Ecommerce is on the rise, but the growing competition is making it harder to stand out.
To get your product on more people’s front doorstep, you’ll need cash to support marketing, to hire a skilled team, and to purchase enough inventory to cover demand.
Funding gives you the cash injection you need to scale, but before you dive in it’s important to know what your options are. Here’s a breakdown of the most popular ecommerce funding models and how they can work for you.
What is ecommerce funding?
Ecommerce financing provides online retailers with the money they need to get started or grow their business.
Funds can come from a range of lenders, including the bank, angel investors, government grants, and even the general public. But the right funding model for you depends on the stage of your business and how quickly you’re planning to grow.
How does funding for ecommerce businesses work?
The type of funding model you go for determines if there’s repayment, if there’s interest and if there’s equity lost. Some methods, such as revenue based financing, ask you to pay back the funds over time, while others, such as crowdfunding, may require you to give up shares in your company.
These are the ten most popular funding options for ecommerce businesses:
- Revenue based funding
- Merchant cash advance
- Lines of credit
- Bank loan
- Bank overdraft
- Equity financing
- Crowdfunding
- Grants
- Invoice factoring
- Asset-based lending
All the funding options available to ecommerce businesses
Let’s take an in-depth look at the most popular funding options for online entrepreneurs.
1a. Revenue based funding (variable collection)
Revenue based funding (sometimes called revenue-share financing) is best for ecommerce businesses.
It allows companies to borrow between $10,000 and $5,000,000 in as little as 24 hours.
Each month, your lender collects a proportion of your turnover (from 5% to 25%) until you repay the loan off in full.
The cost of these business loans are between 6% and 12% so, if you borrow $100,000, you will repay a maximum of $112,000 after a month.
One of the major advantages to revenue based funding is that you need no business plans or pitch decks to apply. Lenders won’t even run a credit score on you or your company.
All they need when you apply is access to some of the apps you use like Stripe, Shopify and Facebook, as well as your accounting software (Xero, QuickBooks, etc).
How you repay revenue based finance is unique too – it goes up and down depending on how much revenue you’re making.
When you have a good month, your repayment is higher and you pay your loan off quicker. But if it’s a slow month, the amount you pay back decreases, giving you some valuable breathing room.
If you’re growing quickly, you should be able to absorb that cost pretty easily. However, if your growth stalls for a prolonged period it can put a lot of pressure on your cash flow.
An example of a company that used revenue based funding successfully is fashion brand Hedoine.
They signed up for $50,000 of funding in 2019 because they wanted to spend on some campaigns on Instagram and Facebook. Those campaigns drove many new orders and in the first quarter of 2020, the brand’s sales grew by 1,106%.
1b. Revenue based funding (flat fee)
The “flat fee” version of revenue based funding is slightly different. You pledge to pay your lender a fixed percentage of your turnover every month for up to 5 years and you’ll pay it back via 1-3% of your monthly revenue.
This means the amount you pay back each month is lower than the variable collection model.
The big disadvantage is that, if you hit or exceed your growth targets, the amount you’ll repay over the term of the loan will often be much more than the variable collection model.
2. Merchant cash advance
Best suited to hospitality and restaurants, merchant cash advance providers advance clients up to 6 month’s credit and debit card turnover ranging between $5,000 and $500,000.
To pay the loan back, lenders deduct around 15% every day from your credit and debit card receipts.
The advantages of merchant cash advances
- Quick access to cash for your business
- They are easy to apply for - you just need to send the last three months’ credit card statements
- There’s no set payment amount
- You can use the money however you like
The disadvantages of merchant cash advances
- They can be very expensive - revenue based funding can cost between 6% and 12% of the amount you borrow, while a merchant cash advance can cost 30% to 40%
- They are only a short term solution
- Financing future sales can be risky if the market is unstable
3. Lines of credit
Lines of credit are a very effective and popular business finance option particularly for ecommerce stores.
Sometimes called alternative overdrafts or revolving credit, lines of credit provide you with money you can access (or draw down) when you need it.
You get a fixed credit limit which is based on your level of turnover. Lines of credit can be as small as $2,000 and as large as $1,000,000.
Let’s say that one of your suppliers is running a special discount on something you sell which is really popular with your customers.
But, to be able to benefit from that discount, your order needs to be a big one.
