Exploring E-Commerce Business Loans: Funding Solutions for Online Stores
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The growth of fully online businesses is undeniable, and e-commerce business loans play a crucial role in ensuring these companies keep up with the pace of expansion. In 2021, total e-commerce sales witnessed a nearly 17% year-over-year increase, accounting for approximately one-fifth of all retail sales globally, according to Statista. Moreover, experts predict that internet sales will represent a quarter of the retail market worldwide in the coming years. Therefore, finding the right funding solutions for your online store is essential to tap into the digital growth of international retail.
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Why Do E-Commerce Companies Require Funding?
For traditional business owners, it may seem puzzling that a fully online store needs financing. After all, there is no physical real estate or vehicles involved. However, building, maintaining, and upgrading a fully functional online store entails higher costs than initially anticipated.
Website Upkeep
As your entire business operates online, your website must exhibit professionalism, functionality, and be well-maintained. This entails significant costs. Key expenses associated with an e-commerce site include domain name purchase and hosting, which can amount to hundreds of dollars per month. Additionally, your e-commerce platform must handle payment processing, ensure data security, and provide valuable analytics for informed decision-making. As your store processes more payments, the cost of your e-commerce platform will increase.
Team
While sole proprietorships may not face this issue initially, growing companies often need to expand their team. This may involve hiring an accountant to streamline tax-related processes, a web developer to maintain your store’s operations, or a sales team to drive revenue. Hiring the right team members requires substantial financial investment.
Inventory
Selling products necessitates acquiring inventory. Purchasing inventory in large quantities can yield cost savings, as suppliers often offer discounts. However, the upfront cost of buying substantial inventory can be significant. E-commerce funding can provide the necessary capital to ensure your store has ample inventory to drive sales.
Marketing
Promoting your business is essential. Implementing a comprehensive marketing plan can be costly, especially if you engage a specialized digital marketing agency. Apart from traditional print advertising, digital content creation, search engine optimization, and maintaining a social media presence are essential considerations.
Am I Ready to Apply?
First and foremost, assess your credit history. Lenders will evaluate your business’s credit score and history. Factors considered include your company’s track record of timely debt payments, credit history length, total debt, credit utilization ratio, and your company’s size and industry. If possible, improve any of these factors before submitting a loan application. Paying off a debt or reducing credit card utilization can enhance your creditworthiness. Good credit enables access to larger loan amounts, lower interest rates, and more favorable funding terms.
Additionally, gather the necessary documents required for the application process. These may include tax returns, bank statements, credit reports, balance sheets, business plans, and future projections.
Part of the application process involves understanding your funding needs and determining the exact amount required. Once you have a clear plan, you can identify the most suitable financing option for your online store.
What Types of E-Commerce Financing are Available?
Various forms of business funding cater to small business owners operating fully online. Eligibility, repayment terms, and interest rates depend on factors such as industry, credit scores, and specific needs. Some funding options can serve multiple purposes.
Term Loans
Term loans are a fundamental form of business funding. Borrowers apply for a loan, and the lender assesses creditworthiness to determine the loan amount and interest rate. Monthly payments cover the principal and interest until the loan is fully repaid.
Term loans offer flexibility as the funds can be utilized as working capital, to hire staff, purchase equipment, or even pay off existing debt. If eligible for a long-term loan, the loan amount can reach millions of dollars.
However, term loans can be challenging to qualify for, as lenders prioritize careful assessment of the borrower’s financial situation to mitigate the risk of default.
SBA Loans
SBA loans are guaranteed by the U.S. Small Business Administration (SBA) using taxpayer dollars. While eligibility and terms may vary, these loans offer a lower interest rate compared to traditional term loans of similar size and repayment terms. The SBA offers various loan types, such as SBA 7(a) or microloans, with guaranteed loan amounts up to $5 million and $50,000, respectively.
The downside of SBA loans is the strict application process due to the taxpayer guarantee. Applicants must demonstrate a clear plan for fund utilization, and some industries may be ineligible. However, for eligible e-commerce businesses, SBA loans provide affordable financing options.
Revolving Credit: Credit Cards and Lines of Credit
Business credit cards and lines of credit fall under the category of revolving credit. They come with a predetermined credit limit, and borrowers can borrow again once they repay the debt.
Business credit cards function similarly to personal credit cards. The cardholder receives a credit limit and only pays interest on the amount spent within that limit. While these cards often offer rewards, their interest rates can be relatively high.
Lines of credit provide cash directly to your bank account when utilized. They offer flexibility in terms of usage, allowing funds to be allocated for various purposes such as employee payments or monthly debt payments. In contrast, business credit cards are solely used for making purchases.
Both forms of revolving credit are useful for emergency funds. They provide access to a high credit limit when needed. For instance, if your restaurant’s range breaks down, having a line of credit enables swift repair or replacement without the need for additional financing. In e-commerce, a line of credit ensures you can seize opportunities when suppliers offer significant discounts on large quantities of inventory.
Inventory Financing
Inventory financing involves securing financing while using inventory as collateral. It is beneficial for bridging cash flow gaps, equipment upgrades, or inventory stocking during peak periods. Lenders can take possession of the inventory if the borrower fails to repay the loan, protecting themselves against financial losses.
Inventory financing is particularly suitable for businesses with substantial inventory. Lenders may not be interested in this type of financing if your e-commerce company deals with smaller inventory volumes.
Merchant Cash Advances
Merchant cash advances (MCAs) are a form of small business financing where a cash advance provider purchases a percentage of the borrower’s future debit and credit card sales. MCAs differ from loans as they do not involve interest rates or monthly payments. Instead, MCAs use factor rates to calculate the total repayment amount. Factor rates, typically ranging from 1 to 2, are multiplied by the advance size to determine the total repayment. For example, an MCA of $8,000 with a factor rate of 1.1 results in a total repayment of $8,800.
MCAs often have higher annual percentage rates (APRs) than other financing options due to the fixed repayment amount. While you can repay an MCA in a short time, such as two months, the repayment amount remains fixed at $8,800. In contrast, repaying a term loan within the same timeframe would result in minimal interest payments. Furthermore, the repayment structure differs from other financing options. Each day, a certain percentage of your credit card transactions contributes to the MCA repayment.
Despite the higher APR, MCAs offer advantages such as fast processing, with funds often reaching your bank account within hours of application. Additionally, MCAs do not heavily consider credit scores, making them accessible to startups or companies with poor credit history.
E-commerce Businesses Can Benefit from Small Business Loans
Although online stores lack a physical presence, the costs associated with running a fully online business make various loan products beneficial. Evaluate your credit, funding needs, and repayment capacity to determine how an e-commerce business loan can set your company up for future success.
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