How Ecommerce Businesses Can Overcome Funding Barriers With the increased demand for online shopping, ecommerce businesses are struggling to get cash to keep up with demand.
By Eden Amirav Edited by Dan Bova
Opinions expressed by BIZ Experiences contributors are their own.
Business is booming for online sellers.According to research by Software Advice, approximately 25% of traditional sellers have turned to ecommerce. This simultaneous increased demand and competition means that ecommerce businesses need more cash to:
Purchase more inventory
Increase online ad spending
Without cash reserves to invest in their businesses, the average e-commerce owner needs to look outwards for funding. Tragically, funding barriers are inhibiting the growth of this thriving industry.
Related: Can E-Commerce Save Retail?
What funding challenges do e-commerce businesses face?
Paradoxically, while liquidity is paramount to e-commerce business success, cash flow is generally tight.
One possible solution is short-term business financing but this often also comes with its challenges and limitations for ecommerce businesses — it's often not a good match. Ecommerce businesses need funding just as any other business does, but since their business model is fundamentally different from that of a traditional retail business, the traditional risk assessment criteria used by lenders do not necessarily apply. Lenders typically base their funding decisions on criteria such as credit score and revenue, while online e-commerce businesses have unique success indicators.
There are three main challenges that block e-commerce businesses from getting appropriate funding:
1. Lenders lack the ability to judge true potential
Online sellers have unique data points that aren't taken into account by traditional lenders and banks, and even by alternative lenders. By basing their assessments on revenue and credit score, they aren't taking into account the potential of the e-commerce business. These unique data points include:
Online ad performance
Digital footprint
Online sales volume
This metric deficiency results in inferior loan amounts and low approval rates that don't reflect the potential and health of the e-commerce business.
Related: The Obsession That's Helping E-Commerce Businesses Make More Money
2. Limited access to specialized ecommerce funding
While many of the top e-commerce platforms offer specialized funding to their customers, they generally only fund a small percentage of online sellers.
3. Traditional loan products are unsuitable
Banks generally favor asset-based funding, which means that the business has to pledge assets as security for the loan. This doesn't make sense for an e-commerce business, which is typically light in assets.
Rewarding ecommerce potential
Increased demand for online shopping means that online sellers really need to up their game if they want to succeed. Scaling typically requires more money to spend on inventory and marketing. Yet, while traditional and even alternative lenders have been holding tight onto their purse-strings since the global health crisis hit, specialized ecommerce lenders have opened their funding doors to businesses that likely wouldn't find the right solution elsewhere.
These ecommerce lenders judge their customers on their potential, with online sales, digital footprint, and ad performance being the key underwriting metrics.
Related: The Pandemic Economy Has Made Ecommerce More Indispensable Than Ever
Specialized ecommerce lenders may ask the business to link its e-commerce platform, such as Shopify for example, to the loan application, as a way to accurately assess online sales as a qualification criterion for the loan. They may also request view-only access to the business's ad platform to analyze ad performance in real-time. The result is higher approval rates for this previously disadvantaged borrower and better terms.
Ecommerce lenders also offer loan products that are best suited to online sellers, including:
Ecommerce Line of Credit
A business line of credit is one of the most flexible types of funding available. Business owners can get approved for a maximum amount that they can draw from on an as-needed basis. This means that they only pay interest on the amount actually drawn and not on the total amount. A line of credit is best to finance immediate expenses such as inventory and marketing costs, and its flexibility and speed are ideal for e-commerce businesses that often need quick cash.
Unsecured Term Loan
An unsecured term loan is a funding option whereby the business can borrow funds without pledging any security for the loan. This is well-suited to e-commerce businesses that usually don't have large business assets to offer as loan security. The loan is fixed term with regular repayments.
Merchant Cash Advance
With a merchant cash advance (MCA), the business gets a lump-sum amount that is repaid by an automatic percentage from future credit and debit card transactions. The repayment period is typically short and repayments are smaller and more frequent.
If you want to get funding for your e-commerce business you need to know where to look. Chances are heading to your bank branch won't yield the best results. Would you go to Starbucks for Krispy Kremes?
