Your Options For Funding and Financing Your eCommerce Business

When it comes to starting and maintaining a business, there always seems to be one resource of which there never seems to be enough. Money. Yep, it’s the cold, hard cash that always seems to be just out of reach whenever we have a new idea or want to increase cash flow. Inventory is great but if it doesn’t turn into profit by sitting on the shelf. Even worse is if you have an empty stockroom and no inventory on its way to fill the shelves.  

So what do you do? 

Luckily, there are all kinds of creative ways to drum up some cash in the business world. There are surprisingly more than just a couple ways to fund your eCommerce business. Check out how you can get (almost) free money, loans from eCommerce lenders, and traditional financing. 

(Almost) Free Money

Who doesn’t like free money? Well, it doesn’t come along very often, but once in a while a lucky small business owner receives inheritance from a rich uncle or they get a huge tax break that they can put back into their business. 

NearlyFree Money Funding for eCommerce Businesses:

1. Savings
2. Crowdfunding
3. Friends and Family Investors
4. Grants

Aside from the unlikely event you become a “legal heir” or the IRS makes a mistake that they don’t recover, there are a few other ways you can come by some cash without taking out a loan. 

Savings

Also known as “bootstrapping” – and trust us, we hate that term too – saving up every extra penny goes into a savings account to accrue interest. The old “make your money make you money” idea. Except these days most banks will only give you 0.01% interest (if you’re lucky you might be able to squeeze out a solid 1% from some banks). So, sure, you can save money, but it could be decades before you can actually make a significant amount in interest. 

Alternatively, you can invest in CDs (certificate of deposit) which could yield an interest rate of 0.3-3.3%. Not a bad way to earn some bread while letting your dough bake. Of course, you won’t be able to eat that bread for 3 months – 5 years. 

You could also look into savings bonds. An EE series saving bond is purchased at face value and reaches final maturity at the 30-year mark. So that’s a long time to wait, but if you invest early you might be able to cash out for a big payday when you’re ready to retire – assuming interest rates are high enough. 

Crowdfunding

Kickstarter, iFundWomen, and GoFundMe are all examples of popular crowdfunding platforms where new startups can collect money from generous strangers. These platforms usually take a percentage from whatever funds you raise, while others take a flat-rate fee. 

When you start a crowdfunding plan, you set a goal and offer something to your donors for their philanthropy. This could be a free item, discounts on your products, or you could simply ask them what they want in return. Usually the owner will offer these in a tiered format so the donor can decide how much they want to give. 

Like with most “free” money options, it can be a long time before you reach your goal and can have access to the money. Unfortunately, if you don’t meet your goal, many of the platforms will revert the money back to the donors and you’re left back at square one – or in the negative since you still need to pay the platform fee. 

Friends and Family Investors

Here’s where that rich uncle comes in again. Asking friends and family can be difficult for some people – after all, begging for money is not exactly something we want to be known for. We want to be self-sufficient and strong business owners. But that doesn’t mean you can’t ask them to become investors or set up a loan repayment plan. 

Offering a percentage of stock in your company (if you trade in stocks) or a percentage of your profits until their investment is repaid. Now, how is this different from a bank loan? Well, it’s definitely not as secure. Without a notarized and legally binding agreement, your lenders could start asking for repayment before you planned or initially agreed. 

And let’s not pretend like we haven’t watched an episode of Judge Judy or Judge Joe Brown. How many families wind up in civil court over unpaid loans? He thought it was a gift, she says, no way it was a loan. Lending money from a friend or family member can get a little hairy. 

Grants

While you are waiting for those savings bonds to mature or your Kickstarter to reach its goal, apply for a few (or as many as possible)  small business grants. The Small Business Association (SBA), private businesses, and nonprofits all offer “free” money to a select few that apply and are accepted. 

In order to receive the grant money, you will need to apply and meet any criteria the donor states in the posting. Think about it like scholarships. People who have ever tried to find money to go to college know that scholarships are incredibly sought after and it’s a competitive climate. There will be hundreds of thousands of applicants racing for the same money as you. 

