Choosing the right ecommerce funding strategy for your online business could be the key to building a more profitable venture. Demand for ecommerce is increasing, with some experts predicting the market will be worth $57.22 trillion by 2032.
However, while there are plenty of opportunities for entrepreneurs to build a successful venture with ecommerce, sometimes you need a little financial help to take the next step.
Ecommerce funding isn’t just valuable when you need to get your company off the ground. It can also help you to scale your business and unlock new opportunities.
The right funding can help you to invest in new products for your portfolio, reach new markets, and even upgrade your marketing campaigns.
Fortunately, there are various different ways to access the cash injection you need to grow. Here’s your guide to some of the most popular funding models, and how you can choose the right solution to give your organization an amazing boost.
Table of contents:
Ecommerce Funding Key Takeaways
Ecommerce funding provides online retailers with the money they need to start or grow their business. Funds can come in a range of formats, from a variety of lenders, but the right funding model for you will depend on a range of factors.
- Choosing the right funding model means carefully assessing your business model, your goals for growth, and your capacity to repay any capital you’re given.
- Each funding method has its own distinct pros and cons to consider. Some require fast repayments, while others limit the amount of capital you get. Some give you more flexibility, while others allow you to maintain more control over your business.
- Shopify capital offers a convenient way to access funds for marketing and products without losing equity in your company.
- Merchant cash advances are a flexible and fast way to access cash for your business, but they can be very expensive, depending on your revenue.
- Revenue-based financing gives you a lot of freedom to borrow significant amounts of money, but there’s a risk your revenue could change over time.
- Credit cards are a very easy way to access rapid funding when you need money straight way, but there are variable interest rates and spending limits to consider.
- Bank loans and lines of credit can be helpful for growing companies, but they may not be suitable for beginners with limited evidence of revenue.
- Grants and equity financing are excellent if you can’t afford to pay money back to a lender, but they can be difficult to access and may give you less control over your business.
Common Types of Ecommerce Funding
There are numerous forms of capital investment and funding that companies can access to facilitate ecommerce growth.
However funding eligibility, repayment terms, and the amount you can borrow will vary for each available method.
Here are some popular funding options to consider:
Shopify Capital
One of the easiest ways for ecommerce companies to access funding, is to apply for support from the ecommerce platform they’re already using. While not all ecommerce platforms offer funding options, some leading organizations like Shopify do.
Shopify Capital is a flexible source of capital companies can use for marketing, inventory growth, and more. You can apply online with minimal effort, and Shopify can approve and deliver your funds in as little as two days.
Most importantly, your payments vary depending on your business revenue. You repay your “loan” as a percentage of your daily sales.
The great thing about Shopify Capital is that you don’t lose any equity in your business, and you can even use the money to hire new team members.
However, your eligibility will depend on numerous factors, including how much money you make from your Shopify store.
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Merchant Cash Advances and Invoice Factoring
A merchant cash advance is a common choice for companies investing in a financial growth strategy. Merchant cash advance providers essentially give organizations an “advance” on the credit they can access, based on their revenue and income.
Companies like Payability can give you a lot of flexibility over the capital you can access, offering support for daily advances, and instant advances based on your monthly revenue.
Lenders draw repayments as a percentage of your revenue based on credit and debit card receipts.
Notably, however, some cash advances can be expensive, with significant interest on the amount you need to repay. Plus, if the market is unstable, it can be difficult to guarantee that you’ll make enough revenue each month to quickly repay what you owe.
Revenue-Based Financing
Revenue-based financing is often considered one of the most flexible options for businesses looking for scale.
You can borrow anything from $10,000 to $5,000,000 from some lenders, and the money can be delivered to your account in as little as 24 hours.
To repay your loan, you’ll give your lender a portion of your turnover each month, which can vary depending on the platform you choose.
For instance, common options include Wayflyer, which offers flexible terms tailored to your company’s needs.
The biggest downside of revenue-based financing is your eligibility depends on the revenue you’re already earning.
This means this form of funding is rarely ideal for startup financing, as new companies can’t always prove they’ll be able to repay the money they access.
Business credit cards
For both new companies and growing organizations looking to access limited extra funding, credit cards are a convenient choice.
It can be easier to apply for a business credit card than a loan, as there are fewer eligibility requirements to meet.
You can also use your credit card to pay for virtually anything, whether you’re purchasing inventory for your store, paying for marketing campaigns, or buying software.
However, compared to other forms of ecommerce funding, the amount you borrow will often be relatively limited.
Additionally, the interest rates can be extremely high, depending on which credit card you choose. You may even have to deal with specific spending limits, which prevent you from making significant purchases as your company starts to grow.
Bank Loans and Lines of Credit
The number of banks offering ecommerce loans has increased in recent years, with the rising demand for online shopping.
