
#3. Business lines of credit
A business line of credit (a.k.a credit line) is a revolving funding option with a capped limit.
Credit lines help businesses fill capital shortages, and they’re flexible too. You can borrow varying amounts at different times—making it a more affordable funding option than a traditional loan that requires you to take out a lump sum. Plus, you can use it for anything related to running and growing your business.
However, you pay a premium for this flexibility and control, and interest rates can start from as high as 10%.
Since they’re short-term funding options, most have repayment terms ranging from 6-12 months. They also take less time to acquire, thanks to more lenders offering streamlined application processes with fewer documentation requests.
👍 Credit lines are great if you:
- Have seasonality in your business and need extra capital to see you through sales surges, leaner months unplanned expenses.
- Need funds quickly to get a short-term project off the ground.
👎 Try to look elsewhere if you:
- Need funding for a long-term project.
- Will struggle to repay with fees and interest charges added on.
- Require a long time to pay back funds.
- Want funds to make small but regular payments.
- Don’t have much time to go through the approvals process.
#4. Business cash advances
Unlike most funding options, cash advances (a.k.a. capital or merchant advances) aren’t loans.
They work by selling a portion of your future sales at a discount and come with a set fee for the entire capital advance.
This setup means lengthy fixed payments won’t tie you down. 🎉
Repayments are flexible since they depend on how much revenue you make and the funder collects its portion of your sales through your card payment takings. Business cash advances are also quicker and easier to obtain than more traditional loans, thanks to their more relaxed requirements.
But these benefits come at a cost: the fee can be more expensive than traditional loans, reaching up to 30% of the agreed cash advance. Plus, cash advances are only a short-term solution, and you’ll lose some liquidity in your business since you’ll sell on some of your future revenue.
Note: With business cash advances, most funders won’t rule you out for having poor credit, and you don’t need to offer up collateral. Plus, you can get approved in less than 48 hours by capital providers. (We can think of one provider that stands out from the crowd 😉).
👍 Cash advances are great if you:
- Have a business with strong sales but periodically lack cash flow. For example, if your sales are healthy and you need an equipment upgrade, a cash advance could work.
👎 Try to look elsewhere if you:
- Operate on a cash basis.
- Have a low-sales volume.
- Want complete control over your operations and cash (lender guidelines often apply, i.e. restriction on payment methods).
CTA: Does a cash advance sound like just what your business needs? Learn how SellersFi can help you secure one.
#5. Working capital loans
These are fast-approval loans you can take out to fund your business’ day-to-day while bridging the gap between receiving payouts and paying bills.
Working capital loans are ideal if you need to pay for a wide range of short-term expenses like payroll, rent, product development, and marketing—but they do have fixed monthly payments which can affect your liquidity, and they come with higher interest rates to account for the additional risk the funder takes on.
👍 Working capital loans are great if you:
- Have opportunities you want to seize, but cash flow issues are preventing you from doing so. For example, if there’s a product trending upwards that you’d like to start selling before your competitors do, a working capital loan could be the answer.
👎 Try to look elsewhere if you:
- Just need a short-term solution to tide you over until your next marketplace payout.
#6. Bonus: Credit cards
You’ve probably heard horror stories of starry-eyed entrepreneurs racking up thousands of dollars on credit cards. But don’t rule them out just yet.
Studies by the US Federal Reserve found that 52% of businesses use credit cards during a financial crisis.
While they are a super short-term funding option, they can buy you time.
Some cards also have 0% free interest promotions that are super useful if you know you’ll receive capital before the bill is due.
Top tip: Credit cards can have ridiculously high-interest rates and fees. If you decide to use credit cards as a funding option, ensure your organizational skills are on top form. Know when to pay to avoid interest, and when to charge your cards so it goes on the following month’s statement.
👍 Credit cards are great for:
- Small unexpected expenses, i.e. a sudden need to restock an item.
- Launch an eCommerce store on a small scale.
- Building business credit.
👎 Try to look elsewhere if you:
- Need short to long-term funding.
- Have considerable expenses you need to pay for.
- Can’t repay in full before the bill is due or the 0% interest promotion runs out.
3 Quickfire Tips to Choose the Right Ecommerce Business Loan
If you’re keen to secure external funding, there are a few things to think about before you apply:
- Decide what you want before you start looking: Save time by figuring out what you need before you dive in. For example, if you’re after a quick cash injection in the next two weeks but have poor credit, SBA loans probably aren’t for you.
- Study all the fees, interest rates, and conditions: What may seem like an awesome deal could end up being unaffordable, so make sure you know all the deets before you commit.
- Check the reviews: Ask whether the funding provider has existing eCommerce businesses on their books and check reviews to get to know them better.
Secure Flexible Ecommerce Capital for Enviable Business Growth
E-commerce business loans are key to up-leveling your business—but there’s way more to it than a simple ‘pick and pray’ approach.
Funding comes with differing requirements, processes, fees, interest rates, charges, and more. And as a business leader, it’s up to you to assess which loan will best help achieve your goals.
Get to know all your options before committing, and you’ll have better odds of securing the right funding for you.
Want to learn which funding options could work for your eCommerce business? Get in touch with us today!
