Published Dec 02, 2021

e-Commerce Lending: Loan Options and Alternatives

Table of contents

You have to spend money to make money, goes the old adage.

As an e-commerce seller, you probably echo with the saying more than you would like to admit. You pay people to help manage your online business, purchase inventory to sell them at a profit, and spend money on ads to bring in customers.

But a company’s cash reserves are not always sufficient to meet its business needs. In fact, over one-third (37%) of companies applied for financing in the past year, according to the 2021 Small Business Credit Survey

If the figure does not impress, think about the 47% of non-applicants who needed loans but did not apply. Evidently, there exists a huge demand for financing in one form or another. 

e-Commerce lending is a topic pertinent to anyone who engages in an online business. To help e-commerce sellers make better financing decisions, this article covers the pros and cons of different lending options as well as some alternatives to e-commerce loans.

  • Why do you need e-commerce loans?
  • What are the available e-commerce lending options?
  • What are the alternatives to e-commerce loans?
  • Choco Up’s pick: Revenue-based financing
  • Some last words

Why do you need e-commerce loans?

E-commerce loans provide you with additional capital. While each business has unique needs, here are some common reasons for obtaining e-commerce loans:

  • To meet working capital needs
  • To make payments on existing debts
  • To purchase inventory or supplies to fulfill contracts
  • To increase cash reserves and maintain liquidity
  • To support business growth

What are the available e-commerce lending options?

1. Business lines of credit

A business line of credit (LOC) is a revolving loan which gives you access to a fixed amount of funds. Within the approved credit limit, you can withdraw money as you need, and pay interests only on the amount borrowed. Once repaid, that amount becomes available for you to use again.
For e-commerce sellers, a business line of credit gives you quick access to funds, which can be used to meet short-term working capital needs such as:

  • Inventory purchase
  • Advertising
  • New hires 
  • New product launches

Pros of business lines of credit

  • Flexible borrowing: A line of credit works like a credit card, allowing you to borrow against a credit limit from time to time. There is no need to apply for a loan every time you need extra money.
  • Help build business credit: Building good business credit is important in many ways. It increases the chances of your company being approved for loans, getting higher loan amounts, lower interest rates and negotiating better payment terms with suppliers. However, business credit takes time to build. Applying for a business line of credit and making repayments on time is a good way to boost your business credit.

Cons of business lines of credit

  • Low borrowing limits: In business lines of credits, there is a limit to the maximum amount of funds you can draw. The borrowing limit is usually lower than that in other lending options.
  • Extra charges and fees: In addition to interest, you may be charged other fees on your business line of credit, such as account set-up fees, annual fees, transaction fees, late payment fees, etc.
  • Complicated application procedures: To apply for a business line of credit, there is a lot of documentation to submit. It could take weeks or months to prepare all of your company’s historical financial statements, tax returns, business planning reports, etc. Regular reviews may also be conducted to continually assess your eligibility for a business line of credit.
  • Long turnaround time: The approval process could take months.
  • Difficult to qualify: Your company must be in business for a certain period of time (e.g. 2 years or more) in order to be eligible for a business line of credit.

2. Cash flow loans

A cash flow loan is a term loan provided based on your company’s past and forecasted cash flow. It is typically used by e-commerce businesses to fulfill working capital needs, such as payroll and inventory.
As a form of unsecured loan, cash flow loans do not require pledging of tangible assets as collateral. You may, however, be required to sign a personal guarantee over the loan.
Cash flow loans are suitable for e-commerce companies which are currently in short supply of working capital, but expect strong cash flows in the future. 
For the following types of businesses, cash flow lending could also give you access to capital which may not be available via other routes:

  • Your company has not been in business long enough to build a strong credit history
  • You do not have adequate physical assets to back a loan

Pros of cash flow loans

  • No physical collateral required: As its name indicates, this type of loan is cash flow-based, not asset-based. Collateral is not required to secure a cash flow loan.
  • Less emphasis on history: Your company’s capacity to generate future cash flows is the major determinant of whether you will be approved for a loan.
  • Quick access to capital: Compared to other lending options (e.g. traditional bank loans), approval for cash flow loans has relatively short turnaround time.