You’ve looked at your sales projections and you’re pretty sure that you can clear that stock in 2-3 months. The problem is you just don’t have the cash right now.
With a line of credit, you can draw down the funds you need to take advantage of the discount and repay it when you’ve sold some or all of that stock.
When you do pay it back, the cash you can take from your line of credit goes back up again – much like how a credit card works.
The advantages of lines of credit
- You only pay interest on the credit you’re actually using - if you draw down $50,000 but you have a limit of $250,000, you only pay interest on the $50,000
- Interest rates on lines of credit are low
- You can use your line of credit for more than buying stock - for example, you can use it for cash flow management
The disadvantages of lines of credit
- Lines of credit can be difficult to get if you don’t have two years’ trading history
- It can be difficult to persuade a lender to increase your limit if business is growing quickly
- Limits can be low if your turnover isn’t huge
4. Bank loan
A business loan from the local bank is the first thing many entrepreneurs think about applying for.
However, banks are historically risk-averse and the chances of them lending to a start-up or early stage internet business are actually low, let alone lending the amount you might want.
Once you pass the $25,000 borrowing level, banks get very uncomfortable and making an application becomes even more complicated.
The advantages of bank loans
- Interest rates can be low
- As long as you keep up repayments, banks can’t demand a full repayment of the loan
- They are flexible and you can spend the funds however you like
The disadvantages of bank loans
- You’ll need to prepare a business plan and cash flow forecasts
- Banks are very likely to ask for personal assets for security on the loan
- They can be hard to secure if you want a large cash injection.
5. Bank overdraft
On the other hand, overdrafts are comparatively easy to get for ecommerce and SaaS providers once they have a good 6 month track record with their bank.
You pay a small fee to the bank every year for the facility and the bank grants you access to your own line of credit linked to your account every month.
Overdrafts are designed to help with cash flow but they’re not really big enough in most cases to use for stock purchase or expansion.
Your overdraft will probably be capped at between 1.5 and 2 months’ turnover and, unless yours is a multi-million pound company, you probably won’t get more than $25,000.
The advantages of bank overdrafts
- They are useful to have for any business
- They can help with small issues in cash flow
- You can borrow the exact amount you need which can make it cheaper than a loan
The disadvantages of bank overdrafts
- They can be withdrawn at any time at the bank’s discretion
- It’s difficult to get anything more than a $25,000 overdraft
- They aren’t a good substitute for a loan if you need to purchase stock or scale
6. Equity investors
Most big ecommerce and SaaS companies have benefitted from equity funding at some stage.
There are three types of equity funding which you can read about in our growth capital article.
With equity funding, you can raise anywhere from $10,000 to hundreds of millions of dollars. The idea is that you give up some of the equity of your company in exchange for a cash injection.
Your investors will be experts in their field with a proven track record of growing many different types of companies.
You’ll not only access their knowledge and expertise but you’ll also be connected to their wider professional network .
This alone is worth it – those contacts will present you and your company with lots of new business development and growth opportunities.
The advantages of equity investors
- Cash injection from invested experts
- Access to a wider network of experts and professionals
- You get input from people who have “been there, done that” before
The disadvantages of equity investors
- Require you to give over some of your company shares to investors
- The more you grow, the more investors will want to install their own people on the board
- You surrender a lot of control and influence as you go through the different rounds of investment
- Investors will expect a detailed business plan with flexible financial forecasts
- Legal fees involved in drawing up a contract can be costly
7. Crowdfunding
Around the world, $304bn dollars has been raised by companies using crowdfunding platforms, $10bn of that in the UK alone.
Crowdfunding is particularly popular for start-up and early stage ecommerce and SaaS companies. Companies using crowdfunding may be seeking anything from $10,000 to $10m.
Take web design tool Macaw, for example, who raised $276,000 within 24 hours of launching their crowdfunding campaign, way past its original $75k target.
On crowdfunding platforms, small investors are presented with the opportunity to back businesses they like.
For their investment, they are rewarded with a small shareholding within your business (just like equity investors).
The difference is that these small investors will not interfere with how you run your business and they won’t try to get their own people on board.
You get to spend the money and manage the company the way that you want. And not all crowdfunding platforms require you to give up any shares. Some platforms, like Indiegogo and Kickstarter, offer investors rewards.
In fact, most rewards are the products and services of the company you’re backing such as this robotic chess board made of real wood.
