eCommerce businesses often face cash flow challenges, and choosing the right funding option is essential. Two popular choices are short-term loans and revenue-based financing (RBF). Here's a quick breakdown:
- Short-Term Loans: Fixed monthly payments, predictable costs, often require collateral, and are ideal for steady revenue businesses or one-time expenses.
- Revenue-Based Financing (RBF): Payments are a percentage of revenue, no collateral required, adjusts to sales, and is great for seasonal or growth-stage businesses.
Quick Comparison:
| Factor | Short-Term Loans | Revenue-Based Financing |
|---|---|---|
| Repayment Type | Fixed monthly payments | Percentage of revenue |
| Approval Speed | Slower | Fast (often within 24 hours) |
| Collateral | Often required | Typically unsecured |
| Payment Flexibility | Fixed | Adjusts with revenue |
| Best For | Predictable revenue needs | Seasonal or fluctuating sales |
Choose short-term loans for predictable cash flow needs or RBF for flexibility during growth or seasonal fluctuations.
Short-Term Loans Explained
Short-Term Loan Basics
Short-term loans give eCommerce businesses quick access to funds that are repaid within a specific timeframe. These loans are often used to handle immediate needs like buying inventory or managing seasonal cash flow ups and downs .
Unlike general business loans, these are specifically designed for online retailers. As one industry expert puts it:
"Ecommerce loans are tailored financing solutions that address the unique needs of online retailers, unlike general business loans."
Now, let’s dive into how the repayment process is structured to make cash flow more predictable.
Repayment Structure
Repayments are typically made in fixed weekly or monthly installments over a term ranging from 3 to 18 months .
Short-term loans usually follow one of two pricing models:
| Pricing Model | How It Works | Example |
|---|---|---|
| Interest Rate | A set percentage of the loan principal is charged as interest | The lender determines the interest as a percentage of the loan amount |
| Factor Rate | A multiplier applied to the loan amount to calculate total repayment | For instance, a $50,000 loan with a 1.2 factor rate would require $60,000 in repayment |
Understanding these repayment terms is essential, but lenders also evaluate specific business factors before approving applications.
Qualification Requirements
When reviewing eCommerce loan applications, lenders look at several key aspects :
- Business Performance: Steady revenue and cash flow, often verified through bank statements.
- Time in Business: The required operating history varies by lender.
- Credit Profile: Both personal and business credit scores are considered.
- Industry Standing: The business model and market position are assessed.
Unlike traditional banks or credit unions, alternative lenders are more familiar with the unique challenges of eCommerce businesses. Their criteria are adjusted to better suit the digital commerce world .
Well-known providers like OnDeck and BlueVine have created programs specifically for eCommerce businesses. For example, OnDeck offers business cash advances with terms between 6 and 18 months, while BlueVine provides lines of credit with repayment options of 6 or 12 months .
Revenue-Based Financing Basics
RBF Definition
Revenue-based financing (RBF) is a funding method where businesses receive capital in exchange for a percentage of their future revenue . Typically, the funding amount is capped at about one-third of a company’s annual recurring revenue or 4–7 times its monthly recurring revenue . This makes RBF an appealing option for eCommerce businesses with steady and predictable income. Let’s take a closer look at how these payments are structured.
Sales-Based Payments
RBF providers usually take 6%–12% of a business's monthly revenue . This flexible repayment model helps businesses manage cash flow, especially during seasonal highs and lows. The RBF market is expected to grow significantly, reaching an estimated $42.3 billion by 2027 .
Here’s how payment adjustments work in different revenue scenarios:
| Revenue Scenario | Payment Adjustment | Business Impact |
|---|---|---|
| High Sales Month | Higher Payment Amount | Faster Repayment Progress |
| Average Sales Month | Standard Payment Amount | Steady Repayment Pace |
| Low Sales Month | Lower Payment Amount | Reduced Financial Strain |
RBF Requirements
Unlike traditional loans, RBF providers prioritize business performance metrics over personal credit scores . Here are the main factors they consider:
-
Revenue Requirements
Most providers require businesses to meet a minimum revenue threshold. For instance, Onramp Funds mandates at least $3,000 in average monthly sales . -
Business Structure
To qualify, businesses generally need to be a legal U.S. entity, use a supported eCommerce platform, and have a U.S.-based bank account . -
Performance History
Providers assess sales history, cash flow patterns, and any existing debt obligations .
This performance-focused approach makes RBF a practical option for growing businesses with consistent revenue streams.
Comparing Funding Options
Payment Methods
The way payments are handled is a major difference between short-term loans and revenue-based financing (RBF). Short-term loans come with fixed monthly payments, while RBF adjusts payments according to your revenue levels .
| Payment Aspect | Short-Term Loans | Revenue-Based Financing |
|---|---|---|
| Payment Schedule | Fixed monthly payments | Variable, based on revenue |
| Term Length | Typically 3–12 months | Until a repayment cap is met |
| Payment Flexibility | Fixed, regardless of sales | Adjusts with sales |
| Default Risk | Higher if payments are missed | Lower, as payments scale with revenue |
| Early Repayment | May include penalties | No penalties; faster repayment possible with strong sales |
Now, let’s look at how the fee structures of these options differ.
