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5 E-commerce Funding Myths, Busted

There’s no shortage of e-commerce funding myths. Learn how the right kind of debt can actually be a good thing for growing brands and marketplace merchants.

Most of us are conditioned to get nervous when we hear the word “debt.”

It instantly fills our minds with images of financial hardship, stress, and rocketing interest rates designed to keep us paying forever.

But in the world of commerce, debt isn’t a bad word.

When done right, it can actually lead to increased sales, fueling your momentum toward a stronger and more profitable business.

However, there is such a thing as debt that drains your profits and your resources. And when the growth of your brand is on the line, it’s critical to understand the difference between the types of e-commerce funding that can grow your business versus those that can make it harder or even impossible to scale.

Today we’re busting some of the biggest myths around using debt to scale your e-commerce business, covering why the right amount of the right kind of debt can actually be a good thing for growing B2B sellers, marketplace merchants, and DTC brands.

5 E-commerce Funding

Debt Will Kill Your Business
Debt Ruins Your Reputation
Equity Is Safer than Debt
It’s Hard to Secure the Right Amount of Funding
Debt Comes with Massive Fees and High-Interest Rates

Good Debt vs. Bad Debt: What’s the Difference for E-commerce Businesses?

When we talk about “good debt”, we’re referring to money borrowed that creates a positive growth opportunity for your business.

On the flip side, “bad debt” is incurred without a clear purpose and therefore doesn’t always yield a return. This can include borrowing money for a longshot investment, bulk purchasing products that have low demand, and extending credit that you won’t be able to collect.

One funding solution that e-commerce sellers sometimes turn to is merchant cash advances (MCAs). MCAs grew in popularity due to their fast turnarounds and the fact that it’s relatively easy to qualify.

However, MCAs often place restrictions on what you’re allowed to use the funds for, limiting your ability to grow.

These types of debt products also charge significant fees (many of them hidden in the fine print), which can eat away at your profits. Some of these fees include:

Loan fees
Bank fees
Underwriting fees
Risk fees
Broker fees
Administrative fees
Application fees

Tight restrictions and predatory fee structures make MCAs one of many risky funding options that can threaten your potential for return. This is an example of what we would view as “bad debt”.

While many of these products have dominated the business landscape for years, today there are plenty of e-commerce funding options that also deliver fast turnaround times with low-interest rates and no restrictions on usage.

Let’s take a closer look at some of the other common misconceptions and the truth about how to use e-commerce funding to get more out of your business.

E-commerce Funding Myth #1: Debt Will Kill Your Business

Reality: Even the Biggest Brands Use Debt to Grow

Despite popular belief, debt has helped all kinds of companies — from Amazon to Uber to NVIDIA — reach whole new levels of growth.

This is because these major players know the truth beyond the myth. They know that a lack of working capital can lead to missed opportunities.

When profitable opportunities come knocking, the biggest players in any given market are able to snap them up quickly. If you pass on growth due to limited cash on hand, you could be letting a golden opportunity slip through your fingers.

Here are some of the ways to use e-commerce funding to fuel your growth:

Strengthen your inventory acquisition with a data-driven approach
Expand your brand across borders by launching in new territories
Test out profitable new marketing initiatives
Invest in professional SEO, web design, and social media management
Run A/B testing to optimize your website for increased conversions
Increase the quality and quantity of your content
Launch a loyalty or rewards program
And so much more

The secret your competitors don’t want you to know is that with a clear purpose and healthy sales history, the right kind of debt can help you thrive.

E-commerce Funding Myth #2: Debt Ruins Your Reputation

Reality: Credit Can Increase Your Brand’s Authority

By taking on debt and paying it back on time, your business may actually become more credible (not less) in the eyes of funding partners, aggregators, investors, and other key financial institutions.

When you borrow money and make on-time payments, you’ll be rewarded with a higher credit score. This ultimately gives you access to various new types of funding solutions and better terms (like lower interest rates).

By managing your company’s debt responsibly, you’re sending lenders and funding partners a clear message that yours is a credible business that should receive more funding with better terms.

And the same is true for suppliers. For example, with invoice factoring and other key funding solutions, you can keep supplier payments on track while you wait for your marketplace payouts or accounts receivable to catch up.

