If you're running an eCommerce business and need funding, you have two main options: secured loans and unsecured loans. Here's the quick breakdown:
- Secured loans require collateral (like inventory or property) and offer lower interest rates and higher borrowing limits, but you risk losing assets if you can't repay.
- Unsecured loans don’t need collateral, making them faster to access, but they usually come with higher interest rates and stricter credit requirements.
Key Uses for Loans in eCommerce:
- Buying inventory
- Running marketing campaigns
- Upgrading websites or technology
- Managing cash flow
Quick Comparison
| Feature | Secured Loans | Unsecured Loans |
|---|---|---|
| Collateral | Required | Not required |
| Interest Rates | Lower (5-25% APR) | Higher (6-36% APR) |
| Approval Speed | Slower (collateral evaluation) | Faster |
| Loan Amounts | Higher limits ($50k–$5M) | Lower limits ($10k–$50k) |
| Risk | Losing assets if defaulting | Credit score impact |
Choose secured loans if you have valuable assets and need larger amounts with better terms. Opt for unsecured loans if you need quick cash and don’t have collateral. For eCommerce-specific funding, options like revenue-based financing can offer more flexibility.
Let’s dive into the details to help you make the right choice.
Secured Loans Explained
Secured Loan Basics
Secured loans require borrowers to pledge collateral - valuable assets that the lender can claim if the loan isn't repaid. For eCommerce businesses, this often includes:
- Business Equipment: Office tools, machinery, or other equipment.
- Inventory: Current stock available for sale.
- Real Estate: Commercial properties owned by the business.
- Financial Assets: Bank accounts, investments, or stocks.
- Outstanding Invoices: Customer bills that haven't been paid yet.
- Blanket Liens: A claim on multiple business assets.
Lenders usually expect the collateral to cover 80% to 100% of the loan amount . For example, a $100,000 loan would require collateral valued between $80,000 and $100,000.
Let’s dive into the advantages and challenges of secured loans.
Secured Loans: Benefits and Drawbacks
Here’s a quick look at how secured loans can help - or complicate - your eCommerce business:
| Aspect | Benefits | Drawbacks |
|---|---|---|
| Interest Rates | Lower rates (5-25% APR) | Risk of losing assets if you default |
| Qualification | Easier approval, even with bad credit | Valuing collateral can delay funding |
| Loan Amounts | Higher borrowing limits | Using inventory might restrict operations |
| Terms | Flexible repayment options | Personal guarantees are often required |
One key issue for eCommerce businesses is using inventory as collateral. While it might seem like an easy option, many lenders are hesitant to accept inventory because it can be hard to resell . Worse, if your inventory is seized, your ability to generate revenue could take a serious hit .
For larger funding needs, SBA loans over $50,000 often require collateral . These loans come with competitive interest rates ranging from 4% to 13% , making them a good choice for established businesses with appropriate assets.
Before committing to a secured loan, carefully assess your assets and potential risks. For instance, using warehouse inventory as collateral might get you better terms, but losing that inventory could halt your operations entirely.
Unsecured Loans Explained
Unsecured Loan Basics
Unsecured loans provide funding for eCommerce businesses without requiring collateral. Instead, lenders evaluate factors like your business's creditworthiness, financial stability, and income history.
To qualify, most lenders expect minimum monthly sales of $20,000, at least six months of operating history, a good credit score, proper business registration, and up-to-date financial records .
Lenders often require a personal guarantee, which holds borrowers personally accountable while offering flexibility in funding . These loans come with both perks and challenges, which are outlined below.
Unsecured Loans: Benefits and Drawbacks
Unsecured business loans come with specific pros and cons for eCommerce businesses:
| Aspect | Impact on eCommerce Business |
|---|---|
| Approval Speed | Funds can be accessed quickly, often within a few days. |
| Documentation | Limited paperwork, focusing on business performance metrics. |
| Risk Level | No collateral is at risk, but personal liability may apply. |
| Interest Rates | Rates tend to be higher due to the added risk for lenders. |
| Usage Flexibility | Funds can be used for inventory, marketing, or operations. |
Interestingly, large banks approve only 25% of loan applications, and only 31% of small businesses receive the full amount they request .
These loans are particularly helpful for managing seasonal demand, funding digital marketing campaigns, upgrading technology, or improving cash flow .
"It's best to carefully evaluate all your options so you can make the right financing decision for your business" .
Before applying, consider using prequalification tools offered by lenders. These tools help you gauge your approval chances without affecting your credit score . Weighing the pros and cons carefully can guide you to the right financing solution for your eCommerce needs.
Comparing Secured vs Unsecured Loans
Side-by-Side Loan Comparison
When deciding between financing options, it's important to understand the main differences between secured and unsecured loans. Here's a clear, side-by-side breakdown of their features:
| Feature | Secured Loans | Unsecured Loans |
|---|---|---|
| Borrowing Limits | $50,000 – $5 million | $10,000 – $50,000 |
| Interest Rates | Generally lower | 6%–36% |
| Approval Time | Longer due to collateral evaluation | Faster approval process |
| Repayment Terms | Up to 25 years | Typically within 5 years |
| Risk Level | Risk of losing collateral | Credit score impact |
| Credit Requirements | More flexible | Usually require a higher credit score |
| Collateral | Required (business/personal assets) | Not required |
| Personal Guarantee | May be required | Typically required |
As one industry expert points out:
"Because you could lose property if you default, secured business loans are not without risk. However, in exchange for taking that risk, you will find secured loans may have lower interest rates than unsecured loans" .