Cons of cash flow loans

  • Rigid repayment schedule: Repayments in fixed amounts must be made on schedule.
  • Higher interest rates: Cash flow loans are usually sought by companies that do not have robust credit histories or lack tangible assets to back the loans. Therefore, lenders would charge higher interest rates to compensate for greater default risks.
  • Automatic repayment: Some lenders may require automatic payments to cover the increased risks of lending to you. For example, installments of repayment may be taken directly from your bank, PayPal or merchant processing account.

3. Traditional bank loans

Commercial bank loans are term loans provided by bank lenders for your business to meet your financial needs. Interests will be charged on outstanding balances, and you need to make repayments according to a fixed schedule.
To apply for a bank loan, you are usually required to provide property or equipment as collateral. In the event of default, these assets will be seized and sold by the lender to recoup its loss. 
Being a conventional lending option, bank loans may not be readily available for e-commerce companies for the following reasons:

  • Newer businesses may not have the requisite history to pass the credit assessments conducted by banks
  • Fast-growing businesses with high risk-return profiles are generally not favoured by bank lenders
  • Asset-light e-commerce sellers may not have sufficient assets to pledge as collateral
  • E-commerce companies may not have standard financial statements 

Pros of bank loans

  • Clear loan terms: Interest rates and repayment amounts are clearly laid out in the loan agreement. No unpleasant surprises.
  • Relatively low interest rates: Compared with other lending options (e.g. cash flow lending), bank lenders usually charge lower interest rates.

Cons of bank loans

  • Rigid repayment schedule: Repayments in fixed amounts must be made on schedule.
  • Complicated application procedures: Extensive paperwork needs to be done. These include filling out lengthy loan application forms, preparing a business plan, submitting your company’s historical financial statements, but to name a few.
  • Long turnaround time: After you apply for a commercial bank loan, it could be months before you get a decision.
  • Collateral required: Bank lenders usually require that you provide physical assets to serve as collateral for the loan.
  • Difficult to qualify: There may be a “time in business” requirement (e.g. your company must have operated for at least 2 years in order to apply for a loan). In the loan approval process, bank lenders place heavy emphasis on the credit history of your company. Newer businesses may find it hard to pass credit assessments.
  • Restrictive covenants: To limit the risks of lending to you, bank lenders may impose restrictions on how you use the borrowed money.
  • Rigid repayment schedule: Bank loans have fixed repayment schedules. This could put a strain on your company’s cash flow if revenue performance falls below expectation. Defaulting on a loan could harm your business credit.

4. Inventory Loans

Inventory loan is a form of asset-based term loan in which a lender provides you with capital to purchase inventory.

While lenders usually require equipment or real estate assets as collateral for bank loans, an inventory loan is collateralized by the inventory you purchase. In other words, the creditor will seize and sell your inventory if you fail to repay.

Inventory loans are helpful for preparation of peak seasons, during which you need to make bulk purchases of goods that tie up a significant amount of capital.

However, this type of loan may not give you sufficient funds to support business growth, such as product launch or market expansion.

Pros of inventory loans

  • Less stringent requirement on collateral: Instead of securing the loan with expensive business assets, the only collateral is your inventory.
  • Easier to qualify: Your company's credit history is not the major factor which determines whether you qualify for an inventory loan. Your eligibility for loan and loan amount depend on the estimated value of your inventory. The “time in business” requirement is usually less stringent than that in other lending options. Companies whose operating histories are as short as 6-12 months could apply for inventory loans.

Cons of inventory loans

  • Loan amount limited by inventory value: The loan amount is usually limited to 20%-65% of your inventory’s appraised value.
  • Relatively high interest rates: Inventory loan providers usually charge higher interest rates than other lenders.
  • Automatic repayment: Instead of repaying on a fixed schedule, some lenders take the cash directly from your inventory sales.
  • Loan covenants: Loan covenants may be imposed by the lenders. For example, you may be asked to use the borrowed funds only for inventory purchase, or to have the collateralized inventory covered by insurance.
  • Larger installment payments: Inventory loans are short-term loans. For inventory loans that require repayment in installments, each installment could be large.
  • Unpredictable risks tied to sales performance: Repayment of inventory loans is largely dependent on selling inventory to customers. Weak sales could negatively affect your ability to repay.

