01 September How do Business Loans Work for Ecommerce Businesses?
It can be difficult to make a decision when it comes to borrowing, both in business and your personal life. There is always an element of risk involved.
When searching for business finance, whether for big investments or one-off purchases, a loan is the default funding option. It is easier to understand fixed repayments and terms, compared to the relative freedom of credit cards and overdrafts.
However, requirements for loans change when a business makes an application. Personal loans are dependent on the person and their credit history. Business leaders need a full picture of both you and your business in order to make a decision. Business loans can be hard to get in certain sectors like ecommerce. This is because most lenders aren’t experts in the space and may mistake cash flow challenges for weakness in the business.
It is important to ensure that you’re confident and understand the requirements of business loans, before making an application.
Types of Business Loan
At face value, loans do all have a similar structure. A sum is given to you. You and the lender come to an arrangement over the repayment amounts and term length. Interest is then charged on top of your loan amount, and repaid to the lender.
However, there is more than one kind of business loan. It is important to note that they all work slightly differently. Take the time to decide which one is best for you, or whether there are more suitable financing options available. Here are all the forms of term loans that might be available.
Bank loans typically offer larger sums of cash. As they are a bank, they have access to large pools of capital. Loans are just one of the ways that a bank makes money. Bank loans are most suited to initial investment payments for your business, like purchasing inventory, rather than one-off payments.
Since they offer larger loan amounts, they also have longer repayment terms. This may be more suitable for your business, as repayments could be more manageable.
However, banks are reluctant to give out loans. This is especially true for business loans, and even more so for ecommerce business loans. As banks offer so many financial products, they do not need to take unnecessary risks. Therefore, you are likely to struggle to secure a bank loan.
Online Business Loans or PEER-TO-PEER
This type of term loan is not as difficult to secure as a bank loan. Online lenders are often just lenders, so they are more likely than banks to fulfill their purpose.
Depending on the lender, they can offer large sums of money and long repayment terms. This is dependent on the company and their assessment of your business.
Therefore, you will still need to make a good case for your business and prove that it is worth lending to you. You also need to have a good personal credit history and usually a good business history too.
However, interest rates are higher than banks. There is more risk to an independent lending company with each loan. Single-digit interest rates are extremely unlikely. Ensure that you can afford to make repayments, including the added interest or fees.
Microloans are fairly self-explanatory. They offer small loan amounts and therefore smaller repayment terms. These are ideal for one-off payments like an early supplier bill.
As repayment terms are smaller, the necessary payments can be more frequent than monthly. Some lenders request weekly or even daily payments. Interest is high, as lenders deem higher risk. As a result, payments can be higher and therefore less affordable than long-term loans.
Ideally, you should ensure that you expect to have the funds incoming to pay it back in full. Avoid getting behind on repayments, as fees and interest can skyrocket.
Other Types of Finance May Be Better Than Business Loans
While loans are a common form of financing, they aren’t always the best option. Consider a capital advance for your business.
At Yardline, we offer capital advances based on a business assessment. This isn’t a form of borrowing. We purchase a portion of your incoming sales so that you can leverage your revenue now.
As a result, we can offer up to $20 million. The benefit is that you only pay back the revenue that you already have coming in.
We also offer access to optimization tools, so that you can generate the most profit from your business.