08 Jun How to Secure E-commerce Financing for Your Business
Every business hits the point where they need to get money to make money. If your e-commerce business is there, then it’s time to figure out how to get the financing you need and which option is the best for you. In this article, we’ll cover the steps you should take when selecting a financing option to ensure you make the right decision for yourself and your business. We’ll also discuss the three primary types of financing and the implications of each for e-commerce companies.
Unique Challenges for E-commerce Businesses
First, let’s take a look at some of the unique business challenges that e-commerce companies face to get a clear picture of why the financing decision you make is so critical and what your opportunities for capital really look like. In addition to common problems that brick-and-mortar retailers face like hiring, inventory, and payroll, e-commerce businesses have to stay on top of the latest and greatest trends in website and app performance, online search, and shopping/checkout experiences, to name a few. They may also need to pay for products months in advance of selling them, which means money exits the company before it enters. Ecommerce financing is a common way of handling this issue.
Consumer behavior is continually evolving, and expectations rise as new services become standard. This can lead to unexpected updates and technology investments like redoing websites or restructuring core tech in their apps. When behemoths like Amazon dominate the e-commerce space, they can quickly amplify consumer expectations and force eCommerce companies to adapt quickly. For example, when they standardized free shipping and rapid delivery of products—sometimes providing same-day service—consumers began to expect free and quick shipping from all companies, regardless of size. That necessitated a shift in focus for e-commerce brands that prioritized free shipping as a core offering, which means that other business levers like pricing or product offerings must make up the difference. Often, rapid restructuring or adaptation requires an influx of financing to cover the work that needs to be done. So, how do you get started?
How to Get Started with E-commerce Financing
STEP 1: EVALUATE YOUR NEEDS
One of the very first things to consider is why you need the financing and what you will use it for. Some examples may include:
- Pay for a major advertising campaign to boost brand awareness and conversions
- Purchase more inventory
- Launch a new product
- Invest in a product line extension
- Hire critical advisors that will take your business to the next level
STEP 2: DETERMINE THE AMOUNT YOU NEED
Determining your financing needs is critical to ensuring that you don’t pay extra fees for unnecessary funds. Based on your answer to step one, you should be able to determine the costs of that project and the amount you should finance.
STEP 3: CONSIDER WHETHER YOU NEED TO DILUTE EQUITY TO GET CAPITAL
Though the venture capital (VC) route is a common pursuit for founders, it’s important to consider whether diluting equity is a good idea for you and your business. If you can get financing without dilution, then you can fulfill your project needs without losing a drop of ownership. This is preferable to most business owners and preserves your ability to offer equity to employees or future partners when necessary or advantageous.
STEP 4: PICK YOUR FINANCING SOURCE
If you’ve been considering e-commerce financing, you’ve likely researched the various types of capital sources you could consider. If you’re like most business owners, the differences and advantages of each may still be a bit confusing. Let’s look at the difference between a VC firm, traditional bank, and growth capital e-commerce lender and what factors to consider when selecting one over the others.
Venture Capital Firm vs. Traditional Bank vs. Growth Capital E-commerce Lender
Venture Capital (VC) firms might be an exciting concept thanks to the popularity of shows like Shark Tank or Dragon’s Den, but the reality is that less than 1% of all small businesses get VC funding. VC firms are not easy to get in front of, funding is highly competitive, and the process can be extensive.
Even if you’re one of the .05% of companies that have the chance to get VC dollars, you still need to ask if getting VC funding is worth giving up equity in your company. Most VCs will provide funding in exchange for an equity position, which dilutes the equity pool that you can offer employees or keep for yourself. There may also be other partnership opportunities that arise down the line for which issuing equity would be advantageous to your business. But, if too much of your equity is consumed by VCs, you’ll have little flexibility to take the steps you need. Since VC funding is a rare offer and may not be in your favor, let’s look at traditional bank loans.
Traditional Bank loans can often be out of reach for e-commerce companies, especially small- to medium-sized businesses. These traditional financial institutions look for assets and a long history of profitability, among other factors, when determining your eligibility for a loan. Smaller e-commerce companies also tend to ask for smaller loans. Because loan amounts under $100,000 are considered riskier and less profitable for traditional banks, they are often rejected.
Banks also significantly reduced the available capital for businesses since the great recession, making them less accessible overall. Companies that do qualify often walk away with only a portion of the loan amount, which leaves them still needing to pursue other avenues for complete funding. High compounding interest rates can also become a challenge for companies to recover from. So, what option is there for e-commerce companies that are determined ineligible by the standard banking system?
Growth Capital E-commerce Lenders
Growth capital e-commerce lenders have stepped in to fill the gaps in the lending industry. These e-commerce financing services are entirely dedicated to the specific needs of e-commerce businesses. They overcome the barriers that other lending institutions put up and provide the flexibility, approvals, and total financing necessary for small- and medium-sized e-commerce businesses to rise to the next level. Unlike VCs, they don’t ask for equity, so your ownership structure remains intact. And unlike traditional banks, they don’t charge interest rates that continue to compound over time, so you know exactly what you owe.
Growth capital e-commerce lenders will typically charge a fixed fee for their services on top of the financing amount. Then, they take a percentage of revenue until the loan is paid back in full. This type of structure enables companies to pay as they go. The expense of the loan payments is well-aligned with the revenue stream, so owners don’t have to worry about whether or not they can make the payments when they come up.
Acceptance rates are also much higher as many of these lenders are funded by investors, not just traditional institutions. That means they can be more flexible in their requirements when determining eligibility. Leading e-commerce financing lenders in this space are also focused on getting quicker approvals so businesses can get the funds they need in as little as 48 hours.
E-commerce continues to be a fast-paced, rapid-growth industry, and the pandemic has only revved up the excitement that surrounds it. Total online spending in May 2020 equaled $82.5 billion—a 77% year-over-year increase. So, it makes sense for the e-commerce financing sector to grow as well. The good news is that while small- to medium-sized businesses have struggled to secure funding in years past, new options are emerging specifically for e-commerce companies that help overcome the hurdles of previous years.