eCommerce financing: how to fund your online business

By Rebecca Montag | January 17, 2023

ECommerce businesses have unique needs. Due to the structure of the eCommerce supply chain and the sales process, they have a number of hurdles to overcome as they run their businesses. These online sellers must pay costly supply chain expenses such as production, warehousing, and freight, before they even receive inventory to sell. They therefore have significant amounts of cash flowing out of their businesses before they ever see revenue from sales. This causes a cash flow crunch, an all too common problem for eCommerce businesses trying to grow.

The lack of working capital is one of the biggest challenges eCommerce businesses face. In addition, they simultaneously have to navigate other challenges such as unexpected supply chain delays and disruptions, changes in demand, seasonality, and more.

Since eCommerce businesses have such particular requirements and struggles, they often find traditional financing solutions lacking. They need a different solution, one that meets their company’s needs rather than a strict and rigid financing plan that leaves them short on funds and cash flow. This is where eCommerce financing comes in.

We’ll talk about what constitutes eCommerce financing, why it is important, and whether these financing options are right for you.

In this article:

What is ECommerce Financing?

ECommerce financing is a funding process that provides relatively fast access to capital for online businesses to improve cash flow and fund every part of their business. This includes payroll, expansion, and inventory procurement.

Online businesses require flexibility, sustainability, and fast expedition of resources including funding. Specialized internet lenders and traditional banks alike are able to provide loan options specific to eCommerce, along with hybrid in-store and online business models, to secure financing that meets individual business needs.

Many of the eCommerce financing options do not require personal assets as collateral and instead will trade future revenue in exchange for capital. In order to find a solution that fits your schedule and your business goals, it’s important to understand the many options available for financing your eCommerce business.

Equity vs Debt Financing for ECommerce

Before we dive into the different ways of obtaining eCommerce financing, you should understand the two types of eCommerce finance: equity and debt.

Equity finance allows you to receive capital in exchange for partial ownership in your company. Usually, this means the investor or financial institution will front you the capital, similar to how you recieve a lump sum with a traditional loan. The investor becomes a minor partner in your business, receiving a share of your revenue.

These partners can help provide connections and networking along with business solutions to continue growing your business. However, you will be required to continue paying out the partner’s shares until they sell the shares back to you which could be more than the initial capital. Your partner will likely also want a say in how your business is run, playing a role in decision-making and management. Examples of equity financing include sources of capital from angel investors and venture capitalists or equity crowdfunding.

Debt financing, on the other hand, takes the more traditional route. When you take out a loan, you are indebted to the lender for the principal amount plus interest. Unlike equity financing which does not require you to pay a specific amount back, debt financing is structured in such a way that you make repayments until the total principal and interest is returned. Debt funding examples include your traditional bank loans as well as merchant cash advances, revenue based financing, and inventory financing.

Why is ECommerce Financing Important?

If you had to choose between a financing option with set, rigid repayments and a lending opportunity that allows you flexibility and meets you on your terms, which one would you pick? For many eCommerce sellers, the answer is pretty obvious. While some companies prefer traditional loan styles, like the way mortgages and car loans are set up, other companies require more options.

You need ways to improve cash flow to cover expenses over a period of time or to fund specific goals and projects. Plus, with the fluctuations in demand and sales that are to be expected in eCommerce, set monthly repayments can be hard to meet.

There is also a great deal of variability when it comes to eCommerce financing options. Certain eCommerce funding solutions may require collateral in exchange for capital, while others trade capital for a percentage of your future revenue. This allows you to make a funding choice that does not plummet you further into the red, but rather builds your cash flow and lifts you out of debt.

Types of ECommerce Financing

ECommerce financing is essential for online businesses to maintain and improve cash flow as well as to grow and reach their full potential. There are many different options for eCommerce financing that are available to businesses with different needs and goals. Each type of financing has its benefits, but they also have their downfalls. Gaining an understanding of these pros and cons is essential when you are choosing which type of funding to accept.

Merchant Cash Advance

A merchant cash advance, or MCA, allows the borrower to receive an “advance” on their future capital and make repayments based on a percentage of their daily credit and debit card sales. The internet prides merchant cash advances on being a loan option that is not really a loan. In a sense, merchant cash advances are commercial transactions, trading capital for future revenue.

Your daily credit and debit card revenue is received through an approved credit card processor and is split between your owed percentage to the MCA lender and the remainder which is placed in your account. You continue making these payments until the advance and interest or costs are reached.

