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
- New hires
- New product launches
Pros and cons of business lines 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 and cons of cash flow loans
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 and cons of bank loans
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 and cons of inventory loans
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.
- Revenue-based financing
- Invoice financing
- Angel investors
- Venture capital
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.
- 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.
- No interest on outstanding balance: The only cost of capital is a one-off flat fee. No interests accrue over time.
- No collateral required: You may apply for revenue-based financing even if your company does not have a lot of valuable physical assets.
- 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.
- 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.
- 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:
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.
About Choco Up
Founded in 2018, Choco Up is the leading revenue-based financing platform in Asia Pacific, offering non-dilutive growth capital to fast-growing companies.
Currently covering more than 10 markets and 10 sectors, Choco Up has helped hundreds of businesses capture growth while protecting equity upside.
Click here to apply for RBF funding!