Funding is absolutely critical for the success of your eCommerce business.
Without funding, you are limiting your ability to grow, secure stock in a timely manner, and even do simple things like pay yourself consistently.
Unfortunately, securing financing for your business can be tricky and expensive.
Because of this, we’re going to go through various popular methods of financing for eCommerce businesses and rank them from worst to best (in our opinion, of course).
Note: While we’re going over different types of financing, all funding effectively functions in a very similar manner: You receive money and pay it back over a period of time with a fee of some kind attached. Certain types of financing will seem very similar to others, and there’s no official way to strictly define one loan type over another.
7. Business Loan From a Bank
Bank loans are the way many businesses who aren’t aware of the options available to them first seek out funding for the eCommerce business.
Sadly, a lot of the time receiving a loan from a bank for a purely online business like an eCommerce shop is typically a non-starter.
Not only are the requirements to get a decent loan from a bank hard to hit for newer businesses, a lot of the time they won’t even work with online businesses at all.
Bank loans rank at the bottom of the list for eCommerce businesses because a lot of the time they won’t even work with you, and on top of that their requirements to qualify are too high.
Pros of a Bank Loan
- Good rates if you can qualify.
- Get funding from the same institution you host your business account.
Cons of Bank Loans
- Non-starter for eCommerce businesses much of the time.
- Hard to qualify for.
6. Equity Based Financing
Our second least favorite form of funding is equity based financing.
Equity based financing is a straightforward idea: You receive money and instead of paying a fee back on it, the lender will instead own a percentage of your business.
There aren’t many scenarios where this type of financing makes sense for an modern eCommerce business, mainly because there are so many other options that don’t require you giving up a portion of your business, and the lack of a “fee” for equity will result in smaller profits that go to your lender for the life of your business.
It only really makes sense to do equity financing if the one providing the funds will help build the business to a level you can’t alone. In that case it becomes more of a strategic partnership that brings in both cash and expertise.
Pros of Equity Based Financing
- No fees on the money borrowed
- No payback schedule since you’re trading equity for the loan instead of promising to pay it back over time
Cons of Equity Based Financing
- Giving up part of your business, which means future profits will never go 100% to you.
- It could complicate your ability to make decisions about the business without others being involved.
5. Collateral Based Financing
While this isn’t strictly a type of funding you seek out, any financing that first and foremost requires you to put up big collateral of something you currently own to even look at qualifying can be looked at as collateral based financing.
With collateral financing, you put up something you own such as inventory, equipment, or real estate in order to qualify for a loan.
If you fail to pay back your loan as promised, then the lender will immediately take ownership of whatever you put up as collateral.
While every type of loan will have some form of collateral baked in (which can even help lower risk and get you a better rate), lenders will typically try to work with you to prevent a messy collection process.
Pros of collateral financing
- Simple to qualify for if you have assets
- Access to good rates because a valuable asset will lower your risk to a potential lender
Cons of collateral financing
- You’re risking valuable parts of your business that could force you to close without
- Higher risk than other options
4. Business Grants
A grant is money given to a business under special circumstances without the need for repayment.
It’s essentially free money, the only catch is you need to qualify, you need to apply for the grant, and there’s no guarantee that if you apply you’ll get the money.
Think of a scholarship, but instead of paying for your schooling it pays for your business expenses.
Grants are great, but there’s very few businesses that qualify for them.
If you do find a grant that matches your business, then by all means go for it, but don’t rely on potential grant money.
Pros of Business Grants
- It’s money you don’t have to pay back! Doesn’t get much better than that.
- Grants can go toward very early stage businesses, and typical loans usually like to work with mature businesses
Cons of Business Grants
- Your business probably doesn’t qualify for a grant.
- Grants are typically very specific on how funds can be used.
3. Traditional Loan for eCommerce Businesses
While very similar to a bank loan, these are from lenders that actually understand and will work with eCommerce businesses.
It works exactly like any other traditional loan: A lender assesses your business metrics to see how risky lending to you will be, and based on that information will give you a loan limit and an interest rate (typically measured in APR).
Pros of a Traditional Bank Loan
- Qualifying for an eCommerce focused traditional loan is not as hard as a regular bank business loan.
- Paying back a loan early will result in lower interest fees paid.
Cons of Traditional Bank Loans
- When you take on a new loan, rates can change suddenly your total costs will rise unexpectedly.
- You’re always required to pay the same amount each month, so if you have a slow month of sales, your minimum payment doesn’t change.
2. Business Line of Credit
A business line of credit is unique, it’s like a mix of a credit card and a cash loan.
When you are approved for a business line of credit, you may pull funds out in the form of cash for your business whenever you need it, and will be charged every billing cycle for a percentage of that amount of cash you borrowed.
As you can guess, it’s good to use for a quick boost of money that is intended to be paid off quickly, as the fees and cost can really add up if you take a long time to pay your balance down.
Pros of a Line of Credit
- Fast funds that are always available.
- One of the lowest fees if you pay back funds quickly.
Cons of a Line of Credit
- You have to pay down your balance fast or else the fees will get very high compared to all other forms of funding.
- Your cash available limit to take might not be enough for your business needs.
1. Revenue Based Financing (aka Merchant Cash Advance)
Revenue based financing takes the top spot in our list because it is uniquely suited for eCommerce businesses, fitting into the flow of how products are restocked and created, and have simple repayment structures that end up in lower fees than other loan types in many cases.
Revenue Based Financing, as its name implies, focuses mostly on the revenue generated by your business (as well as other factors) to determine your funding amount and even how repayment is structured.
Once you are approved for an amount of funding, then your repayment schedule and fee will be based on a range of months (usually shorter term than traditional) and a percentage fee based on sales revenue, or cash flow.
A great aspect of revenue based financing is that repayment is tied to revenue, so slow months will have reduced payments, and can increase once sales have normalized.
Pros of Revenue Based Financing
- Uses revenue as a main metric to assess risk and determine loan amount.
- Simple payback system, based on a percentage of sales or
Cons of Revenue Based Financing
- Typically shorter payback periods, which might not be what your business needs at the moment.
- Lower loan amounts than a longer term loan.
If revenue based financing sounds like a good fit for your business, check out Onramp Funds (this site!) to see how much your eCommerce business can qualify for.
Conclusion
Navigating the world of financing can be stressful, but it’s an absolute necessity in today’s eCommerce world to stay in stock and grow your business.
With this list, you can help decide what source of funding works best for you and your business.