With a healthy track record of sales and debt repayments, key stakeholders like suppliers and funding partners 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.

E-commerce Funding Myth #3: Equity Is Safer Than Debt

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. But that may not be true for every business.

Debt is often a preferred financing option because it does not require you to give up a stake in the business in exchange for capital.

This also means that if you choose to one day sell your e-commerce business, a potentially large amount of the proceeds will go to your investors instead of you.

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, it may be possible to gain some savings come tax season. When researching your funding options, be sure to consult with your CPA to learn more about the nuances of debt versus equity financing and how each option could affect your business.

E-commerce Funding Myth #4: It’s Hard to Secure the Right Amount of Funding

Reality: With Six Months of Sales History, You Can Secure up to $5 Million in Funding

Many sellers have a difficult time securing the right amount of working capital when working with traditional lenders like SBA loans, bank loans, and bank-backed credit lines.

As we’ve seen, traditional funding institutions are 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.

Even for brands and sellers that make it through the red tape, the amount you’re approved for often isn’t enough. For example, the average SBA loan is just $704,581.

But traditional funding partners aren’t your only option.

Today, there are a variety of modern e-commerce funding providers ready to step up and help growing businesses access the right amount of capital exactly when they need it.

For example, to qualify for Working Capital from SellersFi, you just need six months of sales history and at least $20,000 of net sales per month for either your marketplace store or e-commerce website in order to be considered eligible for up to $5 million in funding.

E-commerce Funding Myth #5: Debt Comes with Massive Fees and High-Interest Rates

Reality: Many E-commerce Funding Solutions Offer Low-Interest Rates and Favorable Terms

One common fear 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.

As mentioned, merchant cash advances often fit this description. But even marketplace funding solutions such as Amazon Lending may come with terms that could be difficult for e-commerce businesses to keep up with because these types of funding options typically collect fixed rate deductions and utilize third-party lenders that offer varying terms.

Not to mention the fact that, like inventory loans, many of these funding solutions have the right to freeze your account and hold your inventory in the event of a default.

But the truth is this is just one slice of the e-commerce funding market.

Today, there are a variety of better options available. For example, at SellersFi, we’ve created a range of fast, flexible e-commerce funding solutions purpose-built for every growth scenario.

Whether you’re a Shopify merchant seeking out funding to expand your brand or an FBA seller looking to break free of Amazon’s seller payment schedule, there is a low-interest funding solution that can help make it happen.

Questions to Ask Before Taking on Debt for Your E-commerce Business

Now that you’ve busted some critical e-commerce funding myths, let’s take a closer look at some of the key questions to ask before entering into any debt agreement.

What Are You Using the Funds for?

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’re planning to bolster your inventory before the busy holiday season, you may benefit from a line of credit you can draw from on an as-needed basis. On the other hand, if you need access to your Amazon marketplace payouts without the wait, our Amazon Revenue Advance might be a great fit.

With a funding partner that is experienced in e-commerce and understands your business, you can even use multiple solutions together to cover all your growth needs.

What Are the Payback Terms?

Next, you’ll want to closely examine the payback terms.

Make sure you understand:

How much time you have to pay back the borrowed amount
The size of the monthly payments
The penalties for late payments
Whether you can set up automated payments
All of the fine print

Make sure you can meet the payback terms and be wary of any hard-sell tactics from funding providers that don’t take the time to clearly explain what these terms are.

What Is the Interest Rate?

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.

High-interest rates can also eat into your profit margins, defeating the purpose of borrowing in the first place.

How Long Will It Take to Get Approved?

When looking to secure funding from a traditional bank, the average wait time for approval is between three and five weeks. For many sellers, that’s simply too long.

Pay careful attention to how long the approval process will take with your preferred funding partner to ensure you can access capital when needed. For example, SellersFi provides access to borrowed money within 48 hours.

Is This the Right Kind of Debt for My Business?

Borrowing money can be good for your e-commerce business if:

You understand why it’s needed and where it’s going
The payback terms are acceptable and realistic
The interest rate is fair
You’ll receive your money within the timeframe that you need it
The money you borrow can be used to help increase sales and profits

Depending on your goals for the funding, it may be important to check for any restrictions around how the funding can be used.

With a flexible funding solution, you’ll be able to use the funding 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.