E-Commerce Loans

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Dane Panes

December 31, 2020

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E-Commerce Business

What is E-Commerce Business?

E-commerce or electronic commerce is a type of e-business that focuses on the transaction of goods and services over the internet. It can cover activities like online shopping, internet banking, online ticketing, and online auctions. Essentially, any time a person engages in an online business transaction with another person, they’re engaging in e-commerce activity.

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?

Although e-commerce businesses may face different challenges as other companies, they do share one thing in common – the need for additional funding. Just because they’re utilizing the online platform to earn doesn’t mean that they’re free of the other business expenses.

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.

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E-commerce Businesses Need Additional Financing

Why do E-commerce Businesses Need Additional Financing?

Most people seem to think that starting an e-commerce business doesn’t require much capital. That’s not necessarily true. Just like the others, they need to prepare a substantial amount to keep their business in order.
Below are the reasons why e-commerce businesses often need external funding:

1. Additional Working Capital

One of the challenges that e-commerce businesses face is not enough working capital. While they may have enough amount set aside to keep the business going for a few months, the funds can easily run out. Start-up e-commerce businesses, most especially, need additional funding for the following months after their opening. To keep up with the expenses, e-commerce business owners must apply for an e-commerce loan.

2. Develop and Improve Technology

E-commerce businesses rely on their online platforms to generate sales. With that, their websites must be sophisticated and easy for customers to navigate. Moreover, if their website runs slow as online traffic increases, they could miss out on potential sales. With that calls the need to upgrade to a better website hosting platform.
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

E-commerce businesses need to keep their shelves stocked to supply the demands of their customers. However, buying in bulk can create a big gap in the company’s cash flow.

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

Unless you’re running a drop-shipping company, you’ll probably need a warehouse to store your stocks before shipping. This is especially true for businesses that handle large customers and shipments daily. But with that also comes additional expenses incurred. Without the right investment, the cost for warehouse rent and utilities can be steep.

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

Another important business aspect that companies should consider is marketing. Investing in advertising and getting your company on all social media platforms will help the business reach its target audience faster. Thus, increasing the company’s sales. However, good marketing work can be expensive and can exhaust all your business funds. With e-commerce loans, an e-commerce company can implement their marketing strategies and create better visibility for their store online.

Common Types of E-Commerce Businesses in 2020

The advancements in technology and the growing number of internet users have opened up a lot of opportunities for business owners to sell and actually make money online. As a result, different types of e-commerce businesses have opened up to serve every need of everyone in the online market place. Here are the most common types of online businesses in 2020:
E-Commerce types

Dropshipping

Dropshipping is a kind of e-commerce business where companies sell a product from a third-party business. The owners of the products are the ones that will send the goods to the consumers. The dropshipping company doesn’t come in contact with the products. They simply find buyers for the products. Once the transaction is complete, the company takes then takes a percentage of the sale from the distributor (third-party company).

Wholesale and Retail

Wholesale businesses are companies that distribute products and goods in bulk. It’s where retailers usually get their supplies. The online platform serves as a great place for these companies to conduct their business. Establishing their business online allows them to reach their target audience easier, no matter where they are in the world.

Rent and Loan

Rent and loan businesses involve those that provide temporary service or products to consumers, usually real estate or equipment. Airbnb, for instance, is the best example of a vacation rental platform. It allows home or property owners to put their places up for rent, providing tourists with homes they can stay in during their vacation.

Online Subscriptions

Online subscriptions work by providing consumers with a specific product that they like on a monthly, weekly, or daily basis for a fee. For example, by subscribing to an online newspaper, the consumers can get updates on the latest news in the country through email. Other businesses may also offer other types of online subscription plans. The most popular these days are wine, meal, and coffee, and beauty subscriptions.

Financing Options for E-Commerce Businesses

Qualifying for funding is another challenge that many e-commerce businesses face. Since their business structure is different from traditional businesses, not a lot of lenders are willing to risk investing in their 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?

E-commerce is one of the most lucrative businesses today, considering the current situation. If you have an established e-commerce business or are thinking of starting one, you can trust the experts at SMB Compass to give you the best financing advice your business needs. And, our service doesn’t stop there. Once you’ve reached a concrete decision, we’ll help you reach out to different financing companies and make sure that you get only the best business loan terms.

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.

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