10 Ways to Finance Your E-Commerce Business

Rumzz Bajwa

E-commerce is poised to grow in the next few years. Entrepreneurs should establish a good entry point as early as now to take advantage of the impending boom. There are various financing solutions that can help them in that endeavor.

E-commerce currently makes up about 13.3% of the total retail sales in the United States. This translates to about $431.65 billion in revenues in 2020 alone. Statista projects further growth for e-commerce as well. This year, annual revenues are expected to hit $469 billion, followed by consistent increases until figures hit $563 billion by 2025.

The onset of the COVID-19 pandemic and the accompanying lockdowns highlighted the many benefits that e-commerce brings to businesses and consumers. As a result, many traditional brick-and-mortar stores have set up an online presence to keep up with demand. Many new entrepreneurs are also attempting to grab market share by starting their own e-commerce businesses as well.

Now is perhaps the best time for you to start your journey in e-commerce. You could get a large part of the projected revenues by 2025 if you play your cards right. First, however, you’d have to look for sources of financing with which to build your fledgling enterprise’s capital.

What are your choices? Let’s take a look at ten business financing options that you can consider when working out your new business’ capital requirements.

1. Personal savings

Most budding business owners are reluctant to fund their company with personal savings due to the uncertainties resulting in the business folding. There are, however, some advantages to raising capital for the business from your retirement or savings accounts.

This approach is commonly referred to as “bootstrapping.” This helps protect your personal credit score by eliminating the need to make monthly payments on a loan. Even if your personal savings are not enough to fully fund the company, it does reduce your business’ debt exposure and frees up vital cash flow in the first few months.

You could also ask friends and family members for a loan that you will pay off once the business stabilizes. It is still debt, but you’re unlikely to have assets foreclosed or get charged high interest rates by the people close to you.

2. Traditional term loans

Most people think of traditional term loans when the concept of business financing is brought up. Traditional term loans award borrowers a fixed amount of money that they have to repay with interest through fixed amortizations spread out over a number of months.

There are two types of term loans, namely, secured and unsecured loans. Secured loans are also called asset-based borrowing because they require assets to be pledged as collateral. Borrowers have higher odds of approval because of the collateral.

On the other hand, unsecured loans feature higher interest rates because of the higher risk that the lenders are exposed to. The only way to lower monthly payments and interest is to apply with a good credit record.

3. Business credit cards

Entrepreneurs must learn to prioritize when to use cash for their obligations. This is where business credit cards can help. These cards help preserve cash flow by postponing payment for another 30 days. When used wisely, business credit cards can be a great source of credit that you can use to fund early operational expenses.

The downside to using credit cards to fund your capital is the high interest rates charged to your purchases. Some cards, however, offer zero interest provided that you settle the amount within 30 days. The other disadvantage to these cards is that payments due and interest can compound if not fully settled within a month.

4. Purchase order financing

Purchase order financing helps businesses fulfill bulk orders even if they don’t have the cash flow to support the transaction. Most entrepreneurs end up refusing the order even if the potential revenues are high because they have insufficient stocks and are unable to acquire more. This financing, however, helps to avoid that kind of loss for the company.

Purchase order financing is indispensable when the business is experiencing rapid growth. Lenders will interact directly with the supplier to pay for the pending purchase order. Upon payment of the PO, the supplier ships the order directly to the borrower, fulfilling the customer’s order.

PO financing supplies the value of the purchase order and the cost for conveying the products to the borrower. Lenders may also charge 1.5% to 3.5% in fees on top of the total financing amount.

5. SBA loans

The Small Business Administration provides guarantees for financing so that new entrepreneurs can get their businesses off the ground. You no longer have to provide a personal guarantee to the lender because the government shoulders the liability in case of a default.

SBA loans have very high borrowing amounts, comfortable repayment terms, and affordable interest rates. You only need to satisfy the SBA’s definition of a small business to access loans of up to $1 million. There are various types of SBA loans, including the 7(a) loan offered for veterans who want to invest in real estate, purchase equipment, and hire employees for their business.

6. Invoice financing

Invoice financing is a loan product where business owners can sell their pending invoices for immediate funding. Lenders can advance up to 85% to 90%, depending on the creditworthiness of your customers. You can use the money for various purposes, including plugging gaps in cash flow, payroll, day-to-day operations, and more.

Both the purchase order and invoice financing disregard the business’ credit score. However, invoice financing companies will want to check out the credit records of each customer that owes the borrower money. Invoices owed by clients with bad credit or questionable capabilities of repaying could be excluded from financing.

In any case, invoice financing can advance borrowers up to 97% of the total amount of money in accounts receivables.

7. Inventory financing

Inventory financing is another asset-based financing that provides borrowers up to 65% of the value of their inventory pledged as collateral. You can pledge both existing and future inventory if you wish to apply for this form of financing.

Like invoice financing, inventory financing companies are very particular about the type of inventory that they’ll accept as security. Lenders typically prefer very liquid inventory or those that can be easily converted to cash. Raw materials are on top of this list because of the variety of their applications. Finished goods are also good security, but only if they have a strong market for sales and long shelf-lives.

8. Revolving line of credit

A revolving line of credit is a very flexible source of emergency cash flow. You get access to a specific amount of credit that you can withdraw or borrow when the need arises and only pay for the interest rates for that credit you took out. The unused credit remains in your account until you need it, while the balance is automatically restored when you repay the initial loan.

It is nearly similar to a credit card, but a revolving line of credit charges interest and imposes terms only per transaction. Credit cards, on the other hand, credit cards do the same but for the total number of credit that has been used at the end of every billing period. This means that the revolving line of credit is a more flexible option for business financing.

9. Venture capitalists and angel investors

Venture capitalists and angel investors are similar in principle. They both provide third-party funding to promising businesses. However, there are fundamental differences between the two.

Angel investors are usually wealthy individuals that want to diversify their investments by cashing in on a budding business. They request equity within the company in exchange for their funding. Angel investors provide much-needed liquidity at the initial stages of a business, but the amounts they give business persons are relatively lower than that of venture capitalists.

On the other hand, venture capitalists are corporate entities that pool their money to provide funding to companies that fit their criteria. Venture capitalists can invest at any stage of your business because of their more significant resources. Aside from equity, they might also request a chair at your Board of Directors.

10. Crowdfunding

Crowdfunding was initially intended to finance projects through the internet. Creators create a campaign and offer potential financiers exclusive perks for the project in exchange for their funding. Over time, however, crowdfunding also became a popular alternative source of financing for small businesses.

Crowdfunding works the same as angel investors and venture capitalists. You only need to create a campaign on any of the popular crowdfunding platforms and offer your terms. If anyone is interested, they’ll just click on the button to connect them to the payment portal. Once the business is off the ground, you just need to make sure to keep your end of the bargain.

Conclusion

E-commerce is poised to rise to 2025. Because of the pandemic, both consumers and businesses alike see the merits of online shopping and delivery services. The trend of shopping through e-commerce will clearly persist for a few more years until scientists confirm that COVID-19 is under control and represents an irresistible opportunity for entrepreneurs like you.

Take the opportunity now to research what forms of financing are available for you to fund your emerging business with. Each option has specific attributes, drawbacks, and advantages. You must know which one is ideal for your current cash flow constraints, your business goals, and what your business can give in return to the investors or financers.

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Rumzz Bajwa

Rumzz Bajwa is a digital strategist and content marketer at SMB Compass. She enjoys spending time with her family. She loves to go out and experience new moments whenever they came to light. 


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