In the world of commerce, “debt” isn’t the bad word some people think it is. Done right, it can lead to increased sales and a stronger, more resilient online business.
The wrong kind of debt can drain your profits and resources, making it harder or even impossible to scale. When the growth of your brand is at stake, it’s critical to understand the difference.
In this article, we’ll unpack some of the biggest myths around using debt to scale your e-commerce business. Whether you’re a B2B seller, marketplace merchant, DTC brand, or all of the above, learn how to choose the right lending solutions to meet your business needs.
When we talk about “good debt,” we’re referring to money borrowed that creates a positive growth opportunity for your business. It’s an investment in your future, which will pay for itself over time with a bit of hard work and a high quality product.
“Bad debt,” on the other hand, is incurred without a clear purpose and may not be expected to yield a return. It’s a big purchase you make on a whim, or a band-aid you use to put off solving more serious problems with high overhead or low profitability.
Here are some examples of the differences:
| Bad Debt | Good Debt |
|---|---|
| Used to bulk-purchase inventory, without solid profit margins or evidence of future demand | Used to purchase inventory you can sell at a profit before your next planned purchase order |
| Taken on with no analysis or projections, and no solid repayment plan | Taken on after reviewing sales numbers and projections, and accounting for market factors |
| Used to pay for a risky investment or depreciating asset, costly ad campaign, or unnecessary infrastructure not guaranteed to help the business | Used to acquire assets and investments or fund marketing with proven ROI, increasing cash flow and/or adding value to the business over time |
| Used to hire new employees or cover excessive business expenses or taxes, with no plan for repayment | Used to cover reasonable expenses based on near-term sales projections |
| Has high interest or factor rates, terms that can change, or payments that can increase over time | Has low or competitive interest rates and transparent repayment terms, with no fine-print surprises |
Reality: Even the biggest brands use debt to grow.
Contrary to popular belief, debt has helped all kinds of companies — from Amazon to Uber to NVIDIA — reach whole new levels of growth. When profitable opportunities come knocking, you’ve got to be able to answer.
Here are some of the ways to use e-commerce funding to fuel your growth:
With a clear plan and purpose, the right kind of debt can help you break through in a crowded e-commerce market.
Reality: Credit can increase your brand’s authority.
By taking on debt and paying it back on time, your business may actually become more valuable in the eyes of funding partners and investors.
You can achieve a higher business credit score, which can help you access various new types of funding solutions and better terms, such as lower interest rates. By managing your company’s debt responsibly, you’re sending lenders and funding partners a clear message that your business is credible and reliable.
The same is true for your suppliers. For example, with invoice factoring and a digital wallet to help you pay suppliers in their own currency, you can keep supplier payments on track while you wait for your marketplace payouts or accounts receivable to catch up. As your supplier relationships improve, you can negotiate terms that improve your bottom line over time.
With a healthy track record of sales and debt repayments, all your key stakeholders will be more willing to work with you as you reach for each new growth level, providing more opportunities for increased ROI and healthier profit margins along the way.
Reality: The right kind of debt can be cheaper and safer than equity.
If you’re not using debt to finance your growth, you’re likely using equity. Some entrepreneurs feel this is the safer option since you’re not technically borrowing money.
While equity financing doesn’t obligate you to repay your lenders in cash, it can dilute current shareholder earnings and cost you a huge chunk of the proceeds if you ever decide to sell your business.
Equity financing also puts your investors in the driver’s seat. Depending on how it’s structured, you could lose the freedom to run your business the way you want to.
Debt is often the better financing option because you don’t have to give up a stake in your business in exchange for capital.
It’s also worth noting that with debt, the interest you pay is often tax deductible. So while it might seem that you’re paying out more in the short term, you could gain some savings come tax season. Be sure to consult with your CPA to learn more about how each option could affect your business.
Reality: With six months of sales history, you can secure up to $10 million in funding.
Many sellers have a difficult time securing the right amount of working capital when working with traditional lenders.
Many of these institutions have yet to catch up to the pace of growth in e-commerce. Strict requirements and lengthy application processes make it difficult for growing merchants to secure enough funding for both their short- and long-term needs.
Getting approved for SBA loans, bank loans and bank-backed credit lines can take months and piles of paperwork. Even for brands and sellers that make it through the red tape, the amount you’re approved for often isn’t enough. The average SBA loan is now just $663,000 (as of January 2024).
But traditional funding partners aren’t your only option.
For example, to qualify for Working Capital from SellersFi, you only need six months of sales history and at least $20,000 of net sales per month to be considered eligible for up to $10 million in funding.
Reality: Many e-commerce funding solutions offer low-interest rates and favorable terms.
One common misconception is that debt always comes with hidden fees and high interest rates. While that may be true of many financial products, these scenarios are typical examples of what we referred to earlier as “bad” debt.
For example, even marketplace funding solutions may come with terms that don’t make sense for your business.
Some funding partners will collect fixed rate deductions and utilize third-party lenders with varying terms. Many have the right to freeze your account and hold your inventory in the event of a default.
To help ensure that you’re making the right choice when it comes to e-commerce funding, let’s take a closer look at some of the key questions to ask before entering into any debt agreement.
The best kind of debt is borrowed with purpose and for a purpose. Before taking out any kind of funding, take time to create a thoughtful plan for how you’ll use it.
For example, if you need extra inventory ahead of a holiday or marketing push, SellersFi’s Invoice Flex can help you close cash flow gaps and keep your suppliers happy. If you’ve got your eye on bigger long-term goals, like multichannel expansion or new product launches, you might benefit from a larger infusion of Working Capital funding.
With a funding partner that’s experienced in e-commerce and understands your business, you can work together to figure out what’s right for you. Depending on the range of financial products available, you may even be able to use multiple solutions together to cover all your growth needs.
Next, you’ll want to closely examine the payback terms.
Make sure you understand:
Make sure you can meet the payback terms and be wary of any hard-sell tactics. The right funding provider will take time to clearly explain their terms and answer any questions you may have.
Make sure you know how much interest your debt carries as this can have a significant impact on your ability to pay back borrowed funds on time. This is also important to know because high-interest rates can eat into your profit margins, defeating the purpose of borrowing in the first place.
Keep in mind there is a difference between factor rates and interest rates. Factor rates typically range from 1.1-1.5 and are not percentages. Instead, you multiply them by the amount of the loan to get the total number you’re responsible for paying back.
The wait time to get approved for a traditional loan can be as long as three months. For many sellers, that’s simply too long.
To ensure you have access to capital when you need it, pay careful attention to how long the approval process will take. At SellersFi, borrowers can get access to funding within 48 hours of applying.
Borrowing money can be good for your e-commerce business if:
Depending on your goals for the funding, it may also be important to check for any restrictions around how it can be used.
With a flexible solution, you’ll be able to use the borrowed funds in whatever way best supports your growth, whether that’s filling a large purchase order, expanding into new markets, or improving your e-commerce tech stack.
At SellersFi, our clients come first. With our complete suite of e-commerce financial solutions, we support brands worldwide to grow sustainably and quickly.
Our Commerce Pay solution was purpose-built to help early stage sellers stay in stock and keep the sales flowing, while our flexible Working Capital can support merchants at any growth stage to reach the next level. Apply today and grow your business on your terms.
