Scaling an e-commerce business can be challenging at the best of times. Spikes in revenue are a beautiful thing, but as you grow your store, you’re looking at increased inventory, additional skilled labor, and supercharged marketing — all of which cost money. You need to have a firm grip on your e-commerce funding options.
The problem is, that many marketplaces have rigid payment schedules and with ongoing supply chain issues, troubles with inventory can easily lead to chronic cashflow gaps (or worse, stockouts).
If you’re like most fast-growing sellers, you might try approaching financial lenders like banks to secure a loan or line of credit to help solve these challenges. And like most sellers, you’ll quickly find that many banks don’t offer viable e-commerce funding options. The good news is, you’re not alone.
This business lending vacuum has led to the emergence of new funding options specifically designed for growing e-commerce stores — businesses that have a completely different structure and set of challenges than their brick-and-mortar counterparts.
In this article, we’ll take a look at the range of funding sources available to e-commerce businesses and dive into the pros and cons of each one to help guide you to the solution that best aligns with your brand’s current growth trajectory and vision for the future.
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The Scoop on Your E-commerce Funding Options
- Bank loans
- Friends and family
- Credit cards
- Private investors
- Invoice factoring
- Marketplace loans
- SellersFunding solutions
#1. Bank loans
Let’s start with the most classic form of business lending: the bank loan.
From a bank’s point of view, an online store is a relatively new business model, and the banking industry is still trying to figure out how it fits in.
Though there are some early signals that banks are slowly starting to embrace e-commerce, most still don’t offer the flexibility store owners would look for in a funding option. Also, a bank typically requires quite a bit of paperwork to grant a loan, a process that can take weeks or even months — an eternity in the fast-paced world of online retailing.
Pros of bank loans
- Banks don’t ask for revenue share as a form of repayment
- The interest rates are generally low, ranging from 3% to 13%
- The repayment period can be spread over a long time, giving you low monthly repayment installments
- Banks don’t micromanage how you use the funds once they disburse the loan
Cons of a bank loan
- Banks have challenging approval requirements – you’ll need to provide an ironclad business plan and sales history with your application
- Set monthly repayments could cause further cashflow issues if your business experiences low sales
- Bigger loans can be difficult to secure since banks tend to be risk-averse
- Banks may require you to use personal assets as collateral for the loan
#2. Friends and family
Loans from friends and family can offer a flexible source of e-commerce funding. But the informal nature of these loans requires a high level of trust between the parties involved, and Sunday dinner suddenly doesn’t taste so good when that trust is broken.
As the borrower, it can also be hard to ask your friends and family for funds. And naturally, the lender (in this case someone you know personally) may be on high alert regarding repayments because there’s typically no paperwork involved. On the upside, if this arrangement works, it could save you a bundle in interest fees and potentially build a stronger relationship between you and the person you’re borrowing from.
Pros of loans from friends and family
- No credit checks and business performance information are required to secure the loan
- The repayment terms can be friendly and flexible depending on the relationship between the lender and the borrower
- Loans from friends and family attract little to no interest – this is subject to the agreement between parties
- There’s usually no collateral needed to secure a loan from friends and family
- Friends and family won’t typically ask for equity or revenue-sharing
Cons of loans from family and friends
- Borrowing from friends and family may create awkwardness
- There’s likely a cap to how much money friends and family are willing to loan you
- The lack of clarity stemming from the informal nature of the loan may result in misaligned expectations between the parties
- Misunderstandings between parties could damage important relationships
#3. Credit cards
Traditionally, credit cards wouldn’t be considered a viable source of business funding. In fact, until 2009, retroactive interest rate increases were commonplace in the credit card business. This made credit cards too risky and volatile as a source of business loans since card issuers could raise rates on existing loans unrestricted.
The CARD Act of 2009 changed the credit card landscape by creating regulations to protect borrowers from retroactive card increases and cap credit card fees, making credit cards an attractive source of financing for growing businesses. Credit cards now play an integral role in helping businesses offset short-term expenses and cover cash flow gaps. But what would credit card business funding look like for an online retailer?
If you have high-ticket or high-volume inventory requirements, you’ll likely need a high-limit card to successfully pull off credit card e-commerce funding. At their core, credit cards are designed to cover day-to-day consumer expenses, so most of them don’t come with a high enough balance to take an already established e-commerce business where it needs to go.
Pros of credit cards as an e-commerce funding solution
- You won’t have to share revenue as a form of repayment
- Some credit card companies offer reward programs such as free air tickets and cashbacks
- The loan application process is straightforward and doesn’t typically involve rigorous checks
- Credit cards offer revolving credit that allows you to borrow a new loan once you pay a current loan
- You won’t be required to put up collateral to access credit
Cons of credit cards as an e-commerce funding solution
- There is a greater risk of merging personal and business expenses if you use one credit card for both
- Credit cards charge an annual fee which, in addition to the interest, could make the loan expensive in the long run
- You are liable for the credit card loan, so failing to repay the loan on time could ruin your credit
- Low limits might not be enough to help you grow your e-commerce business
#4. Private investors
Private equity can offer your e-commerce business a stable financial base for growth. Top private equity firms like Advent International, Blackstone, and Investcorp have been betting big on e-commerce. They see the potential in e-commerce growth projections, thanks to the post-Covid e-commerce industry growth, and they want in on the action.
