How Ecommerce Lending Can Affect the Financial Health and Sustainability of Small Businesses

How Ecommerce Lending Can Affect the Financial Health and Sustainability of Small Businesses

eCommerce is a high-risk industry for many first-time business owners, and unfortunately, many businesses won't last long. As many as nine out of ten eCommerce businesses will fail within their first four months, and businesses continue to fail at high rates even after that threshold.

Dozens of different obstacles can block the path between you and business success, from market trends that turn on a dime, to getting undercut, to simply not having enough funds available without eCommerce lending. In fact, that last factor can be a particularly pervasive problem: what if your business runs out of funds to pay your team? 

Marketing for Prime Day, the holiday retail season, or any major sale requires a lot of ramp-up and money—even if you know you'll earn all the money back and more, you can't get through without capital at the start. Even successful eCommerce businesses struggle with not having enough funds to buy more inventory in preparation for a campaign or to seize on an emerging trend in their niche.

That means every eCommerce business, whether you've made it past the first four months or you're not there yet, needs to start thinking about funding sources that can come in advance of sales and revenue. eCommerce lending is one avenue, and it's becoming an increasingly versatile option. 

In this guide, we'll explore how advance funds can bolster your eCommerce business's financial health, sustainability, and potential. Then we'll look at how to choose the right type of funding for your business's immediate and long-term needs.

Today's eCommerce Market Demands Constant Growth (And eCommerce Lending Can Make It Happen)

Out of all the markets, eCommerce might be the one that changes the fastest. While technology continually evolves and general retail is full of fads and sudden twists in focus, eCommerce bears the brunt of both of those factors. 

Popular products change every day. Marketing trends are constantly in flux, and attribution models reveal new avenues of reaching customers by the second. That means your business needs to be constantly propelling itself forward with real-time research and around-the-clock effort. 

Related: Is Merchant Cash Advance Financing the Right One for Your Online Store?

Even more importantly, your business needs to be growing. If it sits stagnant, there's too big of a chance a competitor will come along with a more diverse range of products and more comprehensive solutions for your customer's pain points. 

Expanding across different geographic regions and marketing or selling platforms will also make your business better able to stay afloat through market storms. Experts estimate the value of retail eCommerce at $1 trillion in 2023 and at $1.5 trillion in 2027. In many ways, if you're not growing, you're shrinking.

What Does Your Business Need to Do to Stay Ahead of the Curve?

That's why you're here: you're researching all the different ways you can strengthen your business and stay ahead of your competitors. While your action plan will need granular goals and milestones, add these four critical objectives to your 2023 to-do list:

Improve Inventory Management

While the supply chain turbulence from COVID-19 is far from over, the situation has vastly improved. Still, savvy eCommerce business owners will remember (or remember reading about) how supply chain breakdowns jeopardized even enterprise-level organizations. At a minimum, consider these inventory management approaches:

  • Work with a 3PL service that can manage your distribution network.
  • Never rely on a single supplier for critical products or supplies.
  • Create a real-time dashboard of your inventory levels, especially if you sell across multiple platforms.
  • Automate, automate, automate.

Continuously Market and Advertise

Your business needs to adopt multiple concurrent marketing and advertising strategies:

  • Paid advertising campaigns, such as commercials, PPC ads, and influencer campaigns
  • Content marketing for organic growth
  • Email marketing
  • Social media marketing (both organic and paid)

A significant percentage of your total business revenue should flow into marketing. Otherwise, prospective customers won't see you, and current customers may forget about you.

Improve Your Tech Stack and Infrastructure

This matters for both customer experience and internal workflow management. Assess your business's current tech stack to strip away as many manual or non-standard processes as possible. Prioritize automation and hands-free functionality, especially if you work alone or only have a small team. 

Optimize Your Cash Flow

If you only have room on your to-do list for some of these objectives, make sure maintaining a healthy cash flow is one of them. It doesn't matter if your business always has an excellent Q4 if you're out of funds by the end of Q2. Develop spending strategies, revenue forecast models, and strict budgets to keep your cash flow in check. 

While your budgets and campaigns may change course over the year, creating a general plan helps protect your business. Along with creating plans to ensure your expected inflow of cash stretches across off-peak months, also develop strategies for emergency cash so you can make it through rough patches without having to panic.

All of These Goals Require Cash—But How Do You Get It Quickly?