Best Loan Options for eCommerce
The right loan for your business depends on your assets and credit profile. Secured loans are better suited for businesses with significant assets, while unsecured loans cater to those needing quick access to funds. Here's when each type works best:
Secured loans are ideal for:
- Established businesses with valuable assets.
- Long-term investments, such as expanding warehouse space.
- Larger funding needs exceeding $50,000.
- Companies looking to secure lower rates by leveraging assets.
- Businesses with lower credit scores seeking better terms.
Unsecured loans are better for:
- Rapidly growing online stores needing fast capital.
- Seasonal inventory purchases.
- Marketing campaigns.
- Technology upgrades.
- Businesses without substantial physical assets.
Platforms like Amazon Lending provide funds ranging from $1,000 to $750,000 at rates between 6% and 16%, while Shopify Capital offers up to $1 million .
Revenue-based funding is another option, where repayments are tied to your sales performance, offering flexibility that traditional loans often lack .
"Mercury offers access to competitively-priced capital with fixed payback schedules, unlike revenue-based payback funding options. Combine that with their great financial solutions and it's a no-brainer" .
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Secured vs Unsecured Business Loans: A Complete Guide
Onramp Funds: eCommerce-Specific Funding
Onramp Funds offers a funding solution designed specifically for eCommerce businesses. For those comparing secured and unsecured options, Onramp provides a modern financing model tailored to the unique needs of online sellers.
Onramp Funds Features for Sellers
Traditional loans often fail to meet the demands of eCommerce businesses. Onramp Funds fills this gap by offering equity-free funding and seamless integration with platforms like Amazon, Shopify, BigCommerce, WooCommerce, Squarespace, Walmart Marketplace, and TikTok Shop. Instead of relying on personal credit scores, Onramp evaluates real-time sales data through these integrations, allowing funding offers to be made within 24 hours.
| Feature | Onramp Funds | Traditional Loans |
|---|---|---|
| Approval Process | Based on store performance | Credit score dependent |
| Funding Speed | Within 24 hours | Several weeks |
| Platform Integration | Direct integration with eCommerce platforms | Manual documentation |
| Minimum Requirements | $3,000 monthly sales | Extensive credit history |
| Cost Structure | Fixed fee (2–8%) | Interest rates + fees |
By leveraging these integrations, Onramp ensures quick, performance-driven funding and offers a repayment model designed with eCommerce sellers in mind.
Sales-Based Repayment Structure
Onramp Funds uses a revenue-based financing system that adjusts repayment according to cash flow, unlike the fixed monthly payments required by traditional loans. Businesses typically repay around 1% of their monthly sales volume , which is especially helpful during seasonal fluctuations.
For example, with a $100,000 advance:
- Onramp Funds charges approximately $5,000 in total fees.
- Traditional bank loans (12% APR) cost around $6,618.
- A standard merchant advance (1.1 factor rate) totals $10,000 .
This repayment flexibility is crucial, as poor cash flow is a factor in 29% of startup failures . By aligning repayments with daily sales, Onramp helps businesses maintain cash flow while reinvesting in growth.
"Onramp offered the perfect solution with revenue‐based financing to secure the capital we needed to invest in inventory and pay it back at a reasonable time frame once we made sales. The process was quick, easy, and the support was great."
Nick James, CEO of Rockless Table, shared his experience:
"Applied, got our offer, and had cash in our bank account within 24 hours. Their Austin, TX based team was very professional and helped me deploy the cash to effectively grow our business."
Making Your Loan Decision
When deciding on a loan, consider your assets, credit score, and funding requirements. If your business lacks physical assets, unsecured loans might be the way to go. On the other hand, if you have substantial assets or are open to using personal property as collateral, secured loans could be a better fit. Here's a quick comparison to help you decide:
| Business Scenario | Recommended Loan Type | Key Advantage |
|---|---|---|
| Strong credit score (700+) | Unsecured loan | Quick access to funds without collateral |
| Limited physical assets | Unsecured loan | No need to put up collateral |
| Large funding needs ($25k+) | Secured loan | Lower interest rates and higher limits |
| Poor credit history | Secured loan | Easier to qualify |
| Urgent cash flow needs | Unsecured loan | Faster approval process |
For loans over $25,000, the SBA typically requires collateral . While unsecured loans provide more flexibility, they often come with higher interest rates to compensate for the lender's risk .
CNBC Select: "As a general rule, only borrow what you know you need and can afford to pay back."
To make the best choice, follow these steps:
- Pre-qualify for loans to understand your options.
- Calculate total costs to avoid surprises down the road.
- Review repayment terms to ensure they work for your business.
- Align funding with your growth plans to maximize impact.
These tips will help you find a loan that fits your needs and supports your eCommerce business effectively.