For example, on April 13th, 2022, e-commerce fulfillment platform Shipfusion secured $40 million in private equity funding from Kane Anderson Capital Advisors. While this funding isn’t from a private investor to a B2C e-commerce business, it still proves that even blue-chip private investors are starting to take a strong interest in e-commerce businesses as viable investment options.
Pros of private investors
- Private investors are only interested in the ROI you’ll generate for them, so they may not require a credit history check
- A private investor can offer their business expertise which could be instrumental in growing your e-commerce business
- It’s not a loan, so private investors assume the risk of not getting their money back if the business can’t afford to repay
- Depending on the investor you partner with, you may be able to access high amounts of funding
Cons of private investors
- Private investors expect a share of your profits since they’re investing in your business and not offering you a loan
- There’s the potential for conflict from misaligned visions since private investors focus on growing their investment which may or may not align with your vision to grow the business
- Private investors expect a high level of performance which could put a lot of pressure on you and your team
#5. Invoice factoring
It’s no secret that marketplace platforms like Amazon and Walmart hold the money generated from sales for a certain period before paying it out to sellers. Invoice factoring bridges that payout gap so you can access your sales revenue instantly from a third party.
You essentially “sell” your invoices to a third party (the invoice factoring company). The factoring company then gives you the funds, and you pay them back once the platform gives you access to your money.
Pros of invoice factoring
- The approval process is typically quick and straightforward since you’re essentially borrowing against your invoices
- There’s no collateral needed since you’re borrowing funds equivalent to the sales you’ve already generated
- There’s usually no credit check required for you to access invoice factoring
- It empowers you to ditch more restrictive forms of e-commerce funding like bank loans
Cons of invoice factoring
- Invoice factoring charges a percentage of the invoice amount, which could amount to a lot of money if you need a large advance amount
- This type of e-commerce financing is dependent on your sales, so the amount available to you might not be enough if you aren’t making a lot of sales
- Your invoice factoring provider may want access to your customer’s payment history
#6. Marketplace loans
Some e-commerce marketplaces and platforms offer their lines of credit to qualified sellers in order to help them fill cashflow gaps. For example, Amazon offers Amazon lending, while Shopify has Shopify Capital.
A marketplace loan can give you access to anywhere between $1,000 to $750,000 in funding, depending on your business size and sales history. The lender then deducts a percentage of your sales revenue to repay the loan. These types of loans are only available to select eligible sellers.
Pros of marketplace loans
- The marketplace or platform already has your financial information, so the loan application and approval process is relatively easy and fast
- Your credit score won’t usually factor into the approval process
- Shopify Capital has favorable interest-free repayment plans where they take 8% to 17% of each sale with a 1.1 to 1.13-factor rate
- Amazon sets monthly repayment installments with a 10.9% to 12.9% interest rate
Cons of marketplace loans
- Marketplace loans are invite-only, so they are only available to a few qualified sellers
- Amazon is strict about what you can do with the loan – inventory optimization, so you can’t use the funds in another area of your business
- Marketplace loans are only available to sellers on their platforms, so you can’t access them if you don’t sell on these platforms
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#7. SellersFunding solutions
At SellersFunding, we offer e-commerce funding solutions specifically designed for a growing e-commerce business. Our Working Capital and Daily Advance solutions for example offer fast and affordable options to help fast-growing sellers cover the cash flow gaps preventing them from increasing sales.
With our Working Capital loan, you get access to a $5 million credit limit with flexible withdrawal terms and a repayment period of up to 12 months. Our Daily Advance plan bridges the marketplace payout gap, allowing you to access daily payouts of up to 90% of your sales.
Pros of SellersFunding
- Straightforward process – we don’t ask for collateral or your business’s financial information
- Fast approval time of 24-48 hours
- Terms are flexible and can be customized to your business needs
- There is no impact on your credit score
- Sellers get a dedicated account manager to help select the right terms and amount
Cons of SellersFunding
- Our funding solutions are designed for fast-growing stores, not brand-new businesses
- For working capital, you must have at least six months of sales history and at least $20,000 of net sales per month for either your marketplace store
- For daily advance, you must have at least three months of sales history and at least $1,500 of net sales per month for either your marketplace store or eCommerce website
Get the best e-commerce funding options for your business
Without the right tools and information, finding the best e-commerce funding option for your business can feel like a minefield. But accessing the funds you need to scale your store doesn’t have to be stressful.
At SellersFunding, we’re proud to offer flexible and easily accessible e-commerce funding options to help your business soar to new heights. Read our customer stories to learn how sellers just like you are using e-commerce funding to get ahead with inventory, invest in digital transformation, and keep the revenue flowing.
When you’re ready to learn more about the types of e-commerce funding we offer, our two-minute demo will give you all the basics. Here’s to your e-commerce success!