E-Commerce Financing & Loan Options

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Best E-Commerce Business Loan Options

Ecommerce encompasses a huge range of businesses, from one-man stores from a spare room, to billion-dollar enterprises like Gymshark. The ecommerce industry is unique and operates in many different ways, and so often ecommerce businesses need specialist financing solutions.

What is ecommerce financing?

Ecommerce financing provides funding for web-based businesses that need some extra working capital to successfully sell their physical products online, whether that be on an ecommerce platform like Shopify, Etsy, Amazon, or on an independent online store.

There are a number of options for ecommerce financing, including inventory financing; general business loans; lines of credit; business credit cards; micro-loans; and invoice factoring.

What is an ecommerce system?

Besides needing to be able to process transactions online, ecommerce retailers need to have a system in place that allows them to keep track of their stock, even though they can’t physically see their merchandise and a way of reliably dispatching and delivering goods to their customers.

This is why an ecommerce system combines three different independent systems:

  1. a web server – this manages the online store and is able to process transactions securely
  2. a database system – this automatically keeps track of the inventory, updating every time someone makes an order, and will preferably order new stock from suppliers when needed without prompting
  3. a dispatch system – this is linked to a warehouse where orders can be collated and dispatched to the customer asap

Truthfully, it is only the web server that is actually needed for an ecommerce business as stock and dispatch can be handled by the seller themselves with a simplified system.

Why use ecommerce financing?

Ecommerce financing is useful for bringing some working capital in to stabilize cash flow. This could be used for obligations like wages, tax, and bills, to invest in new stock, to deal with unexpected expenses, or to allow an ecommerce business to put consumer credit in place.

Ecommerce Customer Financing

There are also ecommerce financing options for customers known as consumer credit. Consumer credit gives customers the ability to buy what they want and pay the full price of the goods over an extended time period, which gives customers more purchasing power. Sellers are able to integrate this type of financing into their ecommerce store to allow customers to apply with repayment terms ranging from anywhere between 3 and 36 months.

With consumer credit, ecommerce businesses can increase their sales and build stronger, longer-lasting relationships with their customers simply by giving them an alternative payment option.

Who is involved in the ecommerce financing process?

There are 4 entities involved in the ecommerce financing process:

  1. The Seller/The Supplier – this is typically the applicant of ecommerce financing, such as a manufacturing company, service provider, or trading firm.
  2. Ecommerce Marketplace Platform – this is a well-known digital platform and where the inventory is found.
  3. Financing Platform – this is a financial institution, with a good reputation, that will advance funds to The Seller
  4. End Consumer/The Buyer – this is the customer who buys the goods from The Seller/The Supplier through an Ecommerce Marketplace Platform.

How does ecommerce financing work?

If you choose to work with an Ecommerce Financing Company it works like this:

A Financing Company will advance the seller with capital and will be paid every 15 days with revenue generated through the ecommerce marketplace platform.

An Ecommerce Financing Platform will grant a credit allowance to the seller based on:

  • cash flow
  • yearly turnover
  • sales performance
  • inventory analysis

The Financing Company uses a system known as an Application Programming Interface (API) to have direct access to the online store on the ecommerce marketplace platform to ensure a continuous relay of information, such as order amounts and available stock. With this API, data is collected automatically, eliminating the risk of human error and needing to interact with the seller.

With the connected systems, the Financial Company sends an Advanced Payment directly to the bank account of the seller. As customers make payments for orders placed, this revenue is collected within the ecommerce marketplace platform.

The ecommerce marketplace platform then transfers funds, on a bi-weekly basis, to the ecommerce financing platform until the Advanced Payment is repaid in full.

What are the benefits for ecommerce financing?

As well as providing an increase of working capital to finance more and/or new inventory, ecommerce financing allows an ecommerce business to manage fluctuations in the market. The selling of goods cannot always be predicted, and changes are always possible due to external factors and seasonality.

If an ecommerce business finds that its sales drop for part of the year, ecommerce financing can help to fill this gap in revenue to keep the business afloat. Having financial flexibility with eCommerce financing allows you to react to any changes in the market as quickly as possible so that you won’t fall through the cracks.

If you choose to incorporate consumer credit into your eCommerce business, it can help to empower your business by giving your customers more purchasing power.

What are the risks of eCommerce financing?

Although consumer credit can help to increase your sales in the long term, your customers must first pay back the money they have essentially borrowed. Unless you know how creditworthy your customers are, consumer credit can be a risk if you don’t have any money put aside to cover the initial amount that has been borrowed by your customers.

In the long term, consumer credit can be very beneficial for an eCommerce business, but you do need to be prepared to take a bit of a hit until your customers start to make their repayments.

How to Apply for Ecommerce Financing

Ecommerce businesses tend to struggle to get funding from banks and some of the stricter lenders because of the unique business style, and often, when they do get approval the loan amounts offered are too small to make much of a difference. Thankfully, there are eCommerce financing options, you just have to know where to look.

Ecommerce financing options include:

Business Line of Credit – this is the best option for a business that needs to cover phased expenses. You can draw from an approved amount and pay interest only on what you have actually borrowed.

Inventory or Purchase Order Financing – this is the best option for eCommerce stores that are growing more quickly than expected. A lender will advance a large percentage of the cost of making orders and you will pay the lender a fee in the form of a percentage of the total amount.

Invoice Financing – this is the best option for an eCommerce business that offers consumer credit and needs help with cash flow. A lender will advance you up to 85% of an outstanding invoice. Once the lender has collected the invoice payment and taken their fees, you will receive the remainder.

Business Credit Card – this is the best option for eCommerce startups as it allows you to build your business credit score, which is valuable for the future when looking at other, better financing options.

Short Term Business Loans – this is a good option if you have been trading for 2 years or more. If you qualify, you will be able to apply for a larger amount of funding than many of the other options and you should receive funding in only a few days. Just make sure that you do your due diligence and compare online lenders, including their terms, interest rates, and required credit score.

The exact requirements will vary depending both on the lender and the type of funding you are looking to obtain but generally, in order to qualify you must have:

  • been in operation for at least 1 year
  • monthly average revenue of $5,000 or more
  • access to 3 months of bank statements for your business
  • an active eCommerce store

When applying for eCommerce financing, unlike many traditional funding options, lenders are likely to focus more on the performance of your business rather than your credit score, so you may still be able to qualify even if your credit score isn’t particularly strong.

Also unlike traditional funding options, eCommerce financing options often allow you to apply for amounts as little as a few hundred dollars, anywhere up to hundreds of thousands or even millions of dollars depending on the type of funding you choose.

You will find lenders that specialize in eCommerce financing so it is worth taking some time to look around at all of your options.

Having an eCommerce business can be very profitable in the long term, but it is not unusual to need some financial help, especially when you are working to grow the business. Ecommerce financing options can provide you with the working capital you need to expand your eCommerce business or to deal with fluctuations in the market so that your online store can continue to thrive.

If you’d like to compare business loans to see what rates you may be able to get on your loan, we’re here to help. We’ll compare dozens of loans to show you the best business loans for you in just minutes. Click here to get started.

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