If you have been wondering about how to get funding for an online store, this post will help you learn about the different options available. You will find some traditional alternatives and more innovative ones, specifically designed for eCommerce business owners.
When you run a small business, the last thing you want to do is get into debt you cannot handle. A well-managed debt structure, however, can be helpful in growing your business. Information from Statista indicates that "According to the result of a survey conducted in 2020, 14 percent of small- and medium-sized companies in the United States had debt outstanding between 50,000 and 100,000 U.S. dollars. Meanwhile, 21 percent of SMEs reported having no outstanding debt.”
Debt is inherent in business, and eCommerce is no different. Especially since the pandemic, eCommerce businesses have experienced explosive growth around the world, reaching a staggering $26.7 trillion in value, according to United Nations data. But that doesn’t mean they are all in the black.
In accelerated and unexpected change situations, companies seek financing mechanisms to stay afloat. There is a possibility that you are still struggling with a similar scenario or maybe you’re just getting started and don’t want to make any common mistakes.
Want to know how to get funding for an online store? The following sections will give you an overview of some of these mechanisms.
Funding Alternatives for an Online Store
As discussed above, there are traditional and modern ways to answer how to get funding for an online store. Rather than present each of the methods in complete detail, here you can review several of the available options and, depending on your current situation, select one that best suits your needs.
Consider each of the listed alternatives, because you may be surprised to discover a financing solution designed specifically for eCommerce that you might find helpful.
Small Business Association Loans
Small Business Association (SBA) loans can grant you anything from $500 to $5.5 million. The official website states: “Loans guaranteed by SBA range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital. Some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender when requesting a loan. Your lender can match you with the right loan for your business needs.”
Of course, you will have to comply with eligibility requirements imposed by each lender or loan program. Business eligibility depends on your income, ownership, and where it operates. SBA loans typically require a good business model, repayment capacity, and size standard. Entrepreneurs with poor credit may qualify for SBA loans.
A venture capital (VC) investment provides equity funding. VC investors look for companies that can grow rapidly. In addition to tech companies, VC funds may also be available to eCommerce or consumer product companies if they believe they are likely to develop exponentially.
A VC investment may be a good idea if your business meets VC investors' criteria for high growth. Instead, you may not want to use VC funding if you prefer gradual and steady growth and do not want to share company ownership.
Friends and Family
Many businesses seek loans from friends and family when they begin, but these loans are often used later on. Entrepreneur magazine reports, “The most common source of debt financing for start-ups often isn't a commercial lending institution, but family and friends. It makes sense. People with whom you have close relationships know you are reliable and competent, so there should be no problem in asking for a loan, right?”
This may be a practical solution in many ways, but there are several precautions to consider. If there is any failure of compliance between the parties, there will be issues with the relationship with the lender, and trust will be affected.
Traditional Bank Loans
Although it can be outdated or inconvenient in many ways, especially with a large amount of required paperwork and time-consuming analysis, this is still a common form of financing. It involves the bank lending you money at an interest rate based on the likelihood that you will default on the loan. To ensure you will repay the amount, you will be required to provide collateral.
If you need liquidity in a short period of time, or if your business does not have much to use as collateral, a traditional bank loan may not be the appropriate answer to how to get funding for an online store, at least not for working capital. It may be more appropriate for larger, more long-term investments.
Financing Based on Accounts Receivable (AR)
You can think of outstanding invoices as assets on your balance sheet. Clients and companies owe you money, and these funds are positive in your statements. Factoring, or accounts receivable financing, is the process of raising capital through these outstanding invoices.
You may be at risk with an AR loan if your customers have a poor track record of making payments on time. If you want to consider this option, you can try negotiating shorter payment terms with your customers if you are able to. The sooner your revenue comes in, the less likely you are to need an AR loan, and the less money you will spend on interest.
Financing Based on Inventory
Basically, this instrument is used by eCommerce and retail businesses to take out short-term or revolving credit lines specifically for inventory purchases. The loan is repaid upon sale of the inventory, and the inventory serves as a guarantee. When a business is unable to repay a loan, the lender can take its unsold inventory as payment.
There is now a series of options for retailers to choose from when it comes to inventory-based financing. Online businesses have unique needs and challenges, which eCommerce financing solutions meet by tailoring their terms to fit. You can apply for these options more easily with repayment plans that do not follow traditional, prescriptive rules.
Choose Your Financing Option Wisely: Consider Financing Based on Sales
Hopefully, this post guided you through some of the possible answers to how to get funding for an online store.
There is no universal solution to all of the challenges associated with running an eCommerce business. However, getting a fresh flow of cash can help you overcome several obstacles in the complex field of online selling entrepreneurship.
It can be tedious and lengthy for small businesses to apply for and obtain loans, and the interest rates on credit cards make the debt more difficult to pay off. While these funding options can be an effective component of your capital stack, it’s a good idea to diversify with less expensive options.
There is a lending option that meets your unique needs, offers eCommerce-oriented loans and provides financing based on your sales. This entity has no pressure on you to conform to a conventional business model.
They have developed a deep understanding of how different your financing requirements are. They provide a fast response time, a straightforward application process, and you can repay your loan through a percentage of your inventory sales, helping you feel secure and stress-free. Consider this solution and obtain interest-free cash with friendly conditions for eCommerce sellers.