If you run an e-commerce business, that is, you sell products online on Amazon, eBay, Shopify, or even from your own website and ship them to customers, how do you ensure that you keep inventory stocked, even when funds are low? What do you do if you want to expand into a new product line, but don’t have enough revenue to do so right now? Or what if you need new equipment to produce more of your product, or want to try new marketing methods to tap new customers? It’s a Catch-22: you sell your products to make money. But you need money to buy the products to sell. What if you don’t have the working capital on hand to do so?
That’s where e-commerce funding comes in. You can take out a loan to purchase what you need, then pay it back from your profits. Here’s what you need to know about e-commerce financing.
What is E-Commerce Funding?
E-commerce funding is any funding or financing that an online store takes on to help pay for business expenses. While some retailers sell products in physical stores, you sell online. You have no storefront, but you do have expenses. Taking out e-commerce financing, whether that’s a term loan or a line of credit, allows you to have the cash flow to purchase inventory, pay staff, and cover other business expenses.
Just like any kind of financing, you will pay back the money you have borrowed over time with interest. You’ll also have to apply for the funding and get approved based on your qualifications.
What are the Financing Options for E-Commerce?
E-commerce financing is a broad term that covers a wide range of financing products. Whether you have stellar credit or poor, there’s a financial product and a lender who will work with you.
You’ve likely heard of small business loans, which are typically offered by banks and credit unions, though there are also online lenders of term loans. These offer financing at low rates, though qualifications are sometimes among the most challenging to meet. There are e-commerce loans available specifically for online sellers and businesses, and they may offer more benefits for your e-commerce store than a traditional loan.
The Small Business Administration offers several loans for small business owners at low rates and with long repayment periods. These may be easier to qualify for than traditional bank loans.
Line of Credit
Rather than taking out a lump sum of cash all at once, lines of credit give you access to a certain amount of capital, and you can borrow up to that amount at any time. Once you repay it, you can borrow it again and again.
Maybe your e-commerce business monograms products for clients and you need an embroidery machine to do so. Or perhaps you need to buy a new computer to manage your e-commerce platform. In that case, an equipment loan can give you the capital to purchase equipment. The equipment you’re buying acts as your collateral, which may help reduce the interest you pay on the loan.
While they’re not a loan, business credit cards are another option to consider. Just remember: most have high interest rates (though you may be able to find a card with 0% APR for a year). Look for a rewards card that allows you to earn points you can redeem for cash back, travel, or other rewards. We have a few ideas on the best credit cards for e-commerce businesses, too.
You likely place large orders for inventory, and if you don’t have the cash on hand to pay for it, you could leverage inventory financing. Like equipment financing, the inventory you’re purchasing serves as your collateral.
If you purchase inventory or supplies from the same vendors again and again, see if they offer trade lines. This allows you to access purchasing power to get what you need, but pay later when you’ve got the money from selling the products. They may also help you build business credit.
Merchant Cash Advance
Although they can be very expensive, with interest rates varying from 70–200%, some e-commerce businesses opt for a merchant cash advance (MCA) to get money now. With an MCA, the provider gets repaid by taking a percentage of your daily revenue from credit cards. If you’re doing a high volume business and need growth capital to expand quickly, this may be an option to consider.
How Does E-Commerce Financing Work?
While each of these funding solutions may work slightly differently, here’s the general idea of how e-commerce financing works.
E-commerce financing provides you with capital you can use for your business. That could be to buy inventory or equipment, pay staff salaries, invest in marketing, rent office space…basically any business expense you might have.
Note: some loans will have strict requirements for what you can spend the money on, while others are laxer. Read the fine print before applying.
You may be offered a few payment options, such as whether you want to have the monthly payments automatically debited, as well as what your monthly payment will be.
Once your repayment begins, you will need to make that monthly payment on your loan (which will include principal and interest). If you miss a payment or are late, it can negatively affect your credit.
Once the loan is paid off, that will be reported to credit bureaus, and you may see a small rise in your credit score.
How to Qualify for E-Commerce Financing
Each lender may have slightly different requirements for applicants, but you should expect that your credit score will be an important factor for most. If you have business credit, that may be reviewed, but if not, your consumer credit will be used to determine eligibility.
(Learning how to establish business credit can be helpful in advance of applying for a loan.)
The better your credit, the better the financing solutions you’ll be eligible for. Lower credit may only give you the option for loans with high interest rates.
The amount of time you’ve been in business may also be considered. For SBA loans or bank loans, if you’ve been in business less than two years, you may not qualify. However, other lenders are open to startups.
How do E-Commerce Businesses Get Funding?
E-commerce businesses get financing the same way other small businesses do: by applying for a loan or line of credit and getting approved. However, because they face specific business challenges because of their online-only business model, they may have difficulty qualifying for traditional small business loans or other business funding. As mentioned above, having a relatively new business with fewer than two years under your belt can be a disqualification for many traditional business loans, and many e-commerce businesses look more like startups in terms of their tenure.
This is why many e-commerce companies turn to crowdfunding, venture capital, angel investors, or other investment methods to help fund their business growth. Of course, the problem with these methods is that you may lose some equity or ownership of your business in the process, promising to pay back the funding through shares in your company.
It’s a common practice for e-commerce entrepreneurs that sell on Amazon or other large platforms may want to grow their businesses to a point where they can sell themit to an aggregator, which can get complicated if you use equity-based crowdfunding or venture capital.
Benefits of E-Commerce Specific Financing
E-commerce specific lenders can help address the needs of e-commerce sellers and provide funding in more flexible ways than traditional lenders. Many of the companies that finance e-commerce businesses provide quick, online applications and non-restricted funds that can be used for anything the business needs.
Financing companies that offer e-commerce specific funding may also be more hands-on with their financing customers than other lenders. For instance, they may offer business services like consulting or coaching to help e-commerce businesses grow strategically or understand how to improve their business operations so they can get to the next level. They may also offer data services to help e-commerce sellers gauge what’s working or what isn’t, and find ways to expand, like new product lines or untapped customer bases.
How To Apply For E-Commerce Financing
Once you’ve decided on the best e-commerce funding option for your business, it’s time to apply. In the application process, you will be asked questions about your business, like what it sells and how long it’s been in business. You will also need to provide personal details, like your address and Social Security number.
You will be asked for the loan amount you seek to borrow, and you may be required to provide details on your bank account so that funds can be deposited.
Once approved, you will be shown your financing options, including the interest rate and monthly payments. Once you sign the loan documents, the funds will be deposited into your bank account in as little as one business day.
Choosing the Right Funding Option for Your E-Commerce Business
Having access to working capital lets e-commerce business owners like you run their businesses without worry. You do have many options when it comes to e-commerce financing, so review them all and find the one that offers the best terms for your needs.
Nav can help you find the right e-commerce funding for your online store, whether you sell on Amazon, eBay, Shopify, Etsy, or your own website. Sign up for a free Nav account today to see which kinds of funds you qualify for including small business loans and business credit cards.
This article was originally written on April 22, 2021 and updated on September 8, 2022.