🎉 Tillful is now part of Nav! Find the best small business loan at Nav
The days of e-commerce being an alternative to buying in-store are increasingly behind us. From dropshipping to online-only stores to Etsy shops and Amazon FBA (Fullfillment-By-Amazon) selling, e-commerce business is booming. If you run an online business, you’re no longer an outlier among companies, and therefore less of a risky bet to lenders. As an e-commerce store, you likely experience similar working capital challenges as physical brick and mortar shops. Rest assured, most of the business financing opportunities available to more "traditional" small businesses are also available to you.
With the e-commerce space becoming larger and larger, there are also e-commerce-specific funding options available to you, mainly from alternative online lenders. We’ve come up with a comprehensive list of all the e-commerce funding options on the market and which situations we recommend them for. Just note that this article should not take the place of financial advice — talking to a lender or trusted advisor is always recommended when choosing the best financial product for your business.
First, a Refresher on Short-Term vs. Long-Term Loans
There’s a bit of debate as to what’s considered a “long-term” loan. Generally, if a loan’s payback terms are greater than 12 months, it’s considered long-term, making “long-term loans” a bit of a catch-all for many types of financial products. However, given the range of small business loans on the market, others might define a long-term loan as having a payback period of 3 to 5 years.
Long-term loans are generally used by more established businesses for making big moves. They are also what small business owners most often think of as “small business loans. You usually get long-term loans from the bank or other traditional lender. Their longer payback terms and (usually) larger amounts make them perfect for funding expansion projects, the opening of a brick and mortar presence, big equipment purchases, or hiring. Long-term loan products include equipment financing, SBA loans, and mortgages, among others.
While shorter-term loans are usually intended to help with gaps in your cash flow, long-term loans are typically used to finance larger expenses and long-term investments. Unless you require large assets for your e-commerce company or a significant sum to help you scale, a long-term business loan may not be for you. It is also important to note that long-term business loans are usually available only to those with higher credit scores, as they are most often originated by traditional banks.
As stated above, the best use-case for short-term loans are to bridge cash flow gaps, finance day-to-day expenses, and make micro investments in your online store as you scale. Again, there’s some debate here about what constitutes a “short-term” loan, but we’re going to define it as one that has a payback period of 12 months or less. Short-term loan products include invoice financing, merchant cash advances, and business lines of credit.
Banks and other lenders provide short-term loans at competitive rates, though most of your options will likely be from alternative online lenders. Many products have a quick and easy application process and don’t require excellent credit the way that long-term loans often do. If you own a new business, find yourself in a pinch with cash flow issues, or just need to take advantage of a timely business opportunity, short-term loans are a great option to consider. Just note that while these funding options are often fair credit-friendly, the eligibility requirements typically favor businesses that have $50,000 or more in annual revenue and that have been in business for over a year.
What do I need it for?
There are different types of funding, each of which is best suited for specific use cases. Take some time to assess your business and ask yourself what your plans are. Are you tight on cash flow for payroll? Do you need a vehicle for local deliveries? Depending on your funding needs, here are some options for you.
Small Business Administration (SBA) Loan
The Small Business Administration (SBA) is a government agency that provides support to entrepreneurs and small businesses. SBA loans involve a government guarantee that reduces the risk for lenders that give out loans to small businesses. The SBA itself does not provide loans. Instead, it sets guidelines for its partnering lenders, community development organizations, and micro-lending institutions. SBA loans come with the best terms on the market, making them an ideal choice for funding your expansion needs.
Three main types of SBA loans are:
- 7(a) loans: Guarantees portions of the total amount, caps interest rates, and limits fees.
- 504 loans: Long-term, fixed-rate financing to purchase or repair large assets.
- Microloans: Provides $50,000 or less to help small businesses start-up and expand.
These loans let you borrow money for most business purposes including working capital, purchase of assets and refinancing debt. Typically, small businesses must fulfill certain size standards by the SBA, have a sound business purpose and ability to repay. Those with poor credit history may also qualify for startup funding. If you are an exporter, the SBA also has programs that make it easier for you to get loans for things like day-to-day operations, advance orders with suppliers, and debt refinancing.
OnDeck Short-Term Small Business Loan
Though long-term loans are usually best for funding big expansion plans, in some cases short-term loans can work equally well. For example, if your expansion at your business’s current state means buying more social media or other digital ads, adding a new hire, or making renovations to a brick and mortar location, then a short-term loan might cover you just fine.