Fee Structures
The way fees are calculated also sets these two options apart. Short-term loans rely on standard interest rates, while RBF uses a funding multiple based on the amount borrowed .
| Fee Component | Short-Term Loans | Revenue-Based Financing |
|---|---|---|
| Initial Fee Type | Interest rate | Funding multiple (1.3× to 3× typical) |
| Total Cost Predictability | Fixed upfront | Varies with repayment speed |
| Typical Payment Range | Fixed amount | Variable percentage of revenue |
These different fee structures can significantly influence how businesses manage their cash flow.
Cash Flow Effects
The impact on cash flow varies depending on the financing choice. For example, Pillow Cube chose RBF during a growth phase to reduce cash flow strain.
| Cash Flow Aspect | Short-Term Loans | Revenue-Based Financing |
|---|---|---|
| During Peak Sales | Fixed payments are manageable | Payments increase, speeding repayment |
| During Slow Periods | Fixed payments may strain resources | Payments decrease, easing cash flow |
| Seasonal Business Impact | Can be difficult to manage | Naturally adjusts to sales cycles |
| Working Capital Effect | Predictable but inflexible | Flexible but variable |
For eCommerce businesses using platforms like Amazon, Shopify, or TikTok Shop, RBF providers such as Onramp Funds offer funding solutions that align with sales performance. This makes it easier to manage cash flow during both busy and slow seasons.
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Choosing Your Funding Option
When it comes to financing, the best choice depends on how your business generates and manages its revenue.
When to Consider Short-Term Loans
Short-term loans are ideal for businesses with steady income streams that can handle fixed payments. These loans are particularly useful for specific situations like one-time purchases, unexpected expenses, or bridging cash flow gaps.
| Business Scenario | Why It Works |
|---|---|
| Predictable Revenue | Payments align with regular income |
| One-Time Purchases | Clear repayment schedule |
| Emergency Expenses | Fast access to funds |
| Bridge Financing | Covers temporary cash shortages |
When to Consider Revenue-Based Financing
Revenue-based financing (RBF) is a better fit for businesses with fluctuating or seasonal income, like eCommerce companies. Payments adjust based on sales, making it a flexible option. For instance, Jeremy, the founder of Kindfolk Yoga, shared:
"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."
| Business Type | Why RBF Works |
|---|---|
| Seasonal eCommerce | Payments match sales cycles |
| Subscription Models | Fits recurring revenue patterns |
| Growth-Stage Companies | Scales with business expansion |
| Marketing Campaigns | Repayment adjusts as ROI grows |
How to Decide: A Quick Business Assessment
Use this guide to determine whether a short-term loan or RBF suits your needs:
| Assessment Factor | Choose Short-Term Loan If | Choose RBF If |
|---|---|---|
| Revenue Pattern | Income is consistent | Sales fluctuate or are seasonal |
| Growth Stage | Established with steady cash flow | Scaling or early-stage growth |
| Funding Need | Approval time isn’t an issue | Need funds quickly |
| Payment Structure | Fixed payments are manageable | Prefer payments tied to revenue |
| Collateral | Assets are available | No collateral is preferred |
Real-world examples highlight RBF's potential. A SaaS company grew its customer base by 200% through marketing investments , while a health-tech startup boosted revenue by upgrading its technology .
Steps to Assess Your Business
- Look at your sales patterns over the past year.
- Evaluate your growth potential and when funding is needed.
- Confirm your eCommerce platform supports financing options.
For eCommerce businesses earning at least $3,000 monthly, providers like Onramp Funds offer flexible financing options tied to your sales. Taking the time to evaluate these factors ensures your funding choice supports both your current cash flow and future growth plans.
Conclusion
When choosing funding, it's crucial to align it with your business model and cash flow needs. The rise of revenue-based financing (RBF) from $901.41 million in 2019 to $42.3 billion by 2027 highlights the growing interest in flexible financing options.
Key Comparison: Short-Term Loans vs. Revenue-Based Financing
| Factor | Short-Term Loans | Revenue-Based Financing |
|---|---|---|
| Repayment Type | Fixed monthly payments | A percentage of revenue |
| Approval Speed | Fast approval | Typically within 24 hours |
| Cost Structure | High APRs (up to 400%) | Fixed fee tied to future revenue |
| Cash Flow Impact | Can strain during slow periods | Adjusts with revenue fluctuations |
| Best For | One-time purchases, emergencies | Scaling operations, seasonal businesses |
Providers like Onramp Funds have proven effective for eCommerce businesses, helping them increase revenue by an average of 60% . Their payment flexibility aligns with seasonal sales, as highlighted by Torrie V., founder of Torrie's Natural:
"Onramp has simplified cash flow by automating everything: easy to request, set it and forget it payments - quick and fast!"
Short-term loans are ideal for urgent needs or one-time expenses, while RBF offers a more adaptable solution for businesses aiming to grow alongside their revenue. Choose the option that best supports your business goals and financial health.