Bank loans benefit from relatively low interest rates, and can be extremely flexible, allowing you to spend your money however you choose.
However, since banks are extremely risk adverse, there’s a good chance you won’t be accepted for a loan.
You’ll need to prepare a comprehensive business plan and cash flow forecasts to prove you can repay your loan.
Plus, you may be asked to use personal assets to “secure” your loan.
Lines of credit are a little more flexible. They allow you to access money you can draw on whenever you need it.
You’ll get a fixed credit limit based on your level of turnover, and you can spend it whenever you choose. Common options include PayPal Working Capital.
However, similar to bank loans, it can be difficult for a startup to access funding without an extensive trading history.
Grants and Equity Financing
Grants and equity financing offer companies a way to begin their financial growth strategy, without having to worry about repaying a specific amount of cash.
Equity funding involves essentially giving lenders access to equity in your company, in exchange for money.
The great thing about an equity investment is you access capital alongside support from financial and business experts.
However, at the same time, you’ll be surrendering a lot of control over your company, which can lead to issues as you start to grow and want to make your own business decisions.
Grants, such as solutions from government bodies offering grants, and non-repayable grants don’t require you to hand over equity, or repay your loan.
However, the sums you can access are usually a lot lower. Plus, it’s often very difficult to successfully apply for a grant.
There are strict funding eligibility requirements to consider, and lots of paperwork to complete.
Choosing the Right Ecommerce Funding Option: What to Consider
There’s no one-size-fits-all strategy to choosing the right funding option. The method that works for your business will vary depending on your “growth stage”, and your situation.
To ensure you make the right choice:
- Evaluate your funding needs carefully: Examine your current ecommerce growth strategy, and ask yourself how much funding you’ll need, and how quickly you need to access it. Consider your current revenue, expenses, and growth projections carefully.
- Assess your business risk: Consider the amount of risk involved in each funding options. Sometimes, taking on debt could be a less risky option than giving up equity and shares in your business, particularly if you’re just starting out.
- Research funding options: Take the time to examine the pros and cons of each funding option, and ask yourself which strategy is best suited to your current goals. Make sure you’re aware of the eligibility requirements for each funding strategy.
- Create a business plan: Having a solid business plan is often essential when seeking funding. It can show potential investors that you understand your market, growth opportunities, and the challenges you’ll need to overcome to make a profit.
- Seek professional advice: If you’re unsure which funding strategy is best-suited to your business, consider seeking advice from a financial advisor, lawyer, or accountant. They should be able to give you a better insight into what might work for your business.
Ecommerce Funding Success Stories
Most ecommerce funding providers will be able to share examples of companies that have successfully used their solutions to grow and unlock new revenue.
For instance, Prelude & Dawn, a Shopify ecommerce company, achieved significant growth with Shopify Capital.
Following two rounds of funding, the company was able to move into a new retail space and double its revenue.
At the same time, the flexibility of the funding meant the leader of the company could gradually access funding as and when they needed it to pay for marketing, hire staff, and more.
Hedoine, a fashion brand, used revenue based funding to scale their operations. The company received $50,000 in funding in 2019 to implement a social media marketing strategy.
By the first quarter of 2020, the company’s sales had grown by 1,106% as a result of the new campaigns.
Accessing Ecommerce Funding
While accessing the right ecommerce funding strategy for your company’s growth can be complex, it’s also an excellent way to ensure your organization can scale.
Sometimes, the only way to remain competitive, and unlock new sales in your industry is to unlock additional capital.
The key to success is ensuring you consider your options carefully, and understand the pros and cons of each individual funding option.
Don’t be afraid to seek out extra support if you’re not sure which funding strategy is right for you.
FAQ
The eligibility criteria for ecommerce funding will vary depending on which funding option you choose. Each lender will share specific criteria for their funding solutions on their website. Some common requirements include having a certain amount of experience in your industry, being a registered business, having a good credit score, and meeting minimum revenue thresholds.
Repayment terms can vary drastically among different funding options. With revenue-based financing, your repayments will vary depending on the revenue you earn each month. With grants, you don’t need to repay anything at all. With bank loans and credit cards, as well as various other funding methods, your repayment terms will be set at the beginning of your loan.
Small ecommerce companies can still access funding, but their options may be more limited. The most common options include credit card funding, capital options like Shopify capital, equity investments, government grants, and sometimes revenue-based repayments. You’ll need to check your eligibility carefully before applying for any funding option.
The application process for ecommerce funding can vary depending on the option you choose. Most companies offering funding will ask for basic information to prove your business is registered, and they may ask for insights into your credit score, your revenue, and your expenses. Some lenders will also ask to see a comprehensive business plan, to ensure you can repay what you owe.
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