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e-Commerce Lending: Loan Options and Alternatives

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.

Written and published by

Brian Tsang

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.

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?

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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

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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 and cons of business lines of credit‍

Advantages	Explanation
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.

Disadvantages	Explanation
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

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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

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Advantages	Explanation
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.

Disadvantages	Explanation
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.

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3. Traditional bank loans

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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

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Advantages	Explanation
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.

Disadvantages	Explanation
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.

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4. Inventory Loans

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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

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Advantages	Explanation
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.

Disadvantages	Explanation
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.

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Learn more: Inventory Financing: Everything You Need To Know

What are the alternatives to e-commerce loans?

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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

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

Choco Up’s pick: Revenue-based financing

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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?

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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.

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What are the advantages of revenue-based financing?

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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?

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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

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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 simple	Very simple
Approval process	Slow	Quick	Slow	Quick	Quick
Collateral	Not required	Not required	Property or equipment	Inventory	Not required
Fees	Interest on loan	Interest on loan	Interest on loan	Interest on loan	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 a percentage of inventory value	Depends on revenue performance
Repayment schedule	Flexible	Fixed	Fixed	Fixed	Flexible
Repayment amount	Flexible	Fixed (principal plus interest)	Fixed (principal plus interest)	Fixed (principal plus interest)	Proportional to monthly revenue
Restriction on the use of capital	No	Usually no	Usually yes	Usually yes	No

Some last words

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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 fundingnow!

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!

RBF

e-Commerce Lending: Loan Options and Alternatives

Why do you need e-commerce loans?