How to finance your ecommerce business?
Ecommerce is on the rise, but the growing competition is making it harder to stand out.
To start up and/or grow your business, you’ll need cash to support marketing, to hire a skilled team, and to purchase enough inventory to cover demand.
What is ecommerce funding?
In their early trading days, most new online retailers don’t have enough capital to cover necessary expenses such as marketing costs, inventory and costs associated with shipping and storage.
Ecommerce financing is a cash flow solution that provides financial support for online traders to gain the equity they need to cover these costs and invest in their future growth.
Funds can come from a range of lenders, including the bank, angel investors, government grants, and even the general public.
The right funding model for your business depends on the stage of your business and how quickly you’re planning to grow.
How does funding for ecommerce businesses work?
The type of funding model you go for determines if there’s repayment, if there’s interest and if there’s equity lost. Some methods, such as revenue-based financing, ask you to pay back the funds over time, while others, such as crowdfunding, may require you to give up shares in your company.
Funding gives you the cash injection you need to scale, but before you dive in it’s important to know what your options are. Here’s a breakdown of the most popular ecommerce funding models and how they can work for you.
1. Revenue based funding
Revenue based funding allows companies to borrow between $10,000 and $5,000,000 in as little as 24 hours.
Each month, your lender collects a proportion of your turnover (from 5% to 25%) until you repay the loan off in full.
One of the major advantages to revenue-based funding is that you need no business plans or pitch decks to apply. Lenders won’t even run a credit score on you or your company.
All they need when you apply is access to some of the apps / ecommerce platform / accounting software that you use like Stripe, Shopify, Amazon, Xero, QuickBooks, etc.
The repayment amounts go up and down depending on how much revenue you’re making.
On a good month, your repayment is higher, and you pay your loan off quicker. On a slow month, the amount you pay back decreases, giving you some valuable breathing room.
If you’re growing quickly, you should be able to absorb that cost. However, if your growth is slow, it can put a lot of pressure on your cash flow.
2. Purchase order funding
In this model you can get up to 75% financing of your merchandise and shipping orders.
You order goods and pay the down payment on them, the financing company pays directly to the supplier the balance of the order on your behalf.
The main advantages of purchase order-based financing are that you do not need to present a business plan, give guarantees or bring in investors. In addition, the commission is fixed, there are no interest or commission percentages that cause your repayment to change every month and “bite” into your profits.
If you are interested in purchase order-based financing for your Amazon or Shopify business, we offer a service that will allow you to increase your order of goods and replenish the stock , for a fixed monthly rate.
For more information on our invoice financing solutions, visit this page.
3. Invoice financing
Invoice financing allows you to receive payments quicker by freeing up capital that’s tied up in invoices. Depending on the lender, it can grant you 90% of the capital you’re owed upfront. This type of financing can also give you access to the funds almost immediately, so there’s no need to wait around.
Invoice financing can be a particularly attractive solution for e-commerce businesses that need to access working capital quickly, and helps to maintain healthy professional relationships with suppliers and distributers.
The advantages of invoice financing
- Less risky for small businesses
- Gives you fast access to cash and keeps your cash flow strong
- Allows you to access financing without the risk of debt
The disadvantages of invoice factoring
- The fees charged consume a portion of your profit
- If a platform refuses to pay an invoice, the supplier will still approach you for it
- You’ll often need to offer personal assets as security
4. Merchant cash advance
Merchant cash advance providers advance clients up to 6 month’s credit and debit card turnover ranging between $5,000 and $500,000.
To pay the loan back, lenders deduct around 15% every day from your credit and debit card receipts.
The advantages of merchant cash advances
- Quick access to cash
- Easy to apply for – you just need to send the last three months’ credit card statements
- There’s no set payment amount
- You can use the money however you like
The disadvantages of merchant cash advances
- They can be very expensive – revenue based funding can cost between 6% and 12% of the amount you borrow, while a merchant cash advance can cost 30% to 40%
- They are only a short-term solution
- Financing future sales can be risky if the market is unstable
5. Bank loan
A business loan from the local bank is the first thing many entrepreneurs think about applying for.
However, banks are historically risk-averse and the chances of them lending to an ecommerce business are low, let alone lending the amount you might want.
The advantages of bank loans
- Interest rates can be low
- As long as you keep up repayments, banks can’t demand a full repayment of the loan
- They are flexible and you can spend the funds however you like
The disadvantages of bank loans
- You’ll need to prepare a business plan and cash flow forecasts
- Banks are very likely to ask for personal assets for security on the loan
- They can be hard to secure if you want a large cash injection.
6. Bank overdraft
Overdrafts are comparatively easy to get for ecommerce entrepreneurs, once they have a good 6 month track record with their bank.
You pay a small fee to the bank every year for the facility and the bank grants you access to your own line of credit linked to your account every month.