Pros of a merchant cash advance for eCommerce:

You can receive large amounts of capital up front (sometimes up to $5 million for qualifying applicants)
Quick access to funds – as fast as the next business day advances.
Flexible repayments – you never pay back more than you receive in revenue from credit/debit card transactions.
Use the money in any way you see fit – including, but not limited to, payroll, inventory procurement, and expansion.
Have your payments retracted automatically from your revenue through the credit card processor so you never have to worry about missing a payment.
A high credit score is not required. Unlike traditional loan styles, you do not need to have excellent credit because the MCA bases your advance amount on your history of credit and debit card transactions.
No collateral. No one wants to risk their personal assets, and MCAs allow you to avoid that risk. As long as you are generating revenue through credit/debit card sales and online transactions, you are still in the green.

Cons of a merchant cash advance for eCommerce:

It’s expensive. If you are looking at APRs, MCAs are among the highest when it comes to eCommerce loans. Sometimes these APRs can reach over 200%.
You must accept a majority of your online payments via credit/debit card sales through an approved credit card processor.
There is no incentive to pay off early. You owe what you owe regardless of the time limit. Since you are not bound by the constraints of compound interest, which can lengthen the amount of time it takes to make repayments, MCAs use factor rates to determine the total amount you pay. So in the end, if you come up with quick cash or a high pay day and end up paying off your advance sooner, you don’t get any discounts or save on interest.
Payments begin immediately. Unfortunately there is no grace period to make your first payment. MCAs begin taking their cut of your revenue from the very first day your credit card processor is approved and set up. Remember, you never pay more than you receive in credit/debit card revenue.

Revenue Based Financing

Making flexible repayments is a popular option for eCommerce sellers. After all, eCommerce sales are rarely stable year-round. Due to seasonality, supply chain delays and disruptions, and fluctuations in demand, sellers expect revenue to rise and fall. Revenue based financing offers an eCommerce financing option similar to merchant cash advance but takes into account your total revenue.

Revenue based financing, or RBF, is a funding method in which you receive capital up front and then make monthly repayments based on a percentage of your total revenue. The principal is multiplied by a factor rate (usually 1.1 to 1.9 times the principal amount) which includes all interest and fees. This allows you to make repayments up to a predetermined limit (to include interest and fees) without ever owing more money than you bring in.

Pros of revenue based financing for eCommerce:

Quick access to funds within 24 hours of approval for many revenue based financing lenders. You get your money fast and can start using it right away.
No dilution of ownership. We know that equity financing dilutes your ownership in the company because you are selling off shares of ownership to investors. With revenue based financing, the lender doesn’t want to own your company – they just want their money back plus the cost of capital.
Flexible repayment. You only pay a percentage of what you earn in revenue, so you never have to worry about making a fixed payment every month.
No collateral required. Don’t risk personal assets when all the lender wants is their money back. And since they are taking part of your revenue, there is no need to collect collateral. They will continue to take their cut of your revenue until the principal and factor rate is repaid.
Subscription and recurring revenue streams could give you a higher pay out. If you can show the promise of higher revenue, your lender will be more likely to provide a higher amount of capital. Subscription and recurring revenue streams show stability and consistent revenue which then proves you will have future revenue to make your payments.

Cons of revenue based financing for eCommerce:

Revenue is required. Whether you hit a dry spell or you are a business that does not generate revenue, revenue based financing is specifically for companies that have regular revenue. So, sorry to those companies that aren’t interested in profits, but this option is not the best choice for you.
Not for new companies that haven’t generated revenue yet. Revenue based financing is not ideal for startups or new businesses. In order to qualify, you have to prove that you have generated a certain amount of revenue over a certain period of time.
Less capital available than with venture capital or other equity loans. However, you don’t have to exchange ownership for capital. Additionally, once you have established repayment, many lenders will offer options to take out multiple RBF loans or add the increased amount to your existing RBF plan.

Crowdfunding

We’re all familiar with popular crowdfunding apps and websites that allow startup funding for new and small businesses. The interesting thing is, crowdfunding can be used to raise funds for any project or part of your business that needs a little bump. One way to do so is through traditional donation crowdfunding where you receive monetary gifts that you don’t have to pay back. Another option is equity crowdfunding which allows you to offer equity in your company in exchange for capital from multiple investors.

Whether you are offering monetary or non-monetary gifts, or you choose to give minority ownership to your investors, crowdfunding is how some businesses are able to extract smaller amounts of capital from a variety of lenders or donors.

