How to Get Short-term Financing for Your eCommerce Business and Why You Should

Introduction

Just like brick-and-mortar stores, eCommerce businesses have to maintain a sufficient stock of products. But what happens when an eCommerce business is low on funds—or runs out of money altogether?

When your eCommerce business doesn’t have enough working capital to operate, short-term financing becomes essential. Short-term financing allows businesses to purchase the inventory they need and then cover the cost of interest from their profit margins.

Why Short-term eCommerce Financing Makes Sense

Whether it’s a line of credit or a short-term loan, getting a financing solution allows eCommerce businesses to maintain a positive cash flow. This makes it possible to buy inventory, cover regular business expenses, and pay staff.

Short-term financing is not so different from traditional financing solutions. As with any loan, you need to pay back the amount you borrow with interest within a specific period. The most common types of alternative eCommerce funding involve supply chain financing, working capital loans, and revenue financing.

Once you understand how a short-term financing solution can help your eCommerce business, your next task is to figure out which type of loan is your best option.

The Mechanics of E-Commerce Revenue Financing

In layman’s terms, the financing company or individual provides the required capital to a business owner. The business owner covers the cost of borrowed amount from the revenue produced by their eCommerce platform.

Just as with traditional long-term financing, you will have to meet the lender’s requirements in order to secure the funds. Usually, the lender has a team analyze the quantitative and qualitative aspects of your business to assess the risks and requirements of the financing. This analysis can include your eCommerce business’ sales performance, annual cash flow, material management, and annual turnover rate.

The Practicality of Short-term Financing

For an eCommerce business, short-term financing is an extremely practical way to get funding.

Ordinarily, it can take companies years to achieve certain business goals. Short-term financing, however, levels the playing field, allowing eCommerce businesses to reach their goals faster. This type of financing also allows eCommerce business owners to reinvest in order to achieve otherwise unreachable growth.

The Need for a Short-term Financing Solution

Whether you’re just starting out or have been in business for some time, there is a good chance that at some point, you will need more money if you want to expand.

Bookkeeping, accounting, and cash flow analysis can help you optimize your cash flow in order to maintain adequate working capital at all times for operational expenses. Short-term financing can then be used for growth-oriented expenses.

With cash available to cover payroll and rent, you can use short-term financing for advertising or expanding your product offerings. Unlike rent, these generate a return for your business. This is why businesses need to maintain appropriate accounting records—they can help you keep your business’s health in check and save potential interest expense.

Short-term financing options allow you to meet the standard needs of your eCommerce business. Whether it’s marketing a new product or taking advantage of a large bulk discount, short-term financing, if done right, can translate into profit even taking the interest into consideration.

Considerations: Short-term eCommerce Financing

Before you apply for a short-term financing solution, take a moment and consider a few points:

• You will need substantial funds upfront to cover advertising and inventory costs.
• In a competitive eCommerce landscape, short-term financing can help you take advantage of opportunities to grow, provided you use it correctly.
• Most eCommerce businesses start to experience growth in Q4, meaning that business owners should anticipate needing more inventory to meet higher demand.
• Each type of short-term financing and each lender offers different interest rates and payment terms. It’s important to weigh the pros and cons of each to determine the best option for your needs.

Best Options for Short-term Financing

Loans

Loans are often the first line of defense when a business faces a cash crunch. However, banks don’t simply lend money to everybody that walks through the door. They examine the borrower’s creditworthiness for assurance that they will get their money back.

Of course, they also want to see how well your business is doing. To gauge your business’s potential, banks review your accounting records. This is why high-quality accounting is absolutely critical. Most banks will be reluctant to consider your application unless you supply them with the accounting records they need to assess your ability to pay them back.

Alternatively, you can approach friends and family for “love money.” This comes with obvious drawbacks and isn’t suitable for all situations. However, love money is interest-free, so it may be worth considering.

Crowdfunding

If you want to raise awareness for a new product as well as get financing, crowdfunding is a great short-term option. It is also more fun and comes with no debt obligations. You can secure funds from crowdfunding platforms such as Indiegogo and Kickstarter.

Crowdfunding is a great way to receive seed capital and test your new products in the retail market. But be sure you follow through on your commitments to your supporters or, if you can’t raise enough, refund their money. The last thing you want to do is let them down. Feedback and good word of mouth might be more valuable in the long run than the money itself.