One product worth considering is OnDeck’s short-term loan. With loan amounts ranging from $5,000 to $250,000 and repayment terms up to 24 months, OnDeck’s product could be a good fit for smaller-scale expansion plans. Its same-day funding feature is great for e-commerce businesses that need fast funding. Plus, businesses with less credit history are more likely to be approved by OnDeck than by a traditional lender. You’ll just need to have at least a year in business under your belt, and $100,000 in annual revenue.
For a Big Equipment Purchase
Sometimes expansion means that you need to make a big equipment purchase. Depending on the nature of your e-commerce business, you may find yourself needing to purchase specialized equipment to create your products or to run your day-to-day operations.
By opting for equipment financing over a cash expenditure, you won’t have to sink a large sum into a big cost. Instead, you can pace out your payments to better plan out your working capital for other expenses. Using equipment financing will make the said equipment more expensive, but consider it an investment in your business’s growth and financial health.
As far as your financing options go, an SBA CDC/504 loan or 7(a) loan is going to be your most desirable product. The SBA CDC/504 loan is positioned specifically for big equipment purchases, but also comes with more restrictions than the 7(a). You’ll have to talk with your lender about which is the best fit for you.
However, as previously discussed, SBA loans are among the hardest funding options to qualify for. If you’re not quite there yet, try National Business Capital. If you have a personal FICO score of 650 or higher, then there is no minimum time in business or revenue requirement. Otherwise, you’ll need $120,000 in annual gross sales and six months or longer in business. National Business Capital Equipment Financing caps out at $75,000.
For Flexible Working Capital
Invoice financing is a type of business loan that allows businesses to get cash based on outstanding invoices (owed to them by their customers). A lender will advance a sum based on the invoice amounts, and pay a percentage of the invoice amount to the lender. Invoice financing can be helpful by making your cash flow more reliable and predictable, rather than forcing you to move around expenses and bills based on when customers pay.
In e-commerce, invoice financing looks a little different. In many cases, your “customer” is an e-commerce platform like Amazon or Shopify. Instead of having to wait for a payout, or seeing the dreaded “unavailable balance” for days, an e-commerce specific product, like [sponsored] Payability’s daily payouts, will give you an instant payout in exchange for a fee. This allows you to get paid without having to wait for your funds to be released. Qualification is based on your sales volume, and not your business credit score. All you’ll need is 3 months of selling history and average monthly sales of $2,000.
Business Lines of Credit
Unlike term loans that extend you a lump sum, a line of credit lets you access up to a certain amount of capital during a specified period of time. Think of it as a business credit card with a higher limit and lower interest rate (usually) that starts accumulating interest as soon as you draw the funds, rather than at the end of a specified period. You can access a small business line of credit as needed and funds become available once more when you pay down the borrowed amount. You’ll only be charged interest on the borrowed portion.
If your business has been running for two years and earns $100,000 in annual revenue, you may be eligible for Bank of America’s Business Advantage Credit Line. This line of credit is unsecured, meaning it doesn’t require collateral, and starts at $10,000, renewed annually. For newer businesses or those with poor credit history, consider Kabbage as an option if you meet the eligibility requirements. Lines of credit range from $1,000 to $150,000, and have 6 month, 12 month, and 18 month payback periods (based on borrower eligibility).
For Day-to-Day Expenses
Business Credit Card
Business credit cards are a convenient and highly accessible way for e-commerce businesses to get quick coverage for monthly expenses. If you have a poor credit history or are just starting out, it can be tough to get funding, especially from conventional lenders. You’ll find there is a vast choice of business credit cards to choose from, even if you have a low credit score. For example, the Chase Ink Business Preferred card is great for e-commerce businesses since it gives you more rewards when you spend on shipping purchases, advertising, and internet expenses. Plus, business credit cards are the fastest and easiest way to start building business credit.
Brand new to business credit? The Tillful Card is a secured credit card designed to help you build credit on everyday expenses. Sign up for the waitlist.
Purchasing from vendors on credit will allow you to pay later for supplies and services you need right now. You get to plan your cash flow better and have more spending leeway for staff wages and other short-term obligations. Your long-term suppliers are probably more likely to extend you a trade line because you would have established a relationship and showcased your credibility. If you have been purchasing from the same vendors for some time, it is worth asking about their credit terms. Plus, if those vendors report payments to the business credit bureaus, tradelines can help you build business credit.
Merchant cash advance
While invoice financing gives you advance cash for your future receivables, merchant cash advance gives you a lump sum in exchange for a percentage of your future credit card sales. There is no fixed term for repayment although it typically can go up to 18 months. Instead, it depends on the volume of your future credit card sales and repayment continues until the loan is paid off fully. Lenders may require you to maintain a minimum amount of credit card sales.
