The world of funding eCommerce businesses is one of frustration and a lack of options.
When it comes to lending money to businesses, banks have a high list of requirements.
Just look at this list of business loan requirements from NerdWallet, you can see a bit of what is expected:
- Good Personal and Business credit scores
- Annual Revenue above $250,000
- At least 2 years in business
- Fit business size and industry specifications
- Have a business plan
- Offer collateral
- Paperwork such as tax documents, balance sheets, proof of business experience, and more.
Sheesh, what a list.
Not only that, if you happen to hit these criteria, most banks will not even entertain the idea of funding an eCommerce business!
With the recent explosion of eCommerce businesses, however, there are more flexible options to get funding, and they don’t require much of what is on that list, including checking personal and business credit scores.
Enter revenue-based financing (also known as a merchant cash advance).
Let’s go over revenue funding and how it works.
What is Revenue-Based Financing
Revenue-based financing is a form of funding that looks primarily at the revenue generated by a business to determine the loan amount, repayment schedule, and fee charged.
Why choose revenue-based financing over traditional bank loans
Less stringent requirements
The main benefit of revenue-based loans is that they typically don’t look at personal or business credit scores or many of the requirements we highlighted earlier, but through the use of technology measure your business metrics to assess risk and create loan parameters.
Traditional loans typically give you an amount of money that is paid back over the course of 1-3 years with a minimum payment + interest (usually determined using APR).
While revenue-based financing works in a similar manner, they are typically paid back faster (anywhere from 1-6 months), and fees are calculated based on a percentage of revenue or incoming cash rather than APR.
One thing that revenue-based financing does better than a traditional loan is that minimum payments can adjust to be lower if your revenue takes a dip for a pay period.
This is because revenue financing is more flexible and through using technology can see if you’re experiencing lower-than-expected revenue and adjust repayment accordingly.
Works within the cadence of eCommerce
Traditional loans have long payback periods, anywhere from 1 to 3 years.
While this is fine, eCommerce businesses are in a cycle of constantly reordering restocks from manufacturers in cycles, typically between 3-6 months.
Because of this, it makes sense for loans to be formed around the idea of paying it back within a similar timeframe.
Structuring repayment around the restocking cycle of eCommerce businesses allows for an overall better rate than if you were to get hit with interest for 12-36 months, and also lowers your chance of needing funding while still paying off a previous loan.
Where to acquire a revenue-based loan
If you run an eCommerce business and are looking for revenue-based financing, Onramp Funds (this site), offers flexible revenue-based funding for growing eCommerce businesses.
If you want to see if your business can qualify for funding, signing up and receiving an offer can happen as fast as the day you sign up, so give it a look if you are looking for a lending partner to grow with!