In this article:
- How the eCommerce business model works
- Debt financing options for eCommerce businesses
- Alternative financing options for eCommerce businesses
- Equity financing options for eCommerce businesses
- How Biz2Credit helps eCommerce brands get funding
The eCommerce industry has seen unprecedented growth over the last few years. And as experienced during the COVID-19 pandemic, more and more consumers now prefer the convenience of shopping from home compared to brick-and-mortar stores.
While this is generally a good thing for eCommerce business owners, it also presents some challenges.
Rapid growth in an industry attracts competitors, which means entrepreneurs must either cut prices or improve services to stay in business.
Both options are expensive: Cutting prices lowers profit margins and typically requires sellers to do things like buying inventory in bulk, which reduces unit costs, but requires more capital at the front end.
Adding services in the eCommerce world usually means free shipping or no-questions-asked returns, and/or hiring more customer service staff, which is not cheap.
So, how can you take advantage of the enormous growth happening right now by running an eCommerce business that actually has a chance of succeeding?
Chances are, you’ll need capital.
In this definitive guide, we’ll walk you through various funding products to take your eCommerce business to the next level.
How the ECommerce Business Model Works
The eCommerce business model involves listing products for sale on a user-friendly website–your own, or a platform like Amazon or Etsy. In the online marketplace, costs like brick-and-mortar storefronts and sometimes even warehousing are reduced, while the potential customer base is expanded globally. At the same time, competition is increased globally, and what it takes to win isn’t that different from what it takes to win in traditional stores: who has the best or lowest priced products, has invested the most in their marketing and advertising, or has the best customer experience.
Entrepreneurs who want to grow their businesses beyond being a side hustle in their garage are likely going to need funding for this, so let’s look at the options for both debt and equity financing:
Debt Financing Options for ECommerce Businesses
1. Small Business Loans
If you prefer a more conventional approach, small business loans are a reliable option. Banks and financial institutions offer loans to eCommerce businesses based on factors such as creditworthiness, business plans, and financial stability.
While this method involves paying back the loan with interest, it provides the advantage of maintaining complete ownership and control over your business.
Before applying for a small business loan, thoroughly assess your financial situation and ensure you have a solid business plan. Banks are more likely to lend to businesses with a proven track record and a clear plan for utilizing the funds.
2. Small Business Administration (SBA) Loans
A subset of traditional loans, SBA loans are backed by the U.S. Small Business Administration and are designed to support small businesses. These loans offer competitive interest rates and favorable terms, but are more limited in scope and the approval and funding process takes significantly longer than non-SBA loans.
Several SBA loan options are available, including the SBA microloan and SBA 504 loans. The SBA 7(a) loan however would be great for covering huge capital investments and other eCommerce funding needs.
Alternative Financing Options
1. Invoice Financing
If your eCommerce business operates on a business-to-business (B2B) model and deals with invoicing, invoice financing can be a viable option.
This involves selling your outstanding invoices to a third party at a discount in exchange for immediate cash flow.
2. Merchant Cash Advances
For eCommerce businesses with consistent revenue flow, merchant cash advances offer a lump sum in exchange for a percentage of future credit card sales. While convenient, with revenue-based financing like this it’s crucial to carefully evaluate the terms and understand the impact on your cash flow.
Equity Financing Options for ECommerce Businesses
1. Bootstrapping
Bootstrapping involves using your savings or revenue generated by the business to fuel its growth. It might require a bit of patience, but it allows you to maintain control over your business without incurring debt, plus, since you are self-funding, you also maintain 100% of the equity.
Start small and reinvest profits into your business. This not only helps you keep a tight rein on your finances but also instills discipline in spending. As your business gains traction, you can explore other funding options without compromising your equity.
2. Angel Investors
Angel investors are affluent individuals who provide capital for a business startup, usually in exchange for convertible debt or ownership equity. These investors often bring not just money but valuable expertise and connections to the table.
When looking for an angel investor, focus on finding someone who aligns with your vision and industry. Networking events, pitch competitions, and online platforms can be excellent avenues to connect with potential angel investors.
3. Venture Capital
Venture capital (VC) is a popular funding option for eCommerce businesses aiming for rapid growth. VC firms invest in startups and small businesses in exchange for equity. These firms are looking for companies with high growth potential, scalability, and a solid business plan.
Before seeking venture capital, ensure your business is ready for the scrutiny it will face. VC firms will thoroughly evaluate your business model, market potential, and team.
If you can demonstrate a compelling case for rapid growth and profitability, venture capital could be the rocket fuel your eCommerce business needs.
Biz2Credit — Helping ECommerce Brands Get Funding
Biz2Credit streamlines small business financing by connecting entrepreneurs with funding through its online platform.
By simplifying the application process and leveraging technology, Biz2Credit accelerates access to funds, assisting eCommerce businesses in securing the capital needed for growth, inventory management, and adapting to market demands.
Take Your ECommerce Business to the Next Level
Ultimately, securing financing is essential for the success of your eCommerce venture. Whether you choose traditional financing or alternative methods, Biz2Credit can help you secure the funding you need to grow your business.
For a deeper dive into financing, explore additional resources to empower your business journey. If you would like a personalized consultations with a Biz2Credit funding specialist, get in touch with us today. Your journey to financial empowerment starts here.