Learn more: Inventory Financing: Everything You Need To Know

What are the alternatives to e-commerce loans?

When your business needs extra money, borrowing is probably the first idea that crosses your mind. Yet, commercial loans are often inefficient, expensive and inflexible for e-commerce companies to take out. 
As alternatives to e-commerce loans, below are some options to consider.
E-commerce financing options:

  • Revenue-based financing
  • Invoice financing

E-commerce funding options:

  • Bootstrapping
  • Angel investors
  • Venture capital
  • Crowdfunding

Learn more: Merchant Cash Advance (MCA): Everything You Need To Know

Choco Up’s pick: Revenue-based financing

There are so many e-commerce funding and financing options that it is improbable to discuss, in one article, each of them at length. 

That being said, revenue-based financing is an alternative financing method worthy of e-commerce sellers’ attention.

What is revenue-based financing?

Revenue-based financing (RBF) is a form of financing in which companies raise capital based on future revenue. Repayments are not made in fixed installments, but through a small percentage of your company’s monthly revenue. Total repayment is capped at a predetermined amount, which is usually assessed at capital plus a flat fee.

What are the advantages of revenue-based financing?

An old maxim in project management goes like this — you can have it fast, cheap or good, but you cannot have it all.
In the financing world, however, revenue-based financing is a prime example to show that these features are not mutually exclusive. 
Below are some advantages of revenue-based financing to illustrate this.

  1. Flexible repayment: Repayment is assessed at a predetermined percentage of your company’s monthly revenue. In a particular month, you repay more if you earn more, repay less if you earn less.
  2. No interest on outstanding balance: The only cost of capital is a one-off flat fee. No interests accrue over time.
  3. No collateral required: You may apply for revenue-based financing even if your company does not have a lot of valuable physical assets.
  4. No restrictive covenants: You can use RBF funding in any way you want, allowing you to grow at your own pace and in your own way.
  5. Streamlined application process: Application is quick and easy. To apply for funding at Choco Up, you simply need to complete an online form and connect your sales accounts (e.g. Google Analytics or Stripe). Our data integration platform will work its magic and return with a preliminary offer.
  6. Non-dilutive: RBF platforms (such as Choco Up) do not take equity in return for providing funds to you.

Is revenue-based financing right for your business?

Despite the various advantages of revenue-based financing, this financing method is not suitable for all kinds of companies.
To begin, pre-revenue businesses may not be eligible for revenue-based financing as repayment is dependent on your company’s income. Businesses with modest or unstable revenue performance may also find it difficult to qualify for RBF funding.
On the other hand, fast-growing companies which aim at leveraging funding to generate considerable revenue would benefit most from RBF funding.

Revenue-based financing vs. e-commerce lending

Last but not least, Choco Up has put together a table to help you compare the pros and cons of different lending and financing options:

Business lines of credit Cash flow loans Traditional bank loans Inventory loans Revenue-based financing
Application process Complex and time-consuming Relatively simple Complex and time-consuming Relatively Siple Very simple
Approval process Slow Quick Slow Quick Quick
Collateral Not required Not required Property or equipment Inventory Not required
Fees Interest on loans Flat fee only
Interest on outstanding balance? Yes Yes Yes Yes No
Borrowing limits Low High High Medium High
Borrowing amount Flexible (up to the credit limit) Fixed Fixed Fixed Flexible
Available capital Usually little Depends on cash flow generatio capacity Depends on credit history Capped at percentage of inventory value Depends on revenue performance
Repayment schedule Flexible Fixed Fixed Fixed Flexible
Repayment amount Flexible Fixed (principal plus interest) Proportional to monthly revenue
Restriction on use of capital No Usually no Usually yes Usually yes No

Some last words

E-commerce is a modern business model which requires a contemporary approach to financing.

While business lending played a pivotal role in financing companies in the past, limitations emerge as new forms of businesses call for a different set of needs.

At Choco Up, we understand the needs of fast-growing e-commerce companies. Having worked with hundreds of businesses, we serve as a data-driven financing platform which provides you with a hassle-free funding application experience, quick access to capital and flexible repayment.

To learn more about what we do, check out our client success stories or apply for funding now!