Ecommerce Financing: A Guide To Your Options

Farwah Jafri | January 18 2022

Do you know what separates a successful e-commerce startup from the mediocre one? Capital. Businesses, small or large, need funds to right the wrongs, accelerate growth, and level up. There are only two viable ways to strengthen the bank statement; ecommerce financing and ecommerce funding.

Every debt and equity-based investment falls in the former, be it a bank loan or an investment from venture capitalists and business angels. On the other hand, grants and donations are funding’s.

Finding the Best Way Forward

So, your business needs money. That’s no surprise. The million-dollar question is, how to get it? Let’s clear the air, once and for all. Ecommerce funding is a no-go. Why?

Because until and unless your business provides food for the hungry, shelter for the poor, cure for the sick, or similar, your odds of securing funds are slim. Donations aren’t made for for-profit businesses, while government grants are no less easy to get.

Thus, the best way forward is to try your luck with financing options. But, before we explore the best ones, let’s first understand types of ecommerce financing.

Types of Ecommerce Financing

There are two basic types of ecommerce financing. The first is debt financing, and the second, equity financing. Every time you borrow money from any entity or financial institution at a fixed or variable interest, that’s debt financing. You must pay back the amount plus interest over a definite time or face repercussions.

Equity financing is different. Here, you get to have the capital you need in return for defined equity in your business. In other words, you sell ownership. You may sell it to one investor or more than one. Remember, every percent sale implies giving away a piece of cake. The more you give, the less you get. That’s the price you pay!

On paper, both options works. After all, they get you the funds you want at the time of need. However, both have pros and cons. Every business has its unique needs. For some, debt financing is better, while others must sell a portion of their business to level up.

See Also: 12 Ways To Raise Money For a Startup

Here are the top five ecommerce financing options for businesses to quench their thirst for capital. Know the difference and choose wisely!

1. Venture Capital Funding

Safe to say, there is a no better option to put at the top than venture capital funding. Simply because it gets you loads of money without the need to pay it back. No payback means no interests and no repercussions. However, there’s a catch. Venture capital is an equity-based ecommerce funding solution and is only for the promising few.

See Also: How Venture Capital Works

To secure funds through venture capitalists, your start-up must stand out. It must have a healthy present and enormous growth potential. Remember, as it is an equity-based option, you will be selling ownership of your business in return for the dosh. So, make sure you find the perfect balance between capital received and stakes sold. Best to call your Chief Financial Officer!

2. Bank Loans

A bank loan is a popular ecommerce financing option among entrepreneurs and businesses with assets to show. Many opt for it as it gets them the required money without selling equity. However, loans have strings attached, interests and penalties.

Yet still, it is perhaps the best bet for businesses seeking long-term liquidity. However, you can’t put on a blindfold and say yes. You ought to choose the right banking partner. A good one accelerates growth, while the bad halts it. So, it is best to seek CFO help and select a partner that understands your business, industry, and trends.

Moreover, bank loans work for some yet not for all especially, small and internet-based businesses. Because without collateral, the bank doesn’t lend. Hence, it is best for such small e-commerce start-ups to look elsewhere.

3. Merchant Cash Advance

Not every business gets their loan applications accepted, especially those with no physical assets. They should seek digital solutions like a merchant cash advance. Entrepreneurs operating on e-commerce platforms like Shopify, Stripe, and PayPal may know it. Here’s an overview for others.

A merchant cash advance is a specialized loan for storeowners yearning for short-term liquidity. An ecommerce platform offers it after thoroughly reviewing the stores’ sales. The good thing is that you don’t need to repay it. A certain amount is deducted on every new sale from that point forth. Though, like every other debt-based ecommerce funding option, the catch is interest. Often more than that of traditional banks.

4. Accounts Receivable (AR) Financing

Some e-commerce businesses face long delays between sales and payments. As a result, they invite seasonal financial turmoil. A way out is to ease off a little steam by utilizing outstanding accounts receivables. In simple words, an invoice is an asset that enables businesses to get loans. That’s how AR Financing works!

Businesses attain loans from banks or financial institutions with invoices as collateral. Do remember, AR financing is not best for everyone. It is an incredible option for start-ups with a trusted customer base and a bad one for those with spotted payment history.

5. Inventory Loan Financing

At five lies inventory loan financing, a debt-based financing solution for retail and e-commerce businesses yearning for short-term liquidity. Typically, start-ups who want to stash their inventory yet are running low on funds choose IL financing. They receive a loan to refill it with the products as collateral, failure to repay the loan results in inventory loss.

In a nutshell, there’s no shortage of ecommerce financing and funding solutions for businesses. The point is to select the best one. Spend time deciphering your exclusive needs, consult with a CFO, and move forward confidently. Just don’t forget to keep the books straight!

Check Out: Monily’s Complete Financial Solution for Emerging Startups

Author Bio

Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.