eCommerce Funding: Finding the Best Way to Finance Your Business

eCommerce is still one of the most difficult markets to grasp for sustainable growth and profit. The glaring challenge with operating in this space is eCommerce funding. 

Many banks and credit brokers will not engage with an eCommerce business due to the lack of physical assets they possess and the nature of cash flow in the space. They see the eCommerce system of inventory turnover as too much of a risk for lending and will instead push founders to use their personal credit lines. 

Globally, there are two high-level scenarios where eCommerce businesses need funding. The first is short-term cash flow challenges and the second is as an investment in the business to drive growth or, what we call in the space, growth capital.  

Cash flow challenges are common in the space. Issues with a supply chain can very quickly prove a serious bottleneck for eCommerce businesses to deal with. Say your product is being shipped from China, but experiences an unexpected long-term delay. Therefore, a lack of funds to find a temporary new source of stock could cost you months’ worth of profit.

Another example of this is that many online retailers such as Amazon will take weeks for payments to be released. While this can be a largely manageable issue for larger businesses, small businesses rely on capital made from selling previous stock to invest in new stock, while retaining a small profit. 

In terms of growth capital, eCommerce funding can be hard to come by as well, and tight cash flow means it’s tricky to be able to invest. If your business would like to spend some capital on marketing, hiring, or warehousing, all leading to exponential growth, that growth will never happen if you only receive enough income to survive month to month.

This is also true when an eCommerce business wishes to launch an extension on an existing product line or a new product line under its name. This is a natural progression for any retail business but isn’t always possible without cash upfront.

Ultimately, eCommerce finance and funding are an essential part of growth. While it may be challenging to secure finance by traditional means in the e-commerce space, there are options.

What Funding Solutions Are Available?

There are a vast number of ways in which businesses will attempt to bypass this issue. However, not all of them are successful, and some attempted solutions could actually hurt the business, and the owner’s finances as well.

BANK LOANS

Many businesses decide that the obvious solution to fill this void of income is a loan from a bank. A bank can offer you a relatively sizable amount of capital with an agreement of monthly or quarterly repayments. Bank loans are often the immediate thought for any business owner. Interest rates can be lower than other types of lending, and they can have a manageable repayment structure.

Under a standard bank loan agreement, they will not have the right to demand full repayment at any time, as long as you keep up with the payments each month. Therefore, business outgoings can be managed much easier than the relatively inconsistent repayments that funding like credit cards offer. What’s more, as long as they receive the agreed payments as planned, you are free to use the funds as you see fit.

The issue with bank loans is that, historically, banks do not like to take risks. Should any aspect of a loan proposal be considered too risky to a bank, they are highly unlikely to accept it. This is especially true if you are a relatively new business without a proven track record of consistent capital gain. 

eCommerce businesses are often considered more of a risk than traditional businesses. Unfortunately, the banking sector has not caught up with the rise of online stores and lacks an understanding of their revenue streams and finance challenges. Therefore, they deem investment too uncertain and are far more likely to decline an application. 

The greatest disadvantage of bank loans is that, often, they will ask for an asset to use as collateral in the event of missed payments. This blurs the line between business and personal assets, and could have devastating consequences for you and your family, should something unexpectedly go wrong within your enterprise.

OVERDRAFT OR A LINE OF CREDIT

Overdraft, also referred to as a line of credit, is a set limit that you can dip into at any time. Your limit can be anything from $500 to $10,000, depending on your bank, and is attached to your bank account. Your available credit is calculated based on your personal credit history, income, and reliability with previous credit items.  

This is useful when you have clear sales projections, but you cannot afford to wait up to 60 days to be able to replenish and sell stock. Your overdraft can bridge the gap between incoming and outgoing cash. 

This solution is commonly adopted by very small businesses and startups who may be in need of only a few thousand at a time, to cover inventory purchases for instance.

Once the upcoming income has been generated, you are then able to repay the borrowed amount soon after. With a line of credit, this can be repeated multiple times if needed. As long as you repay the amount, you may then re-borrow, or simply dip into the red. 

The interest rates on lines of credit can vary, but are generally quite high. Again, this is down to your individual credit history. You will only pay a pre-agreed rate of interest on borrowed capital, and if you borrow less than the agreed amount, you will pay less interest.

