So how do get loans to fund an E-commerce startup? The first place you’ll want to look for is traditional small business lending. For the most part, though, we suggest you don’t look at bank loans, because they’re extremely difficult to get for the vast majority of entrepreneurs. (That’s excluding SBA loans, which are issued by banks. More on that later.) Instead, you might want the expediency of an online lender, plus some of the flexibility that they offer.
Here are some options to consider:
Business Line of Credit
Best for incremental ecommerce expenses
As you’re building your business, you might find that you need e-commerce funding here and there, not all at once. A business line of credit is an excellent type of financing for that.
As a kind of hybrid between a traditional business loan and a credit card, a line of credit enables you to draw against a pre-approved amount of financing, and only pay interest on what you’ve borrowed. It’s almost always a higher limit for a lower interest rate than a business credit card. And it’s a great tool to have in your back pocket for general working capital expenses like overhead or payroll, investments like marketing campaigns, or emergencies like system maintenance.
Inventory (Purchase Order) Financing
Best for ecommerce companies in a period of unexpected growth
Ecommerce can be a slow burn. But there may be those lucky moments when your product gets picked up by a major influencer. Maybe a celebrity is photographed on your bespoke bedspread, or Vogue features your personalized pill box. All of a sudden, you’re inundated with orders… that you can’t possibly produce with the cash flow you have. All of a sudden, that slow burn is a box of fireworks, and you’re in the grand finale. Here’s where inventory financing, or purchase order financing, comes in handy. It’s a reliable type of funding for an ecommerce business, because a lender will advance a large portion of the cost of your production to the supplier or manufacturer. You’ll pay interest to the lender. But if your margins are solid, it’s a small price to pay for new customers who could become recurring if you get them their product faster.
Best for ecommerce businesses with cash flow problems
Ecommerce isn’t just B2C. In fact, one group of researchers estimated that B2B ecommerce sales will hit $1.7 trillion by 2020. If you’re among that group of entrepreneurs, then, you might extend your customers trade credit (which you might know as “net terms”).
Trade credit is a form of somewhat informal short-term financing, in which you extend your buyers a certain period of time to pay off a portion (or all) of an invoice. That can make your cash flow uneven—especially if your customers pay late or not at all.
Invoice financing is e-commerce funding that can help with cash flow issues. In this kind of business loan, you work with a lender to front you up to 85% of the outstanding invoice. When you collect the invoice, you’ll receive the remainder, minus any lender’s fees. Many small businesses across many industries do this. It could be a great option for you, too.
Best for well-established e-commerce businesses looking to expand
This well-known type of financing is available to e-commerce businesses with strong financial track records and time in business under their belts. Guaranteed by the U.S. Small Business Administration, SBA loans are doled out by intermediary lenders that work directly with borrowers to provide preferred repayment terms.
Since these loans aren’t easy to get, and approval takes time, you shouldn’t bank on an SBA loan if you’re a brand-new business with little financial track record to present or if you’re trying to secure funding ASAP. But if you think you might qualify for an SBA loan, it’s worth the application process.
Say you want to open up a brick-and-mortar location for your e-commerce business like many innovative companies are doing to establish a different type of presence. That’s a great use for an SBA 7(a) loan, the most popular type of funding within the program. Financing through the SBA can be just what you need to take your e-commerce business into a major new growth phase.
Business Credit Card
Best for e-commerce startups
Business credit cards are a powerful source of funding for an e-commerce business—especially if you’re in your nascent days.
As much as you feel confident in your new ecommerce startup, lenders don’t necessarily see your new business with the same rose-colored glasses. Often, they require a longer financial track record from businesses before they lend out money. That includes a business credit score, as well as time in business, so they can examine your history of revenues and stability. In short: There’s a good chance you might not get the traditional business funding you desire.
And actually, you can use a business credit card kind of like a short-term loan. If you can qualify for a 0% intro APR business credit card, you can spend it for a predetermined period without interest. And if you pay off your balance before the end of the introductory period, you don’t have to pay any APR at all. Some intro periods last upward of a year—plus, you’ll be building valuable business credit along the way, which you’ll need when you want bigger financing later.
How to Choose Your Best Fit Among Ecommerce Finance Options
The retail economy is quickly shifting toward direct-to-consumer goods, and that’s great news for ecommerce entrepreneurs. There are more ways to access ecommerce funding than ever, and more types of ecommerce finance to explore, too.
Before you pursue funding for an ecommerce business, however, you need to make certain that you’re accessing the most ideal source of financing for you. Here are a few things to ask yourself to help figure it out:
- How quickly do I need money?
- How much money do I need?
- Do I have strong business financial history to show a lender or investor?
- What, exactly, am I looking to finance?
- Am I willing to pay interest or a fee for this financing, or do I prefer to give up equity? Or neither?
If you don’t know what you want, you may not be quite ready for e-commerce funding. And you’ll need to know your own business through and through before anyone is going to be ready to get on board with lending to—or investing in—you, too.