Programs like USA Funding Applications, and SBA Grants help small eCommerce businesses with some stipulations. The funding agency may have clauses in their application that dictate how you are allowed to use the money. If they find out you didn’t use it for the intended purpose, you could be told to give the money back to the organization that supplied it. But, hey, you don’t have to pay the grant back as long as you play by the rules. 

eCommerce Lenders

So you’ve tried the “free” money options and nothing is panning out in a way that would successfully fund your business. Not to worry, though, because there are many other options out there that would still require some effort, research, and planning to obtain. But in the long run you might find that what you’ll pay in interest is worth it over waiting for the “free” money. 

Many eCommerce lenders are ready to give you the money as soon as you apply. Make sure to compare each type of financing to determine what works best for your business goals. Additionally, you need to compare things like rates, terms, and penalties so you can budget and build a repayment strategy. 

Types of Loan Financing for eCommerce Businesses:

1. Merchant Cash Advance
2. Inventory Financing
3. Invoice Factoring
4. Revenue Based Financing

Check out how these options can quickly finance your business. It’s also important to note that many financing companies will only lend you the money for inventory purposes, meaning you can’t use the loan for payroll, marketing, or data analysis. But obtaining a loan to obtain your products to sell means you can increase your cash flow for other projects and parts of your business. 

Merchant Cash Advance

Want a loan that isn’t really a loan? That’s where merchant cash advancing comes in. An MCA company will front you the capital for your business and automatically withdraw a percentage of your total sales on a daily or weekly basis, or you can set up a fixed amount to be withdrawn every month. 

This type of financing is different from traditional loans because it’s based on a factoring rate rather than a traditional interest rate. Most MCA companies will charge a factor rate between 1-1.6. If you’re not familiar with a factor rate, it’s actually an easier way to calculate the total cost of your loan. If you borrow $10,000 at a factor rate of 1.5 your total cost of the loan is $15,000 (10,000*1.5). Be advised, this may not include any additional fees the MCA charges. 

eCommerce sellers benefit from this option because the repayment is based on total daily sales and is easier to budget. It can be difficult to make the same fixed payment every month, but if the lender is taking 10% of the daily sales, you can deduct that cost and not worry about making the loan payment at the beginning of the month. 

Additionally, sellers never have to worry about interest rate changes. With a factor rate, the lender is going to continue withdrawing the same percentage until the total amount of the factored loan is paid in full. Interest rates are compounded monthly but the MCA is static – meaning you aren’t paying on the interest long after the principal has been paid. 

The factoring rate is determined by a number of sources but mostly it’s based on your creditworthiness, how long you’ve been in business, and your daily sales transactions. Applying for a MCA is fast – usually within 24-48 hours of submitting your application online and you can be approved for up to $500,000 with most advancement companies. 

The downside is that there is no benefit of paying the loan off early – and early repayment results in higher APR. We used this MCA calculator to figure the APR for our $10,000 loan. If your business makes $5,000 in daily sales, it will take 900 days to pay back the loan and the APR is around 36%. But if you make $10,000 in daily sales, your repayment period is cut in half, but your APR is now 71%. So as we can see, there’s no point in rushing to pay off the loan because the $15,000 is going to be paid whether it takes 2.5 years or 15 months. 

Inventory Financing

You’re already an established business and you have a supplier, a business plan, and the need for some cash flow. Whether you are getting ready for a busy season or you have a plan to incorporate new products to sell, eCommerce lenders offer an inventory loan to purchase your products. Once you receive your financing, purchase and receive your inventory, and start making sales, you can start making payments back to the lender. 

Inventory loans are only to be used for inventory purchasing. This could cover the cost of manufacturing products or the procurement of already made products.You put up your inventory as collateral and if you don’t make the payments, the lender will seize the inventory to sell or return to recoup their losses. 

Because inventory loans are a higher risk to the lender, you could be looking at higher APRs. We’re talking anywhere from 3-99%APR. Terms are unusually 1-3 years and the lender may have requirements for how long you should be in business before they consider handing over the money. 

