While funding can get hidden behind all the tasks and to-dos of marketing, customer service, and fulfillment, it's one of the most important aspects of running a successful business. In the third quarter of 2022 alone, eCommerce retail businesses got approximately $4.6 billion in financing. Financing is business-critical, whether you want to boost growth, cover expenses during slow months, or experiment in new product lines or niches.
But choosing the right type of financing is just as important as the funds themselves, and eCommerce loans are an underutilized option for many businesses beginning to steady their footing in the online retail space. With the right eCommerce loans, you can fund new projects, manage overheads, and keep your business cash flow positive when it needs it most.
Because it's so valuable, eCommerce financing is an important business decision. In this guide, we take a closer look at what eCommerce business loans are, the different forms they can take, and the benefits they offer. We also examine a few common alternatives so you have the full context of what options best fit your business's growth strategy.
What Are eCommerce Business Loans?
Today, eCommerce business loans are similar to conventional business loans—they're funds that your business is approved to use, with repayment expected based on the agreed-upon loan terms. However, unlike traditional business loans, these financing options are built specifically for online businesses. Here are two key ways that distinction matters:
- Loan approval criteria—in traditional arrangements, lenders would consider your capital, assets, property holdings, and collateral to determine eligibility, the loan principal, and elements like the interest rate. But eCommerce businesses operate completely differently. You may not have a building or equipment—your value is best measured by your revenue, sales volume, and contact lists or subscription customers. Good eCommerce financing options are structured to consider these criteria instead.
- Repayment styles—conventional business loans have rigid repayment plans, and your loan can go into default if you don't pay. But eCommerce loans (depending on the services provider) pull a portion of your sales revenue stream to repay terms and may even pull from the attached direct deposit account, depending on the exact terms.
Different Types of eCommerce Business Loans
Just like there are many different types of business financing available (and we'll look at alternatives to eCommerce loans later), there are different structures of eCommerce-specific loans. Some different structures you may come across throughout your search for financing include:
Funding Firms
These are structured very similarly to loans, but the terminology and repayment terms are different. Funding firms will charge a factor rate in lieu of an interest rate. For example, if you borrow $100,000 at a factor rate of 1.1, you'll pay $10,000 in addition to the borrowed principle.
Store-specific Financing
Major eCommerce marketplaces like Walmart and Amazon, as well as eCommerce website services like Shopify, offer financing to eligible sellers. In programs like these, the financing provider assesses your eligibility based on sales volume and performance, and then they make an offer that you can accept or decline. You rarely apply for the financing or request a specific amount, and the provider controls the entire process.
The funds are also often restricted for use on in-platform expenses, such as Amazon-sponsored ads, Walmart's fulfillment program, etc. You cannot use the funds for expenses on other platforms or your business overall. Your offered financing is also only based on your performance on that platform, not your business overall.
Third-party Growth Capital Loans
Through third-party sites, you can apply for growth capital that takes into account your stores across all supported platforms. For example, a growth capital provider might be able to assess your Shopify store, Walmart Marketplace, and Amazon sales volumes together when putting together a funding package, significantly increasing the total amount of financing available.
Different providers will also offer different terms, such as 1% of your incoming sales revenue until the amount is fully repaid, rather than strict repayment terms that can put you in the negative.
It's important to consider all the pros and cons of each type of eCommerce loan so you can choose the right fit (or the right-fit combination) for optimal growth.
Benefits of eCommerce Business Loans
At this point, you can already see key advantages that make eCommerce loans much more appealing than conventional business loans or other funding options—approval criteria that match your strengths, more flexible use cases, and more convenience, to name just a few. Take a closer look at the benefits these financing options receive so you can see how they align with your business needs now and your overarching business strategy.
More Affordable Repayment Terms
There are two ways to look at affordability when it comes to financing, and both of them are incredibly important:
- Repayment over time—most financing options are inflexible. You may have a weekly or monthly repayment bill due, regardless of how well your store performed the month before. During a slow period, you might default on your loan or cut into your cash flow. If you use financing through credit cards, late payments and interest can rapidly stack up. But flexible third-party growth capital financing that ties to your sales revenue is much safer. These options only take a fraction of your cash flow and can lower or pause payment requirements when sales revenue is low.
- Total repayment costs—before you sign on the dotted line, always calculate the total cost of the financing. In our funding firm example, the repayment cost is $10,000. For credit cards with a 16% APR, repayment will cost $8,877—even if everything gets paid on time. Look for financing that has a repayment cost of 5% or less throughout the entire arrangement.
The right eCommerce business loans are flexible enough to give you repayment schedules and terms that actually fit your day-to-day operations and overall financial needs.
Funding Approval Mechanisms Built for eCommerce Businesses
The value of finding loans specifically built for your business cannot be overstated. Conventional business loans look at criteria that don't apply to online businesses, which can result in your application being declined, limited access to a smaller loan, and unfavorable interest rates or loan terms. Similarly, financing from domain-specific sources will only look at your performance in their specific marketplace, not the wider online ecosystem.
But third-party sources measure factors that actually indicate business maturity and sales strength, and they can look at your business overall instead of just a portion of it. As online businesses are increasingly focused on omnichannel strategies, this will become even more essential.