Again, many banks will be hesitant to lend large amounts of capital to e-commerce businesses. For new businesses especially, the challenge is proving a steady cash flow and steady sales stream. The traditional finance sector has trouble understanding the challenges that eCommerce businesses face with cash flow, and deems the business too risky. 

As a result, some owners may be tempted to open a line of credit on a personal account, where they may be accepted for a larger allowance. However, similarly to bank loans, directly involving personal finances in your business can very quickly cause damage to yourself and those that rely on you.

INVESTOR OR EQUITY FINANCING

Equity financing, the search for outside investment, is a challenging but lucrative eCommerce funding method.  Not least due to its non-monetary added benefits in terms of strategy and the raising of your profile. There are certainly pros and cons to equity financing. It works by exchanging a percentage of ownership of the business for a cash investment from an investor, VC, or business angel.

The money can be spent on any aspect of the business. This includes inventory purchases, marketing, warehousing, staff, new product launches, and more.

An investor who has experience, knowledge, and contacts in your specific field of business can be hugely helpful in terms of strategy, finding partners, and making connections. This is a huge bonus to working with equity financing that you won’t find in most other areas. 

However, there are some challenges as well. When you bring an investor on board, you will be diluting your investment. This means you will own a slightly smaller percentage of the company. Of course, this is not necessarily a bad thing, as an injection of capital should increase the value of your company, and, put simply, owning 51% of a $100 business puts more money in your pocket when you sell than owning 100% of a $10 business. 

However, it’s a big risk for you and your shareholders. Your new investor’s ownership stake will also give them some level of control over the company. While this doesn’t have to be a negative thing and their ideas and experience could be useful, many eCommerce founders went into the space to be their own bosses and the idea of having a new boss is unappealing. 

Finally, investors invest in companies to get a return on their investment. This may seem like an obvious statement but what it means is, they will want the company to hit aggressive growth goals and if they don’t like the current direction of the company, they won’t hesitate to take action to replace the team with people they know and trust. Some research shows that up to 50% of startup founders are fired within the first 18 months after receiving VC investment. Admittedly, this research is tilted towards tech startups but the risk is still there in eCommerce.

CROWDFUNDING

Crowdfunding is a term used to describe online platforms which will allow you to appeal to the public for funds to kickstart a new business. The premise is that small investors will be able to pick and choose what they would like to fund, usually in return for either a small equity in the business or an exclusive reward or perk.

The advantages lie in the fact that investors will still not have a say in the running of the business, or the allocation of funds. However, do bear in mind that it can be difficult to gain momentum, especially for large amounts of cash. The market is competitive, and people are less likely to part with their money at this level. 

Only 44% of Kickstarter projects are successfully funded. Furthermore, if you fail to deliver the promises on which the basis of investment was, your publicity and reputation could be impacted.  This, of course, will make it very difficult to gain trust and investment in the future.

CAPITAL ADVANCES

Capital advances provide an “advance” on upcoming sales. Depending on the provider, repayment can be similar to bank loans, with regular repayments. However, some providers take a percentage of your future sales over time, meaning repayment amounts can vary.

A capital advance can be incredibly useful, the cash becomes available almost instantly. Applications are relatively simple, and you must provide a sales forecast, as well as a sales history. 

However, some providers set strict rules on how the funds must be spent. For example, Shopify Capital offers cash advances to its marketplace sellers. However, the funds must be spent on funding your marketplace business. The funds cannot be used on external resources.  The challenge here is that some capital advances are really designed to be short bridge loans, almost like an alternative to factoring. The ‘payday loan’ style advances help you to fill gaps in cash flow, but not to invest in your future. 

eCommerce Funding with Yardline

Fortunately, our partner Yardline offers a wide variety of funding options including, but not limited to capital advances, small business loans, revolving lines of credit, personal and business credit cards, and SBA loans.

With one simple application, Yardline provides eCommerce businesses with access to funding from $5k up to $20mm in as fast as 24 hours. With rates as low as 7.49% APR and credit lines up to $20mm, Yardline offers small businesses access to the best rates and terms to meet business funding needs.

Apply for funding today to get funding and watch your business grow.