As an online seller, you may be feeling cash flow pains. Whether the cause is seasonal traffic, inventory issues, overhead, or rapid growth, a lack of cash on hand can be a significant problem. In fact, 80% of small business owners feel stressed about their cash flow. If that sounds familiar, you may want to consider ecommerce business loans.
Learn more about these unique funding sources and how they compare to other financing options.
What Are Ecommerce Business Loans?
Ecommerce business loans are an efficient, industry-specific way for online sellers to get the cash they need to run their businesses. With these loans, non-traditional lenders provide funds directly to online sellers, with limits based on their sales.
Since the lender communicates directly with the borrower’s store via API, payments are automatic and synchronized with sales. This way, sellers pay when they have cash available due to recent sales.
For online sellers, this type of financing option can solve cash flow issues without some of the adverse financial effects of traditional loans and credit cards.
Beyond Ecommerce Business Loans
Ecommerce business loans are a more modern option that is specialized for the industry. However, online sellers can also obtain funding through more traditional means. Each type has its benefits and drawbacks, so it’s essential to perform due diligence and research thoroughly.
Use a Credit Card
Many ecommerce businesses go the easy route: credit cards. Simple to obtain and manage, credit cards can be an acceptable way to access cash when you’re starting a business. They aren’t an efficient method for providing accessing working capital needed to run an ecommerce business. Ecommerce works in 60- to 180-day cycles, while credit cards do not.
Credit cards have notoriously high interest rates, as well as penalties for late payments. If you’re unable to pay more than the minimum payment, you could end up spending much more than you should in the long run. This lack of flexibility and personal attention can negatively affect your credit, business, and finances. If you choose to use a personal credit card, issues can even impact your personal credit.
Borrow Money from Friends and Family
Some small business owners opt to borrow from people they know at the beginning of their business venture. This strategy does have benefits.
For example, you are likely to get a better interest rate when borrowing from friends or family. You also may not incur the same penalties for late payment as with a bank or credit card. If you don’t have to secure the loan, you can keep your assets in the clear. Additionally, if the lender doesn’t report your payments to a credit reporting agency, late payments won’t negatively impact your credit score.
That said, for many business owners, this type of lending is not ideal. Any issue you may have when repaying a loan from an acquaintance can put the relationship in jeopardy. If your business fails, you would also be hurting the finances of someone you know, perhaps even love. Even with a successful business, this type of loan will generally not improve your credit score or allow you to borrow money at a more favorable rate in the future.
As a trendy, unique way of funding a business or other personal project, crowdfunding is an exciting option for those looking for an alternative to ecommerce business loans. It can develop an audience and create marketing buzz around your product or service. The big drawback: most crowdfunded projects don’t get fully funded. It’s very challenging to stand out in the market, with millions of campaigns launched each year. You’ll also usually have to offer something in return for support, and you’ll need to market and manage the campaign itself. This commitment adds an additional set of tasks to the work you already do in your day-to-day business.
Get a Business Partner
If you’re short on cash, one option is to find a business partner who can inject funds into your business. Since you negotiate the terms yourself, this option can be beneficial to both parties. You’ll have to give up an agreed-upon amount of equity and profit, but you can include certain milestones in the contract to ensure fair treatment.
One big drawback is the fact that you will no longer be the full owner of the business. Depending on the contract, you may lose certain aspects of strategic and operational decision-making. Since many business owners gravitate to the online seller space because of the freedom and independence that it offers, this may be a dealbreaker.
Adding a partner also requires a great deal of research and due diligence since you are dramatically altering the organizational structure of your business. You’ll need to perform a background check and seek legal advice when creating your partnership agreement. Consider these costs compared to the amount of money you need to raise.
Related: Financing Options for Amazon Sellers
Take Out a Small Business Loan
Another well-known funding option is the small business loan. This is actually an umbrella term, as there are several different types of small business loans.
For example, a small business term loan is much like a personal loan. A bank offers you a certain amount of money upfront in return for regular payments at a fixed interest rate. You’ll need to fund a specific investment for your business and may need to provide collateral.
However, when people talk about small business loans, they often refer to loans that the U.S. Small Business Administration guarantees. Known as SBA loans, they offer the backing of the federal government. If you can’t make your payment, the SBA will be responsible for a portion of the loan (75 – 85%). This benefit and others can make it more challenging for borrowers to obtain this type of loan.
Ask for a Line of Credit
A more sophisticated option is a line of credit. Borrowers don’t receive all the funds at one time, but instead you have access to a certain amount of money that you can take out in “chunks” as needed. The bank then charges interest as soon as you take out the money.
Much like a credit card, this type of financing is convenient because it requires a single approval. You can also make long-term decisions about business spending without worrying whether the bank will approve additional funds. This option can be great for start-ups or businesses whose cash flow varies greatly from month to month.
A line of credit requires a credit check and bank approval, which can cause complications for some small businesses. This type of loan may be more expensive than you initially anticipated because interest accumulation can be challenging to predict. Furthermore, some banks charge maintenance fees for lines of credit and offer interest rates that are higher than other types of loans.
As an online seller, you want a financing option tailored to your business and its needs. Ecommerce business loan providers know your industry and its challenges. The unique financing structure ensures that you only pay on the loan when you have cash available to do so, and automation makes it all easy for the business owner. Want to learn more? Onramp Funds was started by entrepreneurs, for entrepreneurs. Our founders have a background in online selling, and they designed Onramp specifically for ecommerce businesses that face cash flow issues. Sign up today and get cash within days.