Overdrafts are designed to help with cash flow but in most cases they’re not enough to use for stock purchase or expansion.
Your overdraft will probably be capped at between 1.5 and 2 months’ turnover and, unless you own a multi-million dollars company, you probably won’t get more than $25,000.
The advantages of bank overdrafts
- They are useful to have for any business
- They can help with small issues in cash flow
- You can borrow the exact amount you need which can make it cheaper than a loan
The disadvantages of bank overdrafts
- They can be withdrawn at any time at the bank’s discretion
- It’s difficult to get anything more than a $25,000 overdraft
- They aren’t a good substitute for a loan if you need to purchase stock or scale
Overdrafts are comparatively easy to get for ecommerce entrepreneurs, once they have a good 6 month track record with their bank.
You pay a small fee to the bank every year for the facility and the bank grants you access to your own line of credit linked to your account every month.
Overdrafts are designed to help with cash flow but in most cases they’re not enough to use for stock purchase or expansion.
Your overdraft will probably be capped at between 1.5 and 2 months’ turnover and, unless you own a multi-million dollars company, you probably won’t get more than $25,000.
The advantages of bank overdrafts
- They are useful to have for any business
- They can help with small issues in cash flow
- You can borrow the exact amount you need which can make it cheaper than a loan
The disadvantages of bank overdrafts
- They can be withdrawn at any time at the bank’s discretion
- It’s difficult to get anything more than a $25,000 overdraft
- They aren’t a good substitute for a loan if you need to purchase stock or scale
7. Equity investors
Overdrafts are comparatively easy to get for ecommerce entrepreneurs, once they have a good 6 month track record with their bank.
You pay a small fee to the bank every year for the facility and the bank grants you access to your own line of credit linked to your account every month.
Overdrafts are designed to help with cash flow but in most cases they’re not enough to use for stock purchase or expansion.
Your overdraft will probably be capped at between 1.5 and 2 months’ turnover and, unless you own a multi-million dollars company, you probably won’t get more than $25,000.
The advantages of bank overdrafts
- They are useful to have for any business
- They can help with small issues in cash flow
- You can borrow the exact amount you need which can make it cheaper than a loan
The disadvantages of bank overdrafts
- They can be withdrawn at any time at the bank’s discretion
- It’s difficult to get anything more than a $25,000 overdraft
- They aren’t a good substitute for a loan if you need to purchase stock or scale
8. Crowdfunding
There are few types of equity funding.
With equity funding, you can raise anywhere from $10,000 to hundreds of millions of dollars. The idea is that you give up some of the equity of your company in exchange for a cash injection.
Your investors will be experts in their field with a proven track record of growing many different types of companies.
You’ll not only access their knowledge and expertise, but you’ll also be connected to their wider professional network.
This alone is worth it – those contacts will present you and your company with lots of new business development and growth opportunities.
The advantages of equity investors
- Cash injection from invested experts
- Access to a wider network of experts and professionals
- You get input from people who have valuable experience
The disadvantages of equity investors
- Require you to give away part of your company shares.
- The more you grow, investors will want to install their own people on the board
- You surrender a lot of control and influence as you go through the different rounds of investment
- Investors will expect a detailed business plan with flexible financial forecasts
- Legal fees involved in drawing up a contract can be costly
9. Grants
There aren’t many available government grants for businesses.
The sums involved tend to be small too.
The advantages of grants
- You never have to pay them back
- You don’t surrender any control over your business
- You’re free to run your company in the way you want
The disadvantages of grants
- They can be difficult to find (especially niche grants)
- Applying can involve massive paperwork
- You are never guaranteed to get the grant and are often competing with many other businesses
Which ecommerce business funding solution is right for you?
All the funding options we’ve listed above come with distinct advantages and drawbacks, and some may be more suited to your business than others. When deciding the best course of action, it’s essential to consider:
- Your credit history
- How quickly you need access to funding
- How much capital you need
- How that spending will add value to your business
- Your willingness to give up equity
- How you’ll repay the money (if you’re taking on debt), and the terms you’d be happy to work with an investor on
- How you’ll repay the money
Establishing the answer to these questions will make it easier to decide which funding option is the best fit for your e-commerce business.
ACCELERATE YOUR GROWTH WITH GAMEON
GROUP E-COMMERCE FINANCING
We’re admittedly a bit biased, but we think that order-based financing is the ultimate solution to the cash flow problem of ecommerce merchants and a brilliant way to finance the growth of your online business. If you are not looking to give up control and distribute shares, use assets as a personal guarantee or pay interest, this solution could be very suitable for you!
We offer financing for purchasing goods and shipping them to your third-party warehouses.
We give you a grace period of one and a half months to make sure you have enough room to breathe and maintain healthy business growth. No business plans are required to apply.
Check if you’re qualify here!
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