Revenue Financing 

Revenue financing is a relatively new and very popular financing solution that gives eCommerce companies some flexibility in repaying the principle. Lenders will look at your company’s revenues from all of your sales channels and assess your ability to repay, based on your historic revenues in a given period. The lender then approves a specified amount and typically lets you choose your repayment terms.

The terms typically include several tiers of repayment based on percentage of revenue. In other words, your business repays the debt each period using a set percentage of your business’s actual revenue. Some months, the debt repayment may be small, and other months, like December, your business will pay back more of the debt, as it is a percentage of revenue. This flexibility in repayment is great for a small and growing business.

The downside is that the effective interest rates can be quite high, especially if your business is growing rapidly, because the repayment will be accelerated while the total interest remains the same despite the repayment period.

As the name suggests, revenue financing helps eCommerce businesses get necessary funding without compromising on ownership or business equity. Revenue financing is a practical short-term financing option to cover marketing and inventory costs.

What about Credit Card Financing?

Yes, you can use your credit card to fund your startup eCommerce business. Credit card financing is an effective way to fund your inventory purchases, but it can result in a lot of debt.

Unlike other financing solutions, credit cards don’t come with structured payments. If you take this route, have a plan for making regular payments. Failure to pay off what you’ve charged will create more debt for your eCommerce business and impact your credit score, making it difficult to get other types of financing.

Most other short-term funding options come with a lower interest rate and better terms than credit card financing.

The Most Common Short-term Financing Solutions for eCommerce Businesses

Amazon Lending

Amazing Lending is a viable financing option for Amazon-based eCommerce businesses. Amazon Lending offers funding in the form of loans to cover the cost of product expansion, marketing, and inventory management. The digital application process also makes it easier for eCommerce businesses to apply and find out if they’ve been approved within 5 days.

PayPal Working Capital

PayPal provides one of the best short-term financing options for small eCommerce business owners. Unlike other forms of revenue financing, it allows you to repay your balance early at no penalty. If your eCommerce business is not generating revenue, you don’t have to make repayments on the loan as long as you pay at least 5-10% every 90 days. Another highlight of securing PayPal financing is that you don’t have to have a credit check to get a PayPal Working Capital loan.

So long as you have a sales volume of $20,000 or more, you can qualify for a PayPal Working Capital loan. The downside to PayPal financing is that you don’t find out the exact fees until you apply.

Shopify Capital

Shopify Capital loans are a great source of financing for Shopify merchants, but they work a little differently than traditional loans.

While a traditional loan requires you to pay a fixed amount each month with interest built in, Shopify purchases a part of your future receivables. In other words, Shopify automatically deducts a portion of the revenue generated from future sales. However, this option isn’t for everyone—the interest rate can be steep, which means you’ll end up paying more than a traditional loan.

Applying for a Short-term eCommerce Financing Solution

You need financing solutions that can help you capture your audience’s attention and roll out more innovative ideas without financial hurdles. Short-term financing makes sense.

Whether it’s crowdfunding, loans, or revenue financing, you should be honest about the value proposition of your eCommerce business. A good accountant can help you understand the strengths and shortcomings of your eCommerce business, perform a financial health check, catch up on your books and ensure they are proper and finally assist you with financing applications. Once you get the approval for short-term financing, they can help you optimize your funds to achieve long-term growth.

All lenders require that you provide financial information, though, so before you apply, make sure that you have the requisite accounting records. Providing detailed financial information allows the lender to understand your business’s position, giving you the best chance of securing financing at the best rate possible.

Choose the Best Short-term Funding Option

Your eCommerce business deserves the best financing solution to help you more than just stay afloat. You can secure the funds to drive growth and expand operations altogether. When it comes to the eCommerce marketplace, there aren’t many short-term financing options. So, review the financing options and compare the terms and conditions of the offer to make the right choice.

Final Thoughts

Although traditional financing works, it tends to be more restrictive, difficult to obtain, and can take longer to get approved. Suitable short-term financing, however, is an option for most eCommerce businesses. You just need to make sure that the option you choose meets your business needs.

Having thorough accounting records that reflect the true and fair view of your business goes a long way. If you have been working with an accountant to optimize your cash flow, your cash flow statement will communicate this to the lender and improve the chances of securing financing for your eCommerce business.

If you want to learn how to avail the most compatible short-term financing solution for your eCommerce business, contact us now. With eCommerce Accounting Hub, you can count on professional CPAs and accountants to scale up your eCommerce business operations and gain a competitive edge in the online retail landscape.