Access to Capital to Fuel Growth and Cover Turbulent Seasons
In contrast to slow-moving conventional financing, eCommerce business loans are also valuable because they infuse your business with cash when you need it most—at much faster speeds. Depending on the service, you can provide business details and get answers in just a few days, not weeks. This means you can quickly apply for financing to ramp up marketing and inventory ahead of the holiday season, apply for emergency financing if you need funds to cover monthly operations during a slow season, and more.
Flexible Funding for Marketing, Inventory, Operations, and More
Historically, credit card financing has been the most flexible business funding available. You can use a business credit card to buy inventory, renew marketing services, and keep your domain or continue to pay for professional services. This came at a high cost, but it was often more versatile than business loans or website-specific financing programs that restrict what you can use the funding for.
But third-party eCommerce loans offer that same flexibility at much better terms. With a loan, you can pay employee salaries, continue to invest in your marketing campaigns, pay for inventory and fulfillment services, and anything else you decide is important to your business.
Cash Flow Protection
Cash flow is always critical. But many businesses, no matter the industry or the experience of its founders, will encounter several moments when they have to choose between paying all the bills and keeping a bit of cash flow at the ready. Financing is a great option so you can pay all the bills without dipping into savings or drying up a bare minimum cash flow.
Beyond eCommerce Business Loans
Today’s eCommerce business loans are a more modern option that are specialized for the industry. However, online sellers can also obtain funding through more traditional means. Each type has its benefits and drawbacks, so it's essential to perform due diligence and research thoroughly.
Use a Credit Card
Many eCommerce businesses go the easy route: credit cards. Simple to obtain and manage, credit cards can be an acceptable way to access cash when you're starting a business. They aren't an efficient method for accessing the working capital needed to run an eCommerce business—eCommerce works in 60- to 180-day cycles, while credit cards do not.
Related: Capital for eCommerce: Getting It the Easy Way
Credit cards have notoriously high-interest rates, as well as penalties for late payments. If you're unable to pay more than the minimum payment, you could end up spending much more than you should in the long run. This lack of flexibility and personal attention can negatively affect your credit, business, and finances. If you choose to use a personal credit card, issues can even impact your personal credit.
Borrow Money From Friends and Family
Some small business owners opt to borrow from people they know at the beginning of their business venture. This strategy does have benefits.
For example, you are likely to get a better interest rate when borrowing from friends or family. You also may not incur the same penalties for late payment as with a bank or credit card. If you don't have to secure the loan, you can keep your assets in the clear. Additionally, if the lender doesn't report your payments to a credit reporting agency, late payments won't negatively impact your credit score.
That said, for many business owners, this type of lending is not ideal. Any issue you may have when repaying a loan from an acquaintance can put the relationship in jeopardy. If your business fails, you would also be hurting the finances of someone you know. Even with a successful business, this type of loan will generally not improve your credit score or allow you to borrow money at a more favorable rate in the future.
Get a Business Partner
If you're short on cash, one option is to find a business partner who can inject funds into your business. Since you negotiate the terms yourself, this option can be beneficial to both parties. You'll have to give up an agreed-upon amount of equity and profit, but you can include certain milestones in the contract to ensure fair treatment.
One big drawback is the fact that you will no longer be the full owner of the business. Depending on the contract, you may lose certain aspects of strategic and operational decision-making. Since many business owners gravitate to the online seller space because of the freedom and independence that it offers, this may be a dealbreaker.
Related: Financing Options for Amazon Sellers
Adding a partner also requires a great deal of research and due diligence since you are dramatically altering the organizational structure of your business. You'll need to perform a background check and seek legal advice when creating your partnership agreement. Consider these costs compared to the amount of money you need to raise.
Take Out a Small Business Loan
Another well-known funding option is the small business loan. This is actually an umbrella term, as there are several different types of small business loans.
For example, a small business term loan is much like a personal loan. A bank offers you a certain amount of money upfront in return for regular payments at a fixed interest rate. You'll need to fund a specific investment for your business and may need to provide collateral.
Ask for a Line of Credit
A more sophisticated option is a line of credit. Borrowers don't receive all the funds at one time, but instead, you have access to a certain amount of money that you can take out in chunks as needed. The bank then charges interest as soon as you take out the money.
Much like a credit card, this type of financing is convenient because it requires a single approval. You can also make long-term decisions about business spending without worrying whether the bank will approve additional funds. This option can be great for start-ups or businesses whose cash flow varies greatly from month to month.
A line of credit requires a credit check and bank approval, which can cause complications for some small businesses. This type of loan may be more expensive than you initially anticipated because interest accumulation can be challenging to predict. Furthermore, some banks charge maintenance fees for lines of credit and offer interest rates that are higher than other types of loans.
Find Growth Capital and eCommerce Business Loan Options With Onramp
As a business owner, it’s vital to keep all of your financing options ready at your fingertips, and always be evaluating new sources of financing that can make your business stronger. At Onramp, we provide convenient, flexible eCommerce loans and growth capital that you can use to grow or stabilize your business.
Whether you sell on Amazon, have a Shopify site, are part of Walmart Marketplace, or work across all three platforms (and more), we can evaluate your sales volume and offer you financing that takes the full scale of your operations into consideration. We also offer incredibly flexible repayment terms—we won't require repayment unless your store is making money. Reach out today to see what better eCommerce business loans can do for your business.