Pros of crowdfunding for eCommerce:

You can raise as much money as you need. There is no limit with crowdfunding, so you can set a goal and collect whatever donors and investors are willing to put in. Essentially, you could potentially earn more capital than any other eCommerce financing solution.
You can determine the requirements and what donors will receive in return. You get to set the terms and let investors and donors decide to accept them. Unlike traditional loans, you don’t just have to accept the terms, you create them.
Multiple investors means potentially more capital. It’s just math – if you have a lender willing to give you $50,000 in capital or 10 investors willing to give you $10,000 each, which would you pick? Looking strictly at the math, you would earn more capital through crowdfunding than the other lending option.

Cons of crowdfunding for eCommerce:

It’s a full time job. Frankly, if you want to meet your crowdfunding goal, you have to put in the work. Investors need to see the benefit of putting their hard earned cash into your business. That includes preparing with presentations, pitches, and promises.
Dilution of ownership. If you follow the equity crowdfunding option, you are selling shares of your company in exchange for capital. These investors are now minority owners in your business and their goal is to make money off their investment. These connections can help you network and give you valuable business expertise, but ultimately, you are now one of many decision makers in your company.
Not every project gets funded. Plus, on many platforms, if you don’t meet your goal the money reverts back to the investors. So if you set a goal of raising $100,000, but you only reach $90,000, all that funding reverts back to the investors. This goes back to our first drawback, that crowdfunding requires extensive effort and in the end, that effort could be wasted by missing your goal by just a margin.

Angel investors and venture capital

Angel investors and venture capitalists are equity financing options. These are wealthy individuals and investing firms, respectively, that provide capital to small businesses and startups. In exchange for capital, angel investors and venture capitalists receive equity in your business – in other words, they own a minority share in your company.

You repay your investment through a percentage of your revenue. The investor will continue to receive their dividends until they agree to sell their share back to you. They may also expect to play a role in the running of your company.

Pros of equity financing for eCommerce:

Investors have connections. Investors have an interest in protecting their money and, arguably more importantly, making money off their money. The only way to protect their investment is to make sure your business is profitable by providing their business knowledge or network of experts to use at their disposal.
High amounts of capital. You could potentially receive higher amounts of capital from an angel investor or venture capitalist because they are looking to benefit from your profits. Therefore, the more they invest, the more ownership they retain, ergo, they make more money.
No collateral needed. What could be better? Well, getting the money for free without trading for future revenue or equity in your company would be the ultimate situation, but that’s really hard to get. But not having to risk your personal assets is a second best.

Cons of equity financing for eCommerce:

You give up a share of your profits. Investments are not expensive in the same sense as debt financing. But you still have someone else coming into your business and splitting your revenue. That means less profits for you and fewer dollars going back into your business.
Dilution of ownership. Once you’re playing with house money, it’s house rules. Now, someone else is putting in their opinion, which may be profit and revenue driven versus growth driven.
There’s no specific end date. You’re stuck paying out dividends of your investor’s shares until the investor chooses to sell their shares back to you. You could therefore be paying back 10-20 times the amount of the principal invested.

Inventory Financing

When you sell a product online, you need to hold inventory in stock so it’s available to ship to customers when they make a purchase. In order to continue procuring inventory to meet regular demand, to grow your business, or to prepare for a peak season, you need financing. Inventory financing is a lump sum loan dedicated to inventory manufacturing or procurement. You may have specific payment intervals, but once your inventory has sold, you can make the final lump repayment, thus completing the loan agreement.

Pros of inventory financing for eCommerce:

Inventory is collateral. This doesn’t sound like it should be in the “pros” column, but in reality, it’s quite the benefit. If you are unable to repay the loan, your inventory will be seized as collateral instead of your personal assets or accounts.
Lump sum available upon approval. You get your loan amount up front in order to make your inventory order or put in motion the production of products.
Obtain new products. Inventory financing is a great time to launch new product lines to your customers, opening up your business to a new market and customer demographic

Cons of inventory financing for eCommerce:

Can only be used for inventory. This is the main disadvantage to inventory financing, and it should not be taken lightly. Inventory financing can only be used for the purchase and procurement of inventory. You cannot use this loan for any other part of your business. If your eCommerce business does not sell a product, this loan is definitely not for you.
Higher interest rates than other types of financing. Inventory financing is often considered higher risk than other kinds of loans due to the fact that you don’t have to put up any personal guarantees or collateral. Therefore, interest rates may be higher, too.
Shorter payment terms. This type of financing is usually repaid over a shorter period of time, leading to higher monthly payments.

