What’s the Best Financing for Small E-Commerce Businesses?
As an E-Commerce entrepreneur, it can be a daunting task to figure out best practices and financing options for your business. Not only do you need a budget to stock up on inventory, but you also need funding to grow your business with tactics like marketing and launching new product lines. While E-Commerce businesses need stock upfront, suppliers often have varying payment dates as compared to shopping platforms. This can create a gap between the day you pay your suppliers, and the day your sales cash arrives. Small online sellers do have options for financing to bridge the gap. Here are some of the financing options for e-commerce businesses.
A loan is often considered the first choice for e-commerce financing. There are multiple kinds of loans. Your choice depends on the amount you need to borrow. Many loans don’t require any stake in your business but are typically secured against assets. Take note of the interest rate and repayment terms before making your decision. There is a chance that the bank offering the loan may ask for you as the business owner to serve as a guarantor. This would put your personal finances at risk.
These loans are generally ideal for larger amounts of borrowing. Consider contacting your bank regarding a loan if you need cash to set up your business, or make big investments. Interest rates can be high and banks can be scared to lend to e-commerce businesses because their working capital often looks artificially low (due to long supply chains and long payment terms).
PEER TO PEER LENDING
Peer-to-peer lending is an exciting new form of a loan. It can take the form of platforms, who conglomerate lots of investors’ money and lend it out like a bank. This type of lending can also take the form of small direct loans. While this is an exciting new space in finance, new spaces come with risks. Peer-to-peer platforms are not yet fully established. You run the risk of your chosen lender going under, or being illegitimate. Also, the bigger peer-to-peer lenders work very much like banks with the same requirements and similar interest rates.
As a business owner, you probably already have one of these. Credit cards offer quick access to cash and a large line of credit. This finance option may come in handy for bridging the gap between payments. However, it’s important that you have the means to pay the sum back to your card. Interest rates are high, and they can get out of hand if not managed correctly. It is also worth noting that many suppliers do not accept credit card payments. Contact your suppliers to discuss their terms.
LINE OF CREDIT OR OVERDRAFT
This option is similar to a credit card, but is linked to your bank account. Banks will decide your limit based on credit history. Interest rates can vary depending on this too. As mentioned before, suppliers generally prefer bank transfers or direct payments. This form of borrowing may be useful if your vendor doesn’t accept credit cards. Borrow what you need, up to your limit, but ensure that you pay it back quickly to avoid heavy fees.
Capital advances aren’t considered a form of borrowing. If you have cash flow from sales, but it is not in your bank account yet, this option is ideal. Capital advances allow you to sell a portion of your future sales and receive the money ahead of time. This means you can spend on increasing stock or other business development initiatives. As a result, these are low risk. You are only gaining capital that you already have incoming. However, the limit is entirely down to your existing capital. These are particularly ideal for bridging the gap between supplier payments and incoming sales cash in online businesses.