E-commerce Business Loans

What is E-Commerce Business?

Ecommerce businesses 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 has especially seen steep growth since the start of the COVID-19 pandemic. With people advised to stay home to avoid getting the infection, more people turned to 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 marketplace provides them with an easier way to achieve their entrepreneurial goals.

While starting an eCommerce business may be seen as an easy way to start your entrepreneurial journey, eCommerce business owners face a lot of challenges as they navigate the world of electronic shopping. One of these challenges is maintaining a stable cash flow. This is then where eCommerce business loans come in.

Ready to apply for an E-commerce Loan?

Apply Now

What are E-Commerce Loans?

Although eCommerce businesses may face different challenges from 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.

Ecommerce loans are specifically designed to help eCommerce 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 online business needs.

Online sellers need funding now more than ever. With the increasing demand also comes the need for e-commerce businesses to keep up. To do that, they need e-commerce funding.

Ready to apply for an E-commerce Loan?

Apply Now

Why do E-commerce Businesses Need Additional Financing?

Most people seem to think that starting an eCommerce 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 small business loans:

1. Additional Working Capital

Working capital is one of the constant challenges that not only eCommerce businesses face, but also other businesses. While they may have enough amount set aside to keep the business going for a few months, the funds can easily run out. When it does, they need some form of business credit option to turn to.

Start-up e-commerce businesses, specifically, need additional funding for the following months after their launch. To keep up with the expenses, an eCommerce loan can provide the funds needed to address these business initiatives.

2. Develop and Improve Technology

Ecommerce businesses rely on their online platforms to generate sales. That means, their websites must be sophisticated and easy for customers to navigate. If their website runs slow as online traffic increases, they could miss out on potential sales. That calls for the need to upgrade to a better website hosting platform.

But to achieve these goals, an eCommerce business needs money. To avoid compromising the business's cash flow, an alternative financing company can be a good source of additional funding for the business.

3. Purchase Inventory

E-commerce companies need to keep their shelves stocked to supply the demands of their customers. Most eCommerce businesses that sell products usually buy their stocks in bulk to get discounts. However, even if they do get the stocks for a lesser price, it doesn’t take out the fact that they need upfront cash to pay for the inventory.

For this reason, online retailers apply for eCommerce business 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 an eCommerce business that handles large customers and shipments daily. But with that also comes additional expenses incurred. Without the right investment, the cost of 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. That means if you are a startup, or you don’t have assets listed on your balance sheet, you can still qualify for eCommerce funding.

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 its marketing strategies and create better visibility for its store online.

Ready to apply for an E-commerce Loan?

Apply Now

Common Types of E-Commerce Businesses

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 eCommerce businesses have opened up to serve every need of everyone in the online marketplace. Here are the most common types of online businesses:

Dropshipping

Dropshipping is a kind of eCommerce 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, and 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 since most of their customers are probably online, too. Establishing their business online allows them to reach their target audience easier, no matter where they are in the world.

Rent and Loan

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, 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, coffee, and beauty subscriptions.

Ready to apply for an E-commerce Loan?

Apply Now

Financing Options for E-Commerce Businesses

Qualifying for funding is another challenge that many eCommerce 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 to improve their cash flow. The most common financing options that online sellers apply for are lines of credit, business credit cards, merchant cash advances, and SBA loans.

Here’s how each of the e-commerce funding options works:

1. Business Line of Credit (LOC)

Start-up e-commerce companies can benefit the most from business lines of credit for several reasons. 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.

The loan terms will depend on the business’ qualifications. Typically, the higher the credit score and financials are, the better the loan terms will be (i.e., low interest rates).

Business Line of Credit Qualifications:

Must be in business for a minimum of one year
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 is 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
Businesses must operate for profit
Down payment

3. Merchant Cash Advance (MCA)

If your e-commerce business doesn’t qualify from traditional lenders, 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, so they can invest in business growth.

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.

However, the convenience that MCA offers also come at a cost. MCAs are notorious for their expensive interest rates and fees. That is also why financing consultants may advise on exploring other business loan options before settling with merchant cash advances.

Nevertheless, it’s a great funding option to consider if you can’t qualify for other business financing options. Plus, eCommerce businesses will find this merchant cash advance 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 e-commerce business loans, it’s the Small Business Administration (SBA).

The SBA 7(a) loan is the most popular type of financing option for e-commerce businesses mainly because of its low rates, high loan amounts, and long repayment periods. Its main goal is to provide established businesses with enough capital to invest in 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 obtaining large equipment necessary for the business operation. Ecommerce businesses usually use SBA 7(a) loans to add to their working capital. Their business loans have a maturity period of over 7 years. This means that the business must pay off its balance within that period.

The only downside of SBA Loans is that they typically take a few weeks to months to get approved. Aside from that, their documentation process is lengthy, which other businesses may find tedious. However, if you’re willing to go through the application process, you can enjoy the benefits that SBA loans offer.

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
Business must be located within the United States or its territories
Must not qualify for other business loans elsewhere
Businesses must meet the Small Business Administration’s (SBA) definition of a small business

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 eCommerce businesses. However, unlike other business loans, the SBA Microloans are usually offered by credit unions and community banks.

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 one financing company to the next. 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 a personal guarantee
A credit score of at least 575
Business owners must have no prior criminal records
Must be located within the United States or its territories
Businesses must meet the SBA’s definition of a small business

Ready to apply for an E-commerce Loan?

Apply Now

Why Work with SMB Compass?

E-commerce is one of the most lucrative businesses today, and as technology continues to evolve, it will more likely become a big part of the future, too. If you have an established eCommerce 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 eCommerce 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.

Ready to apply for an E-commerce Loan?

Apply Now

E-Commerce Loans

Let's Get Started

What is E-Commerce Business?

What are E-Commerce Loans?

Why do E-commerce Businesses Need Additional Financing?

Common Types of E-Commerce Businesses

Financing Options for E-Commerce Businesses

Why Work with SMB Compass?

Learn more about Business Loans

Business Loans

Financing by Industry

Loans by State

Financing Articles

Small Business Loans In Every State