You could also work with your supplier to obtain inventory financing directly from them. Some suppliers allow for a line of credit with your ordered products as collateral. 

Invoice Factoring

In another (and pretty creative, if you ask us) way to finance your business is with invoice factoring. It’s fairly easy – you sell a portion of your invoices to a factoring company and they give you the money. Once you obtain the loan, you can purchase your inventory. When you sell the product, the factoring company collects their payment from the invoices they own. 

Factoring invoices helps you obtain quick cash, avoid overdrafts, and continue operating your business as usual. You can continue to ship orders to your customers without interruption. 

Of course, for every positive there is a negative. Factoring companies will contact your clients to retrieve their payments. The lender will not collect debt on bad invoices – meaning if a client doesn’t pay their invoices, you take on the invoice and are responsible for paying the balance back to the factoring company. 

Factoring loans also tend to have higher interest and fees than other methods of finance and are meant for short term repayment. So the longer it takes to sell the product and receive the payment from the client, the more you’ll spend on the loan. 

Revenue Based Financing

Normally, we don’t love variable repayment plans, but this one can actually benefit you if it’s done right. 

Revenue Based Finance lenders will determine the value of your inventory and provide you capital based on your revenue. Then you’ll pay back the loan at a fixed percentage of your sales until the loan is repaid. 

Some lenders have restrictions on how you use the loan while others could care less as long as they get their 6-12% every month. Unlike inventory factoring, the lending company will only deal with your business and your sales. They don’t want your customers or your invoices – they’d rather get paid. 

Like we said, variable monthly payments aren’t usually what we love to account for. But in this case it actually makes sense. You can still budget for debt consolidation and repayment every month even while paying a different dollar amount. Since the repayment rate is fixed, you don’t have to worry about too many surprises. 

Additionally, you are only paying back based on what you make from sales. Some businesses have a difficult time making a fixed monthly payment. For example, this month you made $1000 in sales and you are able to make your $400 fixed payment. The next month you make $500 in sales which means you can still make the $400 loan payment but it’s definitely getting tight. The following month you only make $200 in sales and you can’t make the loan payment.

On the other hand, with an RBF loan, you pay 5% of your sales. So that first month where you made $1000? You pay the lender $50. The next month when you make $500, you’ll pay them $25. Then that final month where you only brought in $200? Instead of that lofty $400 payment you fork over a whopping $10.

Traditional Financing

Sometimes the best loan for your business comes from the good old FDIC insured banks. Banks are reliable, usually lower interest, and a fixed monthly payment. Depending on your credit you might even get a larger loan than you would have from private lenders. 

Banks tend to have certain restrictions. You need to be aware of any penalties and fees associated with the loans. Compare rates from different banks and credit unions prior to making your decision to avoid paying more than you have to in the long run. 

Traditional Loan Financing for eCommerce Businesses:

1. Term Loans
2. Line of Credit Loans
3. Credit Cards

Term Loans

Term loans are based on how long it will take you to pay back the money you borrow. If you’ve purchased a home you have probably researched FHA loans which are the same monthly payment over a course of 30 years. 

Actual terms of the loan may vary depending on your credit, lender, and what you can afford. The longer your loan is, typically, the lower your monthly payment. That also means you’ll be paying more in interest down the line. 

Business Line of Credit Loans

Business lines of credit are great to have established for your business. If you use it and repay it, that used credit comes available again. Lines of credit are handy for unexpected expenses or to obtain more inventory before a busy season. 

You can’t use lines of credit to pay yourself, though. All expenses need to be related to the business and personal spending will be difficult to explain to your accountant. It’s also risky to use a line of credit because your financier can raise the interest rate. So one month you can have an interest accrual of $100 and the next month the interest is $150 because the bank told you they were increasing their rates, even though you’ve been making payments. 

It’s not a good idea to use lines of credit as continuous funding for your business, but have a LOC established ahead of time for quick emergency funding. 

Business Credit Cards

Some of us are still afraid of using credit cards after we’d been told how easy it is to get caught up in the spending and minimum repayment cycle. You end up in a pickle of constant repayment that results in high interest rates paid over a long period of time. 

