eCommerce merchants have always struggled to receive funding from traditional lenders, in large part because they lack assets that can be used as collateral. With an uncertain global economy, finding money has become more difficult. Rising interest rates and high inflation have made consumers more purposeful in their spending. Combined, these factors present a challenging environment for eCommerce retailers.
Merchants will need to explore new markets and alternative funding sources if they want to expand their businesses. In an unpredictable market, ready access to eCommerce funds is crucial to bridge the gaps that may arise in a tight financial market. Many small businesses turn to credit cards for short-term financing.
Although 65% of small businesses use credit cards, only 50% use a business card. The other 50% use their personal credit cards for business expenses, which can be risky. It's never a good idea to use personal credit cards for business purposes. It puts your credit at risk, and it complicates identifying business expenses for tax purposes.
However, eCommerce merchants may have difficulty finding a business credit card with reasonable interest rates, forcing them to use their personal credit to stay afloat. All that changes with better options. Onramp offers an alternative to credit cards that can protect your personal and business credit history. Let's compare these two options.
When do Businesses Use Credit Cards?
As an eCommerce startup, business owners may not require added labor, but wages can become a leading expense as the company grows and hires employees. Making payroll and paying taxes can leave little money available for inventory or new equipment. Outsourcing services such as accounting or logistics can also eat up cash. Without access to ready cash, eCommerce merchants may turn to credit cards to cover other expenses.
Business advisors caution against using credit cards for long-term financing or large purchases. Large purchases increase balances and monthly payments. Long-term expenses at high-interest rates impact cash flow. Multiple cards for business expenses can quickly overextend financial resources and impact credit history.
In 2022, 74% of small businesses carried a balance on their credit cards. Of that 74%, 34% had less than $100,000 on credit cards, and 7% owed more than $1 million. The remaining 33% carried balances between $100,000 and $1 million. As of January 2023, the average interest rate for a business credit card was 20.24%. If central banks continue to raise interest rates, the repayment costs will also increase.
Clearly, eCommerce merchants need an alternative to business credit cards. They need a solution that helps bridge the gaps in cash flow at low rates and flexible repayment terms with no annual fees. Onramp's solution provides merchants with funds to fill the gaps in cash flow without significantly impacting that cash flow.
Why eCommerce Merchants Should Use Onramp
Business advisors suggest using a business credit card to build credit, earn rewards, and make large purchases. They recommend business owners choose cards wisely and not overspend. Controlling spending is easier said than done.
If limiting credit card usage were easy, 74% of merchants wouldn't carry balances. It's too easy to pull out a credit card when cash is in short supply. No matter the good intentions, the balance isn't paid in full. More expenses add to the balance until the monthly payment is disrupting cash flow.
With Onramp's solution, business owners can avoid the credit card merry-go-round and maintain a healthy cash flow to enable growth. Here are four essential ways Onramp differs from credit cards.
Onramp Doesn’t Charge Interest
Today's variable interest rates on credit cards range from 9.99% to 34.99% for good to excellent credit rates. For most eCommerce merchants, the rates hover around the average of 20.24% unless the business lacks a strong credit history. For merchants with fair to poor credit, interest rates jump to 26.74% or higher. Since all cards carry a variable rate, be prepared for an increase if payments are missed or credit scores drop.
Onramp does not charge interest on the borrowed amount. Merchants do not have to calculate how long it will take to repay the balance plus interest. There's no stressing about how to make the minimum payment because the repayment schedule is determined at the time the funds are released.
Onramp Offers Flexible Repayment Schedules
Every 30 days, a credit card payment is due. How large a payment will be can vary. For eCommerce merchants, the payment variability makes cash flow difficult to predict, especially if purchases are added during a cycle period. What was a payment of $200 suddenly becomes $600. Taking an extra $400 out of a bank account may compound the problem by forcing merchants to use a credit card to cover other expenses.
With Onramp, repayment schedules are tied to sales. As credit card sales are processed, Onramp automatically takes a percentage of the sale as repayment. This process continues until the $5,000 is repaid. No matter the amount, the percentage stays the same.
eCommerce merchants aren't faced with a $600 payment in a month of $200 sales. Their cash flow is not disrupted by a payment that is out of proportion to revenue. With Onramp's flexible repayment schedule, merchants have more control over their financial health.
Onramp Doesn’t Assess Late or Transaction Fees
Fees can quickly add up with credit cards. Late payment fees, transaction fees, and currency exchange fees—they’re all possible with credit cards. Onramp's 1% processing fee stands in contrast to these common credit card additions.
Credit card issuers may charge up to $30 for a late payment and $41 for any other late payments within a six-month period. The fees are automatically adjusted for inflation but are capped at 100% of the late payment amount. Too many late payments not only hurt a company's credit history—they add to the repayment balance.
With Onramp, there's no such thing as a late payment fee. A percentage of each sale lowers the amount due until the balance is paid. No late fees are added to the balance, extending the length of repayment.
Credit cards charge for certain transactions. If a purchase is made in a currency other than what the credit card is issued in, a foreign transaction fee is charged, which averages around 3% of the transaction amount. eCommerce merchants may purchase inventory from sellers outside their country.
Related: The Importance of Borrowing and Spending Only What You Need to Maintain Healthy eCommerce Finances
If they use a credit card issued in US dollars, for example, a 3% transaction fee would be assessed if the seller were paid in Euros. That does not include any adjustments as a result of the exchange rate.
Credit card cash advances are processed at a rate of 3% to 5% per cash advance. Since many cards limit cash advance amounts, merchants may find they need several transactions to receive the amount they want.
Onramp charges a predictable 1% processing fee per transaction. Period.
Get Fast, Personalized Service and Grow Your Business with Onramp
Onramp works with each merchant to structure a plan that fits their unique situation. Business owners can receive cash in minutes. No waiting for lengthy credit checks or physical cards. With Onramp, eCommerce merchants can avoid:
- Late or transaction fees
- High-interest rates
- Rigid repayment schedules
Instead, they have easy access to cash when they need it without the fear of over-extending their financial resources. If you're looking for cost-effective ways to finance your eCommerce business, contact us and let’s get started.