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What is E-Commerce Business?
The world of e-commerce as seen a steep growth since the start of the COVID-19 pandemic. With people advised to stay home to avoid getting the infection, more people are turning into online businesses to get whatever they need. In fact, recent estimates show that in May 2020 alone, e-commerce sales gained a 77% increase compared to the previous year.
Modern technology has paved the way for aspiring entrepreneurs to set up their shops online. Whether entrepreneurs doing it to earn a living or pursue a passion, the online market place provides them with an easier way to achieve their entrepreneurial goals.
What are E-Commerce Loans?
E-commerce loans are specifically designed to help small business owners obtain the working capital they need to sustain their online business operations. Like normal businesses, online sellers also have to come up with enough cash to keep up with their payables. It could be utilities, inventory, shipping and logistics, equipment, or other business need.
Online sellers need funding now more than ever. With the increasing demand also comes to the need for e-commerce businesses to keep up. To do just that, they need e-commerce funding.
Why do E-commerce Businesses Need Additional Financing?
Below are the reasons why e-commerce businesses often need external funding:
1. Additional Working Capital
2. Develop and Improve Technology
But to achieve these goals, they have to spend money. To avoid compromising the business’ cash flow, they turn to banks and alternative lenders for additional funding.
3. Purchase Inventory
For this reason, online retailers apply for e-commerce financing to get the stocks they need. With external funding, they can buy their inventory without sacrificing the stability of their cash flow.
4. Shipping and Storage
With the help of short-term e-commerce loans, business owners can get the funding they need. Some funding options may not even require companies to present collateral to secure the loan.
5. Marketing Efforts
Common Types of E-Commerce Businesses in 2020
Wholesale and Retail
Rent and Loan
Financing Options for E-Commerce Businesses
But that doesn’t necessarily mean that all hope is lost. E-commerce businesses do have a variety of loan options they can choose from. The most common financing options that online sellers apply for are lines of credit, business credit cards, merchant cash advance, and SBA loans.
Here’s how each of the options works:
1. Business Line of Credit (LOC)
Start-up e-commerce companies can benefit the most from business lines of credit. For one, they don’t need to meet a time-period requirement to qualify. Secondly, it’s a flexible financing solution that lets online sellers use the fund in any way they see fit, any time they need it. Third, lenders usually don’t require collateral, so businesses without assets to pledge can still qualify.
With a business line of credit, an e-commerce business can buy inventory, cover marketing ads, and pay for other short-term business expenses. The business owners can draw cash any time they need it, as long as they don’t exceed the set credit limit.
Business Line of Credit Qualifications
- Must be in business for a minimum of 2 years
- The company must be profitable
- Collateral (optional)
- Reasonable debt to equity ratio
- Good personal credit (preferable)
2. Business Credit Cards
Business credit cards are also a good choice among start-up e-commerce companies mainly because it’s easy to qualify for. If the business owners have a good credit standing, they can use their personal credit history to apply for a business credit card. Once they’re approved, they can use the additional funding to purchase more inventory, supplies, or pay for unexpected costs in times when they don’t have cash on hand.
Furthermore, applying for a business credit card also a great way for start-ups to build their business credit. The better and more varied their credit background is, the higher their chances are of qualifying for bigger and more comprehensive business loans in the future. Also, with frequent credit card use, the business becomes eligible for rewards in the form of airline miles or discount coupons.
Business Credit Card Qualifications
- The owner must have a personal credit rating of at least 600
- Business must operate for profit
3. Merchant Cash Advance (MCA)
If your e-commerce business doesn’t qualify for traditional financing options, consider applying for a merchant cash advance. As the name implies, a merchant cash advance allows business owners to sell a portion of their future profits for advanced cash. This, in turn, gives e-commerce businesses immediate access to additional working capital. To repay, the lenders will take the percentage of your debit or credit card transactions daily or weekly, depending on the agreement until the balance is paid in full.
One of the advantages of applying for an MCA is that the business doesn’t need to have an impeccable credit background to qualify. All that matters for the lending companies are that the business reaches a certain amount of credit card transactions each month. Aside from that, e-commerce businesses will find this financing option more convenient since they handle credit card sales all the time.
Merchant Cash Advance Qualifications
- Have a monthly credit or debit transactions of over $2,500
- Must be in the business for at least 6 months
- Have at least $50,000+ in annual revenue
4. SBA 7(a) Loan
If there’s one thing that small businesses, including e-commerce companies, can turn to for funding, it’s the Small Business Administration (SBA). The SBA 7(a) loan is the most popular type of financing option for e-commerce businesses. Its main goal is to provide established businesses with enough capital to invest large business opportunities. With the SBA backing up the loan, lenders are more confident in approving small businesses for the loan.
Typically, SBA 7(a) loans are used to fund large business expenses such as refinancing existing debts, buying real estate, or for obtaining large equipment necessary for the business operation. E-commerce businesses usually use an SBA 7(a) loans to add to their working capital. The loan has a maturity period of over 7 years. This means that the business must pay off their balance within that period.
SBA 7(a) Loan Qualifications
- Must be in business for the last 2 years
- A well-written business plan
- The business must operate for profit
- Owners must have reasonable equity to invest
5. SBA Microloans
Unlike 7(a) loans, an SBA Microloan doesn’t have time-in-business requirements, making it a good financing option for both start-ups and established e-commerce businesses. Microloans can fund up to $35,000 of your business’ working capital. If a business can present a solid business plan and the owners have a good personal credit score, they can qualify for an SBA microloan.
The interest rates for SBA microloans may vary from lender to lender. However, it usually falls between 8% to 13% and the repayment period can run up to 6 years.
SBA Microloans Qualifications
- Business must be for-profit
- Borrowers must present collateral or personal guarantee
- A credit score of at least 575
- Business owners must have no prior criminal records
Why Work with SMB Compass?
We have helped over a thousand businesses in all the years we have been in business. Now, let us help you. No matter what industry you’re in, you can trust SMB Compass to steer your business in the right direction.