Onramp vs. Bank Loans: Which Is Better for eCommerce?

Onramp vs. Bank Loans: Which Is Better for eCommerce?

Most businesses rely on financing to get them through tough times or periods of growth. Loans and cash advances can fund payroll in a pinch, help businesses put down money on new equipment, or open up the door to new suppliers and geographic markets. In fact, only 7% of businesses didn't use financial services at all in 2021. 

But many new business owners are leery about financing arrangements. What kind of debt is "good debt?” Will monthly payments start to eat into your cash flow too much? How do you even secure the right financing in the first place without traditional collateral, a strong commercial credit score, and the conventional hallmarks of getting money to grow your business?

In this comparison guide, we address those questions as we explore two popular options for financing in the eCommerce industry: conventional business loans and merchant advances. By the end of the article, you'll:

  • Have a clearer idea of what criteria you're looking for in a financing provider
  • Know the advantages and disadvantages of business loans for different types of businesses
  • Have the information you need to see if merchant advances from Onramp are the right fit for your business
  • Be ready to take the next step to get a lump sum for growing your eCommerce business

Onramp vs. Bank Loans: Consider Your Criteria Before You Start Comparing

Choosing a financing option is a big deal, even bigger than deciding to get financing in the first place. Because you're entering into an arrangement that can shape the financial future of your business for years to come, you need to know what is non-negotiable for your business. Consider these questions and know the right answers for your unique business so you can easily decide between Onramp vs. bank loans:

  • How much money do you need? Different lenders may offer different interest rates based on the size of the loan. They might also decline your application or offer a smaller amount than you need. Similarly, merchant advance services offer a lump sum based on your sales volume.
  • What does your cash flow look like? Conventional business loans require you to pay down the loan at regular intervals, regardless of your sales volume. This might jeopardize your cash flow during off-peak months. Onramp's repayment plan is mapped to one percent of your monthly sales volume so you only pay what your revenue easily supports.
  • What do you want to use the money for? Some financing options restrict what you can use the funding for or will decline your application if they think a growth opportunity is too risky.
  • How quickly do you need the cash? If you need to move on an opportunity quickly or need fast cash to stay afloat, many business lenders may not be able to help. The process simply takes too long (and faster ones may have more fees and higher interest rates).

Writing down the answers to these questions can help you keep your core financing needs in mind as you compare different types of financing and service providers. 

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

Bank Loans: Advantages and Disadvantages of Common Options

When you think of traditional ways of financing a business, a business loan may be the first option that comes to mind. Short-term and long-term business loans have been a common option for centuries, long before online businesses were even an idea. But while they may be common, they present unique challenges and drawbacks for eCommerce businesses. 

Traditional Short-Term Commercial Loans

Short-term business loans were once the go-to financing option for business emergencies. Short-term loan providers would offer relatively fast access to a relatively small amount of cash at higher interest rates. This funding could cover emergency expenses, important expenses like payroll if cash flow slows down, and even working capital. 

These short-term loans are just that: loans with short terms of up to 24 months, with much shorter timelines for repayment. Repayment is due in regular weekly or monthly installments. The key benefit of this type of loan is that qualifying businesses can get the cash they need to stay afloat. However, it offers significant drawbacks such as:

  • Higher interest rates, which can change due to economic factors
  • Fixed repayment schedule that doesn't consider your sales volume or cash flow
  • The lender isn't invested in your business's growth—they just want their money back on time

Conventional Long-Term Business Loans

Long-term business loans are structured similarly to short-term loans: qualifying businesses apply for a certain amount of funds, receive that lump sum if accepted, and are required to pay the principal and interest back on a strict repayment schedule. 

However, there are some differences. Long-term business loans are geared toward business growth purposes—buying property, buying equipment, etc.—and so have longer repayment terms. However, they often require more stringent qualifications. 

Loan underwriters want to know your business is strong enough to be a low-risk borrower, and their metrics don't often coincide with the metrics of a growing eCommerce business. For traditional lenders, even thriving online businesses can look bad on paper.

What Types of Businesses Do Conventional Business Loans Work Best For?

Both short-term and long-term business loans can be powerful tools for qualifying businesses. But not all businesses meet the requirements conventional lenders set, such as:

  • Low debt-to-equity ratio
  • Low debt-to-total assets ratio
  • High business credit scores
  • Years of stable growth

Long-term brick-and-mortar or professional services businesses are often the best fit for these loans, simply because they're the businesses these loan structures were built around. eCommerce businesses, because they're new, turbulent, and don't have the same equity or asset earmarks, have a harder time qualifying.

Onramp's Financing Options

eCommerce businesses are wildly different from traditional businesses, so they often need their own financing options. Merchant advances are becoming increasingly popular for online businesses because their structure is built around the needs and important metrics of these businesses. Rather than looking at debt or assets, merchant advances consider the sales volume of a business to determine the size and viability of a loan.

Related: Revenue-Based Financing Term Sheet: Guide for Understanding

Onramp takes the contemporary structure of merchant advances one step further by mapping repayment amounts to each cycle's sales volume. The repayment amount of a merchant advance is just 1% of the sales volume. This means you can pay down more of the advance during months with a lot of sales and pay less during slower months, which protects your business' cash flow. Onramp's financing structure is designed to prioritize your business's growth instead of overwhelming that potential growth with rigid repayment demands.

Advantages for eCommerce Businesses

Some of the key advantages provided by Onramp's financing options include:

  • Low fees: For a $100,000 advance, a business only pays $5,000 in fees. Compare that to $6,618 for bank loans at a 12% APR or $10,000 for merchant advance funding firms with a 1.1 factor rate.
  • Lower financial risk: The repayment amounts are flexible to protect your business's margins and optimize business performance
  • Speed: All you have to do to apply is integrate your store with our calculator, pre-qualify for a lump sum, and connect your bank to get the cash.
  • Flexibility: Some lenders and finances keep a strict eye on what you can do with the funds. But it's your money, so we think you should spend it on the business initiatives that you want to prioritize.

Choose Financing That Aligns With Your Business's Growth, Not the Lender's Schedule

Conventional loans can be a great option for conventional businesses that align with their preferred criteria. But modern businesses like eCommerce stores need a more flexible solution that qualifies them for cash based on how eCommerce businesses actually grow. 

At Onramp, our team helps your business thrive with flexible eCommerce funding options. Learn more about our process or sign up now to start the pre-qualification process.