Farwah Jafri | October 20 2021
Ecommerce financing is the pre-eminent solution to allow a business to join the internet gold rush. Ecommerce has quickly risen to become a multi-trillion dollar industry. Some of the largest companies in the world, such as Amazon and Ali Express, have relied on ecommerce to get to their current size.
Websites like Etsy have given many home-based craft makers a place to showcase their talent to the world. Global trade enables a transaction to be made across the globe to be fulfilled within days. In February 2019, online sales in the United States of America exceeded in-store purchases for the first time in history.
The Covid-19 pandemic has only amplified the necessity of ecommerce. There has been a significant rise in the use of ecommerce services to avoid being out in public. It has also helped reinforce the safety of such services in the mind of the larger public. Companies that do not have the capital to transition to the internet may use ecommerce financing to gain access to the funds.
Any business or seller that does not take advantage of the new online sphere would be at an immediate disadvantage. Primarily due to the Covid-19 pandemic, consumers increasingly prefer to shop online. If a shop wants to open up a digital storefront but lacks the capital to do so, it must resort to ecommerce financing.
Ecommerce financing is a vital tool to transition beyond a brick-and-mortar setup. The finances gained from such an endeavor are crucial for a small company to make this transition. Most online retailers pay the seller on a bi-weekly basis.
This system is different from cash or credit cards, as used for in-person purchases, as this means that any seller must be prepared to accept credit in the form of delayed payment. The seller must also work hard to gain a foothold in the new market by actively marketing the storefront on places through social media and traditional marketing sources such as newspaper advertisements.
Ecommerce funding becomes vital to achieving access to Key Opinion Leaders (KOL). These are influencers and content creators who can further push the image of the business. Ecommerce financing can be accessed through a variety of channels, enabling the online transition.
The primary option for ecommerce funding would be the owner’s capital. The owner could use his or her income or wealth to help supplement the business in this transition. This money can be taken out of the owner’s retirement fund or from any other savings the business owner has.
The clear advantage of such a move is that it does not dilute the owner’s equity in the company and does not add any liabilities. This process also means that there is no interest to be generated to help pay back any loan. However, the extent to which an owner can effectively gain ecommerce finance through this technique is limited to what their savings are. If the owner does not have sufficient savings, then such a mechanism would not be effective.
If personal savings are not adequate, there exist other ecommerce financing options. The first option would be to ask for family or friends for a loan, possibly both.
Amazon would not exist today had Jeff Bezos not taken $250,000 from his parents to help jump-start the business. The benefits of such an arrangement are clear, as friends and family are less likely to be stringent with loan payback deadlines compared to banks. In the case of loans, the owner also does not have to dilute their equity in the business. However, failure to pay back loans on time may damage or strain the relationship.
In the scenario of an equity agreement, a lack of profitability for the business may also cause the relationship to become strained. While the maximum possible capital from such a scheme may come from the owner’s savings, this amount may also not be sufficient for a transition to ecommerce.
Owners can also look towards credit cards as a way to get eCommerce financing. A credit card can allow easy access to funds, especially if the owner has multiple credit cards. This mechanism, too, will not dilute the owner’s equity and will enable them to make independent decisions without being influenced by friends or family.
However, credit card companies often charge a high interest rate, around 16%. This form of ecommerce funding can also lead to the owner’s credit score declining, meaning the interest rate for other loans may be higher or become inaccessible. The debt from this model may hamper further growth for the business, leading to a debt cycle where more loans need to be taken to pay back the high-interest rate credit card loan.
The entrepreneur can also look towards traditional banks to get the funding required to kickstart the conversion. Bank loans are suitable for ecommerce financing as they charge a significantly lower interest rate at around 6% to 9%. The lower interest rate can mean that the business can focus on growth and spend money on research and development with less debt obligation to fulfill. A bank loan, however, requires more bureaucracy and is less convenient than the options listed above. Banks also require collateral and may outright reject the deal for ecommerce financing if they feel that the debt isn’t secure. Banks do not traditionally deal with eCommerce financing and thus may not give a package that suits the business model.
Some companies specialize in ecommerce financing. These companies inject capital into the owner’s business, and after a fixed duration, when the business gets paid through the eCommerce website, they take a portion of that amount. This method of ecommerce financing is more flexible to account for the natural ups and downs of running such a business, while the owner does not have to deal with reduced equity or high interest rates.
With the rise of the internet, businesses are required to develop a digital storefront. This process can become considerably more accessible through ecommerce financing and allow small shops to thrive rather than sputter out in their brick and mortar confines.
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.