Unfortunately, all four objectives take money—and a lot of it. It may take even more than you have on hand, and that's where your responsibilities as a business leader come to the forefront. Are you going to try and maintain slow and steady growth, where potential growth opportunities pass you by? Do you want to experiment with business loans to get immediate funding—but risk a lot of business debt? Both foregoing extra cash and pursuing extra cash are active business decisions.

If you think extra cash now is critical for your business's continued success, keep reading; we'll walk through some of the most common options for eCommerce lending and what their effects may be.

Short-Term Business Loans

Short-term business loans are relatively low-value but often high-interest loans. If a traditional bank or online lender accepts your loan application, you'll receive an immediate lump of cash. But the clock will start ticking on your repayment schedule, which involves both principal and interest payments. 

The Effect on Your Business' Financial Health and Stability

There are immediate benefits to this strategy: you can tide over payroll payments until your next sales boost, purchase more inventory, or increase the marketing budget. However, there are both short-term and long-term drawbacks: 

  • You have to make weekly or monthly payments on time or risk defaulting on the loan, whether your business has the money or not.
  • Having a big liability on the books will complicate business finances and jeopardize your financial standing.
  • Those repayment amounts can jeopardize your cash flow.

Longer-Term Business Loans

Long-term business loans tend to come in a wider range of dollar values and have lower interest rates than short-term loans. These loans typically fund big equipment purchases, expanding your building (if you have one), or other growth-based endeavors. 

The Effect on Your Business's Financial Health and Stability

Long-term loans are a mixed bag. In the short term, you can jumpstart your access to new markets because you now have the resources. But it also depresses your cash flow and profitability because you need to start paying the loan back.

Traditional Merchant Cash Advance Financing

Merchant cash advances are a more flexible form of eCommerce lending: the repayments are tied to your sales rather than a fixed schedule. Also, this lending style has a factor rate instead of an interest rate. You multiply your 'loan' amount by the factor rate, and the product is the total amount of money you have to repay. As you earn sales over time, your lender will take a percentage (1%, 1.5%, 2%, etc.) from your daily sales revenue until it's repaid.

The Effect on Your Business's Financial Health and Stability

Like traditional loans, this option gives you an immediate cash infusion. However, depending on the cash advance provider, you may face severe restrictions on what you can do with the funds, such as using it for payroll. 

Related: The Importance of Borrowing and Spending Only What You Need to Maintain Healthy eComm Finances

Long-term, even a factor rate of 1.1 (which is seemingly low at first glance) results in hefty fees that eat into your growth and available cash. A 1.1 factor rate is typically found at funding firms like Shopify; Capital, Payoneer, and others. Compare the expense of a $100,000 loan at this rate—$10,000—to the costs of other funding options: $8,877 on a credit card with a 16% APR or $6,618 on a bank loan with a 12% APR.

eCommerce-Focused Merchant Advances (eCommerce Lending)

The basic model of merchant advances isn't bad for your business, but it's important to choose one offering the right particulars. Opt for a plan that:

  • Has a repayment schedule tagged to your sales: this ensures you're only repaying when you have new revenue to allocate to repayment.
  • Doesn't put artificial barriers on what business expenses you can cover with the advance: You can buy new inventory, experiment with new markets, or handle internal expenses without relying on the say-so of other businesses.
  • Has minimal fees: look for programs that have fees that are approximately 5% of the advance value, or $5,000 for a $100,000 advance.

The Effect on Your Business's Financial Health and Stability

In the short term, this sort of eCommerce lending model offers far more benefits than potential concerns. Once approved, you get immediate access to cash and can launch your new business initiatives. You also don't have to pay back the money unless you make sales—and even then, the repayment amount won't exceed a set percentage of your sales revenue.

In the long term, this continues to be a predictable, sustainable model for your business. Repayment won't outpace sales, so you can manage cash flow across peak and off-peak seasons without a fixed bill. This sort of flexibility creates the smallest possible amount of deceleration for your organization—and it's dramatically offset by the acceleration it offers.

Develop a Healthy and Sustainable eCommerce Business with the Right eCommerce Lending Option

The right eCommerce lending structure isn't just a nice option for potential business growth or a cash infusion in an emergency—it's a necessity for keeping your business financially healthy now and in the future. Knowing your options and being ready to act makes your business stronger. At Onramp, we've developed an eCommerce lending option that aligns solely with your business performance, gives eCommerce business owners flexible repayment schedules, and won't charge high fees. We don't make money unless you do. Sign up now to integrate your store and pre-qualify for a cash advance in just a few minutes.