Which Loan or other Funding Options are Best for a Business?
When it comes to financing, businesses often face the same problem: which option is the best?
Not all business loans are equal, and some are better suited to certain industries. Some are great for fast-scaling businesses, while others are designed to help you cover emergencies. However choosing the right loan or financing for your business is crucial.
This is even more true in the ecommerce space, where companies can find themselves frozen out of some funding options.
If you choose to go the traditional route and look for a bank loan, you may find that is very challenging.
When it comes to ecommerce businesses, not all funding options are on the table. This is because many traditional lenders don’t understand the ecommerce space. In this case, alternative funding may be the more attractive solution.
Banks don’t know ecommerce.
Ecommerce is still a new industry to banks, with many uncertainties involved. Banks tend to be cautious and apprehensive about entering a new space where operational protocols and procedures are untested.
They generally choose more traditional businesses to lend to, as they are safer and more familiar options.
For them, your business may be deemed too risky.
Traditional lenders see online sales as open to fraud.
Ecommerce companies have much higher incidences of fraud rates and more opportunities for security breaches compared to traditional stores. Because of the nature of ecommerce, criminals may exploit your online business for illegitimate purposes.
When it comes to lending, banks consider these increased risk factors prohibitive and prefer to work with industries with less risk exposure.
Limited access to customer data
Typically, bank branches are knowledgeable about their markets. When a business opens and applies for a loan, the underwriters can evaluate if the business will resonate with the town’s residents.
The bank can see their bank accounts and can deduce if the business is fulfilling a need. They can then forecast the success or failure of the company with confidence.
With ecommerce companies, this is not possible, as banks aren’t familiar with the global trends. They also are not tech-savvy enough to understand and use seller data from Amazon or another online marketplace to inform their decisions. When a bank’s underwriters feel they can’t accurately assess where the customers for the business will come from, they don’t feel they can predict an outcome. This leads to many ecommerce loan applications being rejected.
Lack of assets
If an ecommerce business fails, there aren’t many assets the bank can use to recover its losses. Besides inventory, ecommerce businesses have little for the bank to repossess.
Brick-and-mortar businesses, on the other hand, typically have enough assets in case it goes under – including the building itself. This gives the bank a safety net that ecommerce companies often can’t provide.
Alternative financing
Traditional funding options like bank loans are not as easy to access. For many ecommerce businesses, the perfect cure to this problem is alternative financing. Generally, they are much more flexible and can also be easier to obtain.
Factoring
Factoring is a financing process whereby a business sells its unpaid invoices to a third-party company, called a factoring company. When an invoice is sold, the factoring company pays the business a percentage of the total amount – typically 80% – and takes full responsibility for collecting the payment.
Factoring allows businesses to get quick access to cash before clients pay for the goods received, allowing them to re-invest that cash right away.
Generally, factoring companies will make two payments. The first payment is made immediately when they “buy” the invoice, and the second one is made when the client pays off the invoice.
However, factoring can be a complicated process, and it may not be the right choice for every ecommerce business. At the same time, every factoring company works differently, so you need to read the fine print.
Factoring companies charge you factoring fees for taking on the risk and collecting the payment of unpaid invoices. As a result, you stand to make a reduced amount from your invoices.
They tend to have certain expectations about the way businesses are run, and they may insist you change the way you do things.
Capital advances
A capital advance is not a loan. Instead, you get an advance on your future earnings.
Ecommerce businesses don’t have weeks to get the funding they need. With capital advances, online applications are quick and easy. You can be approved within a few hours.
A positive influx of money may be one of the best funding options for your business.
Capital providers issuing cash advances are flexible and focus on the current state of your business. If you’re a healthy business bringing in sales, then you’re likely to get approved.
Geared exclusively toward ecommerce companies, Yardline understands the equity that every entrepreneur has put into their business. We purchase a part of your future receivables equivalent to the Capital Advance.
We provide access to flexible growth capital that you can tailor to your business needs.