Credit cards and lines of credit

Switching gears to a more traditional style of financing, eCommerce businesses can utilize credit cards and lines of credit to get emergency funding or a bump in available credit. Credit cards can be used at point of sale and lines of credit can be transferred to a bank account.

Pros of credit cards and lines of credit for eCommerce:

Lines of credit tend to have lower interest rates because they fall under similar guidelines as traditional bank loans. Credit cards, however, may have high interest rates.
Use the loan as you need it. You don’t have to spend all $50,000 of your available balance right away. Draw from credit cards or lines of credit as you need it.
Only pay on what you owe. In addition to our point above, if you do not use the total amount available, you don’t owe on the unused balance. You are only charged interest on the money you borrow, not on the total amount available.
Grace periods or rewards available. Typically, you have a certain amount of time before you make your first payment. You will still accrue interest during this period, but it gives you a chance to generate revenue before your first payment. Credit cards also tend to offer incentives or rewards such as 6-12 months of no interest or points toward special offers (or even cash back).
Build business credit. If you are looking to improve your credit score, conservatively utilizing and making payments on a line of credit or credit card help build and strengthen your credit.
Cons of credit cards and lines of credit for eCommerce:

Based on credit. Yes, business credit scores are a real thing and they are taken seriously when it comes to traditional lending. If you have poor credit, your credit card or line of credit application may be declined or you could face high interest rates.
Can be difficult to obtain. Again, based on credit, credit cards and lines of credit may be difficult for businesses with poor credit to access. You do have the option in many cases to use your personal credit or assets as collateral to build your business credit.
Lower loan amounts. You could have high revenue, but no credit history, which leads to lower credit limits. Starting with a lower credit limit could help build your credit score, leading to higher credit loans.

Small Business (SBA) Loans

Small business loans fall under traditional bank loans with a twist. These loans are safeguarded for small businesses – defined as a company with less than 1,500 employees and no more than $41 million in annual revenue. That ends up being a wide range and a valuable asset for many businesses. The US has over 30 million small businesses, with small to medium businesses representing 90% of the business population.

Pros of small business loans for eCommerce:

Lower interest rates. Borrowers with good credit can score an interest rate between 7-15%. Other eCommerce financing options tend to have exponentially greater interest rates.
Borrow large sums. SBA loans max out at $5 million, but ultimately your approved loan amount depends on your credit score and revenue.
Variety of loan options available. Whether you are looking to consolidate debt, grow and scale your business, or you need real estate and equipment financing, SBA loans have an option to help you fund your next venture.

Cons of small business loans for eCommerce:

Eligibility is complicated. Frankly, SBA loans can be difficult to obtain. Since your approved loan amount is based on credit, you may not receive as much as you need. Additionally, you have to meet specific criteria.
Collateral is usually required. The lenders want to secure their finances, which means you may have to put up personal or business assets of equal or greater value to your loan amount against the loan. If you do not make the required payments, the bank will seize your assets to avoid losing money.
Rigid repayment schedules. SBA loans usually have set monthly repayment amounts. For eCommerce businesses with fluctuating sales, these can be difficult to meet during a slower month.

Is ECommerce Financing Right For Your Business?

Any type of growth requires funding. If you are an online business owner looking to grow your business, eCommerce financing is essential. Whether you are getting over a seasonal hump, you’re seeking to scale your business, or you are ready to hire that next employee, eCommerce financing gives you flexible, affordable, and accessible options to meet your needs.

8fig: A Unique Growth Solution for ECommerce Businesses

Do you need working capital to grow your eCommerce business but aren’t sure if the above options are right for you?

8fig is another solution that is designed specifically for eCommerce. We’re a non-dilutive growth partner for eCommerce businesses, providing you with the tools and resources you need to reach your full potential as well as continuous and flexible funding.

Our funding is optimized for your cash flow, helping you stay in the green while growing your business. In addition, 8fig funding is flexible, meaning you can change any aspect of your Growth Plan from your funding amount to remittance schedule in order to keep up with the natural fluctuations in your business.

Interested in learning more? Sign up for an 8fig Growth Plan today and find out how 8fig can help you grow your business up to 2.5 times faster.

Rebecca Montag

Rebecca is an eCommerce writer at 8fig. She strives to provide sellers with the information and support they need to succeed in the ever changing eCommerce space.

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