Launching or growing an e-commerce business is a financial feat. In order to bring in more sales, you likely need more money up front to put your business in a position to handle more orders and revenues.
You might want e-commerce financing to:
Invest in new inventory
Emphasize product research and development
Supplement your marketing budget
Redesign your website
Cover day-to-day operational expenses, especially during times of change
Bring your online store to a physical location
Getting more cash in your pocket is an advantageous way to grow your business. Finding and choosing your funding method is one of the greatest challenges a business owner will face. You have to weigh the cost of current and future growth with the financial risks and burdens of taking on a loan or giving up equity.
Below are some of the most common methods that small to mid-size e-commerce businesses utilize to find financing. Additionally, we provided some third-party companies that can get you started on your hunt to find the right funding.
1. Friends and family
You might want to look at your personal savings first, or you could consider taking out a business line of credit. This can help you avoid the cost of borrowing so you don’t pay interest, have to deal with complicated paperwork, and won’t worry about diluting ownership of your business. “Bootstrapping” can be risky, because you’re putting up your own money at the risk of the business.
You can also ask friends and family to make a loan for your business. Some may ask you for interest, although it’s usually less than a bank (and they’re more forgiving than a bank). Keep in mind, your business would be playing with their money, and your friend may start to offer unsolicited business advice. This could seriously strain your relationship with them moving forward if contracts aren’t drawn up properly.
There are advantages to avoiding a third party loan and putting up your own money, but it’s also one of the riskier business moves. When possible, it’s best to keep church and state (or in this case, home and business) separate.
2. Bank Loan
Most banks offer business loans, but it may be dependent upon the size and profitability of your business. Bank loans are hard to secure for most small business owners. The big banks are wary of giving to small companies, knowing that the majority of companies fail in the first five years. For most bank loans, you need to show a credible track record of profits with a strong business credit score.
Although hard to secure, they’re considered one of the best options for business owners because they offer some of the lowest interest rates. Bank rates are never above 10%, and the average annual interest rate for small or regional banks is between 2.48% and 5.40%. A lot of smaller banks will be excited to offer small business loans, as opposed to larger banks because they stimulate their economy and bring in another revenue stream. These banks also charge fees and require significant collateral, but it’s still typically less than other types of lenders.
Talk to your bank to see what kind of loans and options they would offer a small business. The most widely regarded banks for small businesses are Wells Fargo, Chase, Bank of America, U.S. Bank, and Celtic Bank.
Wells Fargo is the top provider of SBA 7(a) loans, which is a loan used to make real estate purchases or buy another business. They also offer business lines of credit, equipment loans, and commercial real estate financing.
3. Venture Capitalist
A venture capitalist is geared towards businesses that are looking for serious long-term growth and show a lot of promise and opportunity. Rather than pay back a loan, you give venture capitalists equity in your company. This “trade” leaves you without debt and pulls in an experienced business partner. (Think: Shark Tank)
Venture capitalists can be very picky, though. They’re making an investment in your company because the payout they get is directly related to how well you do. They will likely want a say in how you run operations, and they’ll insist on an exit strategy so they can get paid at some point.
Also, you’re giving away part of your business. Even if the VC is a minor stakeholder, the more shares you sell, the more you dilute your own ownership. VCs also put a heavy focus on business valuation. Beware of selling yourself short early on. 50% of your original idea may scale out to 50% of a billion dollar product. Avoid giving away too much of your company if you don’t have high proven profits yet.
This shouldn’t scare you off of VCs. If you want to pull out massive growth with your company, a venture capitalist investor could put you on a trajectory for success. Check out this list of Forbes VCs to get started on your search.
4. Peer to Peer Loan
There are a lot of private online lending platforms specifically designed for small businesses. Recently, entrepreneurs have noticed a need to provide funding to small businesses—and banks just aren’t cutting it anymore. So, they stepped in to fix the system in their own way with their own team of investors. Most of the business is conducted online, and they lend solely based on your application.
A specific type of online lending platform has emerged and become incredibly commonplace: the peer-to-peer lenders. This allows individual investors to invest in your company. An investor can fully or partially fund your project. Oftentimes, these companies will set up a sort of mutual fund of different loans, so individuals have a portfolio of loan investments at one time. One investor might have $25 in your loan and $25 in another’s.
Peer to peer loans are worth looking into. You can usually get the money you need quickly with decently low-interest rates and fees. You’re getting money from real people, but you’re secured with an online platform.
Some popular online lending platforms include:
Crowdfunding has become popular for small businesses, especially if you’re launching a new product. This allows for a wide range of personal investors who invest on a smaller scale. Investors love that they get in on the hottest trends before they become mainstream.
For small businesses with product-centric models, crowdfunding is a great solution. On most platforms, like Kickstarter and Indiegogo, business owners can choose not to repay the loan or pay interest. Instead, the personal investor gives a certain amount of money in exchange for an early release of the product. This means you’re not strapped with a loan when your products go live, and you already have an initial set of beta-testers to give you feedback and post reviews.
Check out some of the popular crowdfunding sites below:
How to qualify for the best loans
1. Know what you’re going after.
What do you need the money for? What kind of loan will best suit your needs? For example, if you’re buying tools for your warehouse, you may want to consider an equipment loan. If you need to pay for daily operational expenses, you might want a line of credit. If you’re looking to grow fast and gain business partners, you could consider a venture capitalist.
There are different types of small business loans, including those that are guaranteed by the SBA (small business association). Learn more about SBA-backed loans here.
Image via Shutterstock.com
2. Compare options.
Don’t go with the first bank or company who makes an offer. Take time to compare the following variables:
APR (annual interest) or factor rate
Fees (like origination, underwriting, and more)
You’ll also want to look at the reputation and reviews of the company. Are previous clients happy with their service? Are they reliable? You want to work with a credible business focused on customer service and business success. Don’t get stuck with a money-hungry business that doesn’t have your interests or growth in mind.
3. Prepare your application.
The top reason lenders reject loans is due to errors or inconsistencies in applications. Take time to review all of the information on your application. You’ll also want to present a strong business plan with projected financials to demonstrate your ability to repay your loans.
Keep in mind that most lenders will also look at your business and personal credit scores, your years in business, your profitability, and your industry statistics.
Check out this awesome Friday Feedback where we talk to Payability about how to scale your Amazon business with funding.
Funding can take your business to the next level. Finance your e-commerce growth to make 2019 the best year yet and bring your company to new heights.
Which of these financing options have you used or looked into? Give us your words of wisdom in the comments below.