If you run an ecommerce business, the beginning of the year is often when you turn your attention to growth opportunities in the months ahead. That means it may also be time to review your funding options, so you can finance all those grand plans.
If your first thought is a traditional term loan from a bank, keep reading. If you run an ecommerce business, there are a ton of financing options you should consider, besides traditional bank loans. Some of them are harder to qualify for than others, some are faster than others, and some offer higher or lower funding amounts. It all depends on a few key pieces of information about your business, the amount of capital you need, and how you intend to use the funds.
To make your financial planning easier, here are four ways business owners with ecommerce stores can get financing, besides traditional bank loans.
The term “microloan” usually refers to a term loan in an amount below $50,000. Small and early-stage businesses may use these loans to purchase office supplies, equipment, and inventory, or to pay for other general business expenses.
Microloans are generally short-term loans, and you can find them through banks, credit unions, government programs, and some non-government organizations. You may have first heard the term “microloan” when the U.S. Small Business Administration started a microloan program in 2009, increasing the maximum size of an SBA microloan from $35,000 to $50,000.
Things to know about microloans
If you’re a small business owner in need of $50,000 or less in funding, SBA microloans are an attractive option. If you’re approved, there are few restrictions on how to use the funds, giving you flexibility. Like other types of SBA loans, interest rates are relatively low.
As with any type of funding, though, there are some downsides. Applying for an SBA loan takes thoroughness, patience, and good credit business and personal history. You’ll need to provide detailed information about your business, and the application and decision process may take days or even weeks. Events that affect the SBA (like a government shutdown) can delay loan decisions even further.
If you have time to wait, you only need a small amount of funding, and you’re confident in your credit history, an SBA microloan might be a good choice for your business. If, however, you need funds faster (to take advantage of a time-sensitive opportunity, for example), you should consider a faster funding source.
2. Business lines of credit
If you’ve used credit cards, then you’re already familiar with how lines of credit work. Unlike a term loan, a small business line of credit doesn’t provide a lump sum of cash with a monthly repayment schedule. Instead, if you’re approved for a line of credit, you get access to capital as you need it, and you can carry the balance from month to month. According to the terms of your credit agreement, interest is calculated based on how much you draw. As you pay back that amount, it becomes available again as credit, up to your limit.
Because of their flexibility, lines of credit are some of the most popular sources of business funds. Like credit cards, lines of credit come with few restrictions on how to use the funds. You can use your business line of credit to cover any business expense, within your credit limit. This makes lines of credit handy for everything from travel and vehicle expenses, to inventory and materials purchases, and more.
How to get a business line of credit
The stronger your financial position, the easier it will be for you to get approved for a line of credit. Because of this, it’s a good idea to apply for one well before you think you’ll need it.
Where you go for a line of credit may partly depend on how much time you have to wait. Applying for a business line of credit from a major bank can be a lengthy process. You may need to fill out paperwork, provide financial statements and revenue reports, tax returns, and more. You may also need to submit to a personal credit check and provide other personal information.
There are also some new fintech options, where you can apply for lines of credit online, with far less paperwork. Be sure to research and compare lines of credit before spending hours on an application. With so many fast alternatives these days, you might be pleasantly surprised.
3. A/R Factoring
Accounts receivable factoring is a popular option for ecommerce businesses. This option is also known as “A/R financing,” “A/R factoring,” “receivables factoring,” or just plain “factoring.” Depending on context, you might hear any of those terms.
With A/R financing or A/R factoring, a third party company (known as a “factor”) will buy a portion of your receivables in exchange for cash. The amount of capital you get will be a fraction of the receivables you pledged.
Fees can vary widely depending on your A/R financing or factoring agreement and situation. Most factoring companies will advance anywhere between 50 and 90 percent of the total amount of outstanding invoices while they will hold the remaining amount in reserve. Some factors will advance 100 percent of the invoice value but will almost definitely charge other fees.
Considering A/R factoring
Receivables factoring has been around for a long time, but it’s often not the cheapest option. If you’re considering going this route, be on the lookout for things like processing fees, origination fees, monthly minimum fees, factor fees, and so on.
If that sounds like a lot of fees to keep straight, you may want to search for a simpler financing solution. A/R factoring can be a faster way to get cash in your hands when compared with traditional business loans, but it can also be more expensive. Interest rates and fees may depend on the quality of your invoices (as judged by the factor), which is difficult for you to control.
Crowdfunding has skyrocketed in popularity with small business owners, especially ecommerce entrepreneurs. Platforms like Kickstarter and Indiegogo have made it easier than ever for inventors and entrepreneurs to get pre-orders for products and services.
The way crowdfunding works is simple: would-be customers pledge to pay a certain amount to a business, using a crowdfunding platform. In return, the business pledges to provide a reward, usually a specific product or set of products. Sometimes the crowdfunding platform will also provide some promotional help to the business by featuring and sharing popular crowdfunding campaigns.
Many web- and social-media-savvy entrepreneurs love crowdfunding because it allows them to get their products in front of customers right away, before spending money on materials. With crowdfunding, you don’t have to pay any interest on pledges (the money you get from backers). You also don’t have to worry about losing equity in your company, like you would if you took capital from more traditional investors.
Finally, with crowdfunding, you can ask for as much or as little money as you want. Unlike traditional loans, which typically have high minimum loan amounts, with crowdfunding, the amount is up to you.
How to succeed with crowdfunding
Crowdfunding is far from easy, and some types of businesses or products are better-suited to a successful crowdfunding campaign than others.
When deciding if a crowdfunding campaign is right for you, be sure to consider all the costs involved. You’ll need a compelling idea, a product people want, and a list of reward items to offer at different pledge levels. You’ll have a much greater chance of success if you can write great copy for your profile and campaign page, and include original images and even a video, explaining your products and reasons for crowdfunding. Campaigns are time-limited, so you’ll have a finite amount of time to drive web traffic to your campaign page or else risk losing out on the funds.
In short, crowdfunding is time-consuming hard work, requiring good digital marketing, social media strategy, and creative skills. And even if you do run a successful campaign, remember: the crowdfunding platform you use will take a part of the funds raised, in fees. Factor all this into your decision before getting started to avoid costly surprises later.