Nebraska SBDC Blog

If you run an e-commerce business, that is, you sell products online and ship them to customers, how do you ensure that you keep inventory stocked, even when funds are low? Here’s what you need to know about e-commerce financing.

It’s a Catch-22: you sell your products to make money. But you need money to buy those products to sell. What if you don’t have the working capital on hand to do so?

That’s where e-commerce funding comes in. You can take out a loan to purchase what you need, then pay it back from your profits.

What is E-Commerce Financing?

While some retailers sell products in physical stores, you sell online. You have no storefront, but you do have expenses. Taking out e-commerce financing, whether that’s a term loan or a line of credit, allows you to have the cash flow to purchase inventory, pay staff, and cover other business expenses.

Just like any kind of financing, you will pay back the money you have borrowed over time with interest.

What are the Financing Options for E-Commerce?

E-commerce financing is a broad term that covers a wide range of financing products. Whether you have stellar credit or poor, there’s a financial product and a lender who will work with you.

• Term Loans – You’ve likely heard of small business loans, which are typically offered by banks and credit unions, though there are also online lenders of term loans. These offer financing at low rates, although qualifications are sometimes among the most challenging to meet.

• SBA Loans – The Small Business Administration offers several loans for small business owners at low rates and with long repayment periods. These may be easier to qualify for than traditional bank loans.

• Line of Credit – Rather than taking out a lump sum of cash all at once, lines of credit give you access to a certain amount of capital, and you can borrow up to that amount at any time. Once you repay it, you can borrow it again and again.

• Equipment Financing – Maybe your e-commerce business monograms products for clients and you need an embroidery machine to do so. Or perhaps you need to buy a new computer to manage your e-commerce platform. In that case, an equipment loan can give you the capital to purchase equipment. The equipment you’re buying acts as your collateral, which may help reduce the interest you pay on the loan.

• Credit Cards – While they’re not a loan, business credit cards are another option to consider. Just remember: most have high interest rates (though you may be able to find a card with 0% APR for a year). Look for a rewards card that allows you to earn points you can redeem for cash back, travel, or other rewards.

• Inventory Financing – You likely place large orders for inventory, and if you don’t have the cash on hand to pay for it, you could leverage inventory financing. Like equipment financing, the inventory you’re purchasing serves as your collateral.

• Trade Line – If you purchase inventory or supplies from the same vendors again and again, see if they offer trade lines. This allows you to access purchasing power to get what you need, but pay later when you’ve got the money from selling the products. They may also help you build business credit.

How Does E-Commerce Financing Work?

While each of these funding solutions may work slightly differently, here’s the general idea of how e-commerce financing works.

Note: some loans will have strict requirements for what you can spend the money on, while others are laxer. Read the fine print before applying.

You may be offered a few payment options, such as whether you want to have the monthly payments automatically debited, as well as what your monthly payment will be.

Once your repayment begins, you will need to make that monthly payment on your loan (which will include principal and interest). If you miss a payment or are late, it can negatively affect your credit.

Once the loan is paid off, that will be reported to credit bureaus, and you may see a small rise in your credit score.

How to Qualify for E-Commerce Financing

Each lender may have slightly different requirements for applicants, but you should expect that your credit score will be an important factor for most. If you have business credit, that may be reviewed, but if not, your consumer credit will be used to determine eligibility.

(Learning how to establish business credit can be helpful in advance of applying for a loan.)

The better your credit, the better the financing solutions you’ll be eligible for. Lower credit may only give you the option for loans with high interest rates.

The amount of time you’ve been in business may also be considered. For SBA loans or bank loans, if you’ve been in business less than two years, you may not qualify. However, other lenders are open to startups.

How To Apply For E-Commerce Financing

Once you’ve decided on the best e-commerce funding option for your business, it’s time to apply. In the application process, you will be asked questions about your business, such as what you sell and how long you’ve been in business. You will also need to provide personal details, like your address and Social Security number.

You will be asked for the loan amount you seek to borrow, and you may be required to provide details about your bank account so that funds can be deposited.

Once approved, you will be shown your financing offers, including the interest rate and monthly payments. Once you sign the loan documents, the funds will be deposited into your bank account in as little as one business day.

Choosing the Right Funding Option for Your E-Commerce Business

Having access to working capital lets e-commerce business owners like you run their businesses without worry. You do have many options when it comes to e-commerce financing, so review them all and find the one that offers the best terms for your needs.

Printed with permission from ASBDC. For the original article, click here.