Other platforms like Funding Circle offer loans to businesses but in most cases, not to ones with less than two years’ trading history. You can also expect to sign a personal guarantee.
The advantages of crowdfunding
- Investors don’t take any control over your business
- If you gain momentum, you can get a cash injection very quickly
- It can raise public awareness of your business in the process
The disadvantages of crowdfunding
- There’s a lot of competition - only 44% of Kickstarter projects are funded
- You need to spend a considerable amount marketing your crowdfunding campaign if you want to see results
- You can receive bad publicity if you fail to deliver on your promises
8. Grants
Government-backed grants seem like a solid bet, but there aren’t many available for businesses.
The sums involved tend to be small too – for example, with this micro-business ecommerce grant in Northern Ireland, the maximum grant is $10,000 but you have 20% of that as spare cash to apply.
There are some larger ones which tend to be very specialist like this grant of up to $1m awarded in the form of a contract to supply.
This grant is offered to companies whose products and services help to reduce waste and promote the reusing and recycling of particular resources and products but they tend to be really niche.
Obviously, this rules most companies out from applying.
The advantages of grants
- You never have to pay them back
- You don’t surrender any control over your business
- You’re free to run your company in the way you want
The disadvantages of grants
- They can be difficult to find (especially niche grants)
- Applying can involve mountains of paperwork
- You are never guaranteed to get the grant and are often competing with many other businesses
9. Invoice factoring
Many ecommerce businesses have found a happy home on platforms like Amazon and Zulily to sell their products.
In exchange for access to their tens of millions of visitors, you pay a small transaction charge to these platforms every time you make a sale (plus a hosting fee in many cases).
What’s less well known is that many 3rd party platforms like these keep you waiting for your money – sometimes 30 days, sometimes 60 days, sometimes longer.
You won’t be able to use cash from these sales to pay your staff, order new stock, and invest in your business for up to 2 months.
One of the oldest forms of finance – invoice factoring – is useful here. It works by sending an invoice to your factorer when you send an invoice to a third-party platform or marketplace.
They release up to 90% of the value of that invoice and it lands in your bank account the following day. When the platform pays up, you get the remainder minus a small fee.
Invoice factorers will set a limit (normally around one months’ turnover) on the value of the invoices you send to them.
They’ll often be more than happy to increase your limit if turnover increases and once they get to know your business better.
The advantages of invoice factoring
- Less risky for small businesses and banks
- Gives you fast access to cash and keeps your cash flow strong
- Allows you to access financing without the risk of debt
The disadvantages of invoice factoring
- The fees charged eat into your profit
- If a platform refuses to pay an invoice, the factorer will still approach you for it
- You’ll often need to offer personal assets as security
10. Asset-based lending
Finally, asset-based lending. This financing option will get you the machinery and equipment you want and need whether it costs $1,000 or $100,000.
Instead of paying for them in advance, you pay monthly payments towards them. Asset-based finance is great for online shops that create their own products.
It might be that the machinery you currently have in-house only allows you to produce X number of garments a month. But you know the demand is there for more – if only you had the equipment you need.
Most sellers of business equipment and machinery will partner with finance companies to offer asset-based lending to their clients.
Simply approach the company with the equipment or machinery you want and ask them what finance options they have available.
Certain types of asset finance also allow you to replace the machinery and equipment you’re leasing with the newest models after a given length of time (normally 3 years).
The advantages of asset-based lending
- Buy machinery and equipment you need but can’t afford to buy outright
- Quicker and easier to secure than bank loans and investors
- Generally come with a lower interest rate than other types of funding
- You can get machinery and equipment replaced with the newest models
The disadvantages of asset-based lending
- You’ll never actually own the equipment
- The equipment will be repossessed if you can’t keep up repayments
- Asset-based financing companies are very particular about what they need in exchange for the goods
Which ecommerce business funding solution is right for you?
Before deciding which types of ecommerce funding to apply for, it’s important to consider:
- how much you need,
- how that spending will add value to your business,
- how you’ll repay the money (if you’re taking on debt), and
- the terms you’d be happy to work with an investor on (if you’re looking for equity backing).
Revenue Based Financing from Uncapped
We’re a little biased, but we think revenue based funding is a brilliant way to finance your ecommerce business. If you’re not looking to give away equity, make personal guarantees or pay interest, it’s a great fit!