Alternative lenders that provide merchant cash advances are Fundbox and LoanBuilder. For businesses that don’t qualify for conventional bank loans because of credit history, a merchant cash advance is a good option to consider (though we recommend exhausting your other options before reaching for this type of funding).
How urgently do I need funding?
This is another factor that will influence which type of funding you should opt for. In addition to asking what you need funding for, consider how fast you need it. Some loans, typically short-term ones, are processed faster than others. However, if you need a larger loan amount, it may take a longer waiting period.
Here are some options to consider if your business is in a tight spot and needs quick funding:
- Line of credit: The application typically just takes minutes and you could get approved in a matter of days depending on the credit provider.
- Merchant cash advance: Approval results can come as quick as 24 hours. The drawback is they can be quite expensive. Your repayment is based on a factor of your daily sales ranging between 1.2 and 1.5. Repayment for borrowing $10,000 can be up to $15,000.
- Trade lines: Since this is based on your relationship with your suppliers, you are likely to score quick flexibility when you need it.
Which loans can I qualify for with my business credit score?
With a better business credit history, you can access more and better quality funding options. A lot of times businesses with good credit scores can secure loans with better terms from conventional lenders. But as more fintechs enter the lending space, there are plenty of funding choices for businesses with fair to poor credit.
The below list is a general breakdown of loans that are usually available to each credit score range. However, it’s best you spend some time researching your loan type and lending provider options. Lenders also sometimes make exceptions in their eligibility requirements depending on market conditions and your profile.
- Good credit: You’ll be spoilt for choice with the funding options available to you. Conventional lenders and banks like funding businesses like yours because you meet their risk profile. Loan types that are more easily available to you include Small Business Administration loans, long-term loans and business credit cards with lower rates and excellent rewards programs.
- Fair credit: Businesses with average credit scores may still have access to conventional lending options. Some options include lines of credit and business credit cards available to you. However, these may come with higher repayment rates.
- Poor or no credit score: There are many alternative lenders that provide bad credit funding. Depending on the loan terms, you may need to put down security or take up more expensive options. Talk to your suppliers about the possibility of trade lines, or consider receivables financing through merchant cash advances or invoice financing. Platforms like Shopify, Stripe, and Amazon all have funding options for their customers as well that don't rely as heavily on credit scores.
Are you looking to aggressively scale your business?
Business loans are not the only way to get access to funding. If you are still in the early stages of your e-commerce business, or are looking to make it into the next big thing, look into these forms of financing.
If you’ve come up with an innovative and unique product that solves a significant market gap, your e-commerce startup may draw the interest of investors. Venture capitalists are investors that give early-stage companies funding in return for equity. As the business grows and sales increase, so will the value of their stake in your company. Basically, venture capital involves an investment in an entrepreneurial idea and business plan with huge potential.
However, acquiring venture capital isn’t as easy as submitting an application and awaiting a decision. It takes networking, pitching your ideas, financial projections, and finding the right investor-fit for your business. Often, investors would also like to have some say in the direction of your business which makes your compatibility important. Give some thought to the idea of giving up an equity stake. If you believe your business has high growth potential and a unique business model, venture capital is a great option to consider.
Growth Capital: ClearCo
Unlike traditional venture capital, growth capital by ClearCo doesn’t require you to give up equity in your business. Instead, the investments ranging from $10,000 up to $10 million are repaid through a revenue share agreement with a 6-12% fee on top of it. ClearCo is also renowned as an e-commerce investor and caters to businesses at all stages. In order to apply, you’ll have to connect your e-commerce sales accounts to ClearCo’s platform, select the offer that suits you best, and await your equity-free funding.
The No-Expense Funding Option: Grants
Grants are an excellent option for small businesses since you are not required to give up equity or take on debt. You will need to meet the eligibility requirements and use the funds as stated. However, securing a grant isn’t straightforward - you will need to put in the research to find the right grant and be patient with the lengthy application process. Typically, grants are given out by government agencies or non-profit organizations.
Under the SBA’s Program for Investment in Microentrepreneurs (PRIME), four types of grants are available. Program announcements that cover the eligibility criteria, terms and conditions, and available funds are regularly posted on the grants.gov website.
Last Word on How to Get Funding for Your E-commerce Business
You are not limited when it comes to funding options for your e-commerce business. However, it is important that you choose the right type of funding for your business. Think about your business needs carefully before applying for funding. You will be more confident in your choice once you have a clearer idea of your growth trajectory and financing needs, and your online small business will thank you.