What Are the Differences Between eCommerce Loans and Other Small Business Loans?
Today, brick-and-mortar stores need an online presence to keep up with budding eCommerce trends. It’s an exciting change of dynamics, as almost all businesses now must have at least some presence in the online merch space to maintain customer-brand connections.
For example, even the most physically established retailers, such as Target, Best Buy, and grocery chains, have been pressured to adopt curbside pickup, creating a more substantial niche in non-delivery eCommerce services for retailers. With eCommerce increasingly necessary to drive sales and deepen customer engagement, it’s essential to look at more than the technical logistics — what of the innovative small business loans for eCommerce that have also emerged?
Small Business Loans for eCommerce and Financing Alternatives
Even the most inspired tales of rags-to-riches eCommerce success stories will reveal a pivotal moment where the most vital initial funds served as a turning point.
Some businesses achieve it through a windfall of initial sales performance driven by a significant media spotlight or social buzz. Others, like Shopify, discover they inadvertently created a highly marketable product while trying to solve their specific pain points. These are highly inspiring examples of when key initial funding bolstered an already diligent work ethic and ambitious vision.
There is a much surer way to achieve your financing needs and generate initial momentum or expand your operations into new territory — and it’s all about relationships. Just as eCommerce brings the customer-brand relationship into vastly new territory, cutting-edge eCommerce financing partnerships are now helping new and established vendors secure funds for daily sales performance.
Before we compare this new financing solution with traditional small business loans for eCommerce, it’s important to frame it with a look at the unique needs of eCommerce businesses and the challenges they face during start-up and expansion efforts.
What eCommerce Businesses Need
When entrepreneurs or physical store owners look into eCommerce, the initial key benefits of low overhead and non-locality can quickly become overshadowed by a range of other complexities requiring more mental resources. Some of the most common needs of eCommerce businesses are:
- Guaranteed web traffic and polished marketing services to secure it
- Accurate order and fulfillment processes
- New digital tools and services
- Secure network infrastructure
- Versatile payment processors supporting multiple payment types
- Streamlined communications systems for SMS, calls, email, and chat
- More straightforward procedures for regularly and accurately replenishing inventory
- Financing that meets them where they’re at, without the qualification catch-22s
Funding is always an essential element that requires keen attention, planning, foresight, and judgment to get it right. Only recently, equally advanced options were almost entirely lacking.
Related: The Basics of Funding for Ecommerce Businesses
Getting Resourced From an eCommerce Perspective
As with any business, making money requires money — and in eCommerce, those needs are much easier to fulfill with more adaptive and flexible financing methods integrated into their tech stack. Here’s how traditional small business loans for eCommerce purposes stack up compared to modern eCommerce funding solutions.
Term Loans for Small Businesses
Regular small business loans usually have very stringent application prerequisites that are only sometimes relevant to the bottom line: the lendee’s ability to discharge the debt simply. Instead, the lending institution will want to look at your cash flow, credit history, and collateral and estimate based on a broad range of complex factors.
This makes sense for the way traditional banks have been doing business already, given the risks involved in physical storefront operations. Traditional store owners often run multiple lines of credit, and the bank wants to see their previous or another current creditor/debtor relationship.
Collateral helps the banks feel more secure, especially if the credit check is sub-par. For eCommerce businesses, this may be nothing more than inventory (or not even that, if they use dropshipping or 3rd party fulfillment services). However, this creates dangerous potential cross-purposes, where certain banks could find themselves more motivated to default on loans and keep the collateral.
From the perspective of an eCommerce business owner, who is less reliant on physical assets, cash flow is about the only metric that ultimately seems relevant. After all, cash flow is the bread and butter of their financial health. Why aren’t there financing options that also base their assessments more, or even entirely, on this bottom-line measurement?
Small Business Association Loans
Eligibility issues are easier to overcome through SBA resources. SBA-partner lenders have much looser collateral and cash flow requirements, typically wanting to see assets valued at 25–33% of the loan’s value.
However, SBA loan 7(a) qualifications often require a small business to have been in operation for two years. It’s catch-22s like this that compel SMBs to look at alternative funding sources in the first place, and just like regular small business bank loans, SBA loan approval processes can go at a glacial pace.
Further, the arrangement is for bulk sums, leaving those needing more incremental amounts still searching.
Credit Cards and Lines of Credit
While credit lines solve the issue of speed, they come with highly disadvantageous interest rates. Those with exceptional business credit history will get superior credit terms, but at that point, such business owners will have qualified for a loan anyway. It’s best only to use business credit cards to build credit and earn rewards, in which case, it’s best to view them as something other than credit.
Even when merchants secure a decent credit line for funding purposes, repayment schedules tend to be along the same timelines as small business loans. The repayment procedures for these options are essentially blind to your real-time performance.
While it’s always possible to pay more of your loan or credit down during higher-performing months, the need to deal with double-digit interest rates is a disadvantage that should be avoided if possible.
Taking hefty interest rates as a matter of course, the allure of bridge loans may draw merchants. These short-term financing options fund basic operations while you await other funding with more advantageous terms, adding to their appeal. These can be easier to obtain but often involve weekly or daily payments.
Bridge loans, in particular, are fundamentally time-limited solutions that still leave you searching for a specialized eCommerce funding resource.
Related: Revenue-Based Financing – The Secret to eCommerce Growth
A True Alternative
Seeing the options side by side, it’s clear that they are all double-edged swords. None of them have a combination of features that align with the incredibly unique needs of eCommerce businesses specifically, such as:
- Smaller and more regular cash injections
- Lower interest rates
- Flexible repayment terms timed with actual sales
- Customer service & support
- Fast approval, with performance-based qualifications
- Automated API store integrations
- An ongoing relationship with a coequal partner financier
- Industry-specific education resources
- Revenue-based funding that correlates with cash flow realities
In all the options outlined above, there is a stark disconnect from an important consideration: how is your eCommerce business performing daily? Private financing from an eCommerce specialist is the only solution that doesn’t just consider this — it makes it the primary consideration.
Introducing Revenue-Based Financing
Except for those businesses that hardly even need it, obtaining business capital has been challenging. SMBs, in particular, have long faced rules that made traditional lending options challenging to qualify for, even with good financial performance.
Only now, small business financing options have emerged with the unique needs of eCommerce businesses in mind. Banks often offer only significant lump-sum funds with stringent standards, amounting to loan offers that are larger than required and are attached to steep terms.
In light of this demand, private financiers have created revenue-based financing, adapting payments and terms to actual funds needed as they’re needed — nothing more or less. These relationships can be ongoing, and such financing partners align with the merchant’s store success. They have no interest in structuring excruciatingly complex contractual terms to favor default because there’s little-to-no collateral to claim.
Instead, the financing partner and the online business owner are on the same page and mutually aligned with the other’s success. This also means the approval process is lightning quick, as there’s little need for the not-so-traditional provider to painstakingly pore over the details of your company’s credit history or assets. Your payments are automatically deducted when you receive earnings, allowing them to cut through the red tape.
Further, the fintech tools needed to make all this happen correlate directly with your account(s), creating an automated and streamlined financing process that occurs strictly in the background.
Adaptable Small Business Financing From an eCommerce Specialist
If you’ve stalled your business’s growth and expansion due to the “funding desert” caused by unobtainable small business loans for your eCommerce business, look further ahead with revenue-based financing. With eCommerce financing, you can boost your cash flow at low risk with repayments drawn from a percentage of your actual sales.The barriers between eCommerce businesses and financing resources are falling — reach out and get an offer today.