Like a line of credit, business credit cards are great to have on hand for fast purchases and emergencies. But it’s not a long term solution to your financial problem. Credit cards could end up being a long term financial burden instead of a salvation. 

Also like lines of credit, as you repay the loan the credit becomes available to you again. Unlike lines of credit you can potentially get major perks depending on the lender. Some credit cards use points or cash back promotions to sweeten the deal and keep you using their services. 

Use credit cards wisely and include interest rates, fees, and penalties in your budgeting. 

Why Apply for Loan Funding? 

You have an idea, a plan, and a product. Hopefully you have been able to create a prototype of your product or service and that gave you an idea for how much each sellable item will cost you to make, procure, and distribute. 

An idea is a great start, but without a solid business plan, no bank is going to take a chance on a new company. The bad news is that 90% of startups fail and 70% fail between year 2-5. The second highest reason why businesses fail is due to inability to obtain financing (the first highest reason is because new business owners aren’t able to read the market). And a surprising 82% of businesses close their doors because of cash flow problems. 

So the key to success, unsurprisingly, is money. You need money to make money.  How you obtain that funding is up to you. But if you think you can start so small that you plan to buy your next inventory with what you received from the orders, it will either take you a long time to build up enough inventory to make a profitable business. Or you will be stuck in the never-ending loop of only being able to manage the smallest amount of inventory. 

With funding you can increase your inventory, improve your cash flow, and grow your business. 

What You Need for Business Loans

Each lender is as unique as the businesses they serve. They’re ready to fund your business goals, but to do so they need to find out if your business stands a chance in the real world. As we stated previously, the failure rate for new businesses is pretty high. Banks and lenders don’t want to risk funding a business that isn’t going to be around to pay back the interest. 

So to prove that you’re in the top ten percentile, you need to bring a few documents with you when you address the lender.

Documents Needed To Apply For A Loan

• Loan Application: This usually includes your business name and information. You’ll have to indicate what type of loan you are looking for and the intended purpose of the money.  

• Business Plan: Many lenders don’t just want a couple sentences on the loan application. They want a full plan on how and where you plan to use their money. For example, you may be applying for an inventory loan and part of your business plan is to hire additional employees, you’ll most likely get denied. You need to pick your loan based on your business plan. 

• Credit Reports: Don’t stress if your business hasn’t built up substantial credit yet. You can use your personal credit to back up your loan. If your personal credit isn’t in the best shape, start working on it as soon as possible to make you a more attractive borrower. You can check your personal credit through Experian and start managing the not-so-desirable items on your credit report. 

• Tax Returns: Basically, they want to verify your income. They use the tax returns to ensure you make enough money throughout the year to pay back the loan. It also legitimizes your business making you a more credible lender. 

• Financial Reports: Your transactional account is used to show your business’s performance over a quarterly or yearly basis. Financial reports include all types of income, balances, cash flow, and any investor or stockholder information. 

• Invoices: Your invoices might be included in your financial reports, but if not be sure to provide these as financial statements to show you have promised money coming in. 

• Debt statements: This is another document that should be included in your financial reports but if it isn’t, the lender should be able to pull them up on your credit report. But providing these documents upfront helps show that you are aware of your financial status and are taking steps to reduce debt by using the loan to increase sales (include that in your business plan). 

• Collateral: The type of collateral that is accepted depends on the lender. Many of them will let you put up your inventory as collateral while others may want something a bit more solid. Real estate and items of value are attractive ways for lenders to recover any lost investments. 

Each lender may have more or fewer steps to their loan process. Reading the loan application thoroughly will help better prepare you for your interaction with the lender. Having all of your financial documents in order also gives you a deeper look at your business situation. Is there anything you can do differently? Cut expenses on areas that are less efficient, reevaluate trends and forecasts, and organize your accounts. Once you have started the loan application you’re not going to be able to make any major modifications to your transactions and documenting, but beforehand, you can make as many positive changes as you can control.