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Founding and running an ecommerce business can be challenging. You have to find ways to differentiate your business in the sea of competitors.
On top of that, you have to deal with Amazon and Walmart.
But that’s not all. You also need a lot of capital. After all, you can’t get your business off the ground without funding.
If you’re reading this guide, you probably need money to get your business to the next level.
That’s exactly what you’ll find in this guide. By the end, you’ll discover great options available to you.
Here are the top 9 ways you can fund your ecommerce business:
Considering there are billions of people on the internet, you can find hundreds or thousands of people who believe in your ecommerce business idea. And crowdfunding helps you to turn these believers into investors.
Crowdfunding is the process of funding a business by many people on platforms such as Kickstarter, Indiegogo, Crowdfunder, and more.
Over the years, crowdfunding has become popular among businesses. For instance, Statista estimates that North American crowdfunding platforms raised about $74 billion in 2020.
Currently, there are 3 forms of crowdfunding which are:
- Rewards-based crowdfunding: for this type of funding, investors, especially the early ones, receive a reward such as free products for their investment.
- Donation-based crowdfunding: in this funding type, investors expect nothing in return for their investment. This is usually done by people who have used your products and love them.10
- Equity-based crowdfunding: this is the closest to the traditional funding vehicles. Here, investors gain equity as a result of their funding. This type has encouraged more investors as they stand to gain from their investments.
If you want to raise money fast without going through a long and complicated process, crowdfunding may be your best bet. In another sense, crowdfunding helps you test how popular your idea is to internet users.
Right now, crowdfunding is still evolving as there’s no strict regulation that guides it. So, there may be changes to it in the future.
One of the most popular ecommerce crowdfunding campaigns was MVMT watches on Indiegogo. The trendy watchmakers raised $300k on the platforms and grew to become a big company.
- It’s easier to raise money fast.
- It can help you test your business idea’s popularity.
- Most investors will become customers.
- Most crowdfunding campaigns raise a little amount of money.
- You may get nothing if you don’t reach your funding target.
2. Venture capital
If you’re looking forward to obtaining venture capital, then you must have run your ecommerce business for a few years. In this funding type, you have access to capital from hundreds of thousands to millions of dollars.
To get the attention of most VCs, you need a unique selling proposition in a growing niche. Fortunately, the ecommerce business sector is still growing and has a lot of room to grow.
Naturally, venture capital funds operate differently. This means every venture capital fund has preferred industries they invest in.
Before reaching out to a Venture Capital fund, you need to find out if they invest in ecommerce businesses and your niche. Then, you should prepare an elevator pitch, executive summary, business plan, presentation, and more that may be required.
Likewise, you need to do due diligence and get legal assistance before signing up with a VC firm. If you’re successful at obtaining venture capital funding, you should know that the firm will hold a share of your business and have a say in the critical decisions.
To illustrate, Everlane, the American clothing retailer, is a company that has received funding from VC firms.
- It provides access to a huge amount of money that can run into millions of dollars.
- It gives your business more reputation as a serious company.
- The application process is long and complicated.
- You have to forgo a big part of your company in exchange for funding.
- You lose autonomy in making decisions for your company.
3. Business line of credit
For every business, there are times of economic uncertainty. This may be due to some seasons when there are higher demands or lower revenue.
Whatever the situation, you need an emergency fund to meet these urgent needs. Some common reasons your ecommerce store may need a business line of credit include:
- Purchasing a new piece of equipment
- Purchasing extra inventory for a busy holiday period
- Hiring a new employee to meet a rise in product demand
- Surviving temporary dips in sales and cash flow
That said, there are two types of business lines of credit which are secured and unsecured. For the secured line of credit, you need to present collateral.
On the other hand, you can obtain an unsecured line of credit without collateral. But the process is longer. Since the risk is bigger for the lender, you need to have a track record of generating revenue, a good business credit rating, and a good personal credit rating.
Moreso, the unsecured line of credit only provides access to a low amount of funds with higher interests.
There are many advantages to using a business line of credit. One, it’s flexible, and you only have to pay interest on the credit you use. For instance, if you use $20,000 out of a $100,000 line of credit, you only have to pay interest on the $20,000 used.
Also, if your lender reports your activities to the credit bureaus, you can use your line of credit to improve your business credit rating. Other benefits you’ll derive here are lower interests and fees than most funding options.
However, the application process is complicated. For example, you need to provide financial statements, profits and revenue reports, cash flow, tax returns, personal credit history, and more.
Furthermore, you need collateral to qualify in most cases. For some lenders, your business must have operated for a stipulated period before you can qualify for the line of credit.
Just like most loans, your debt can spiral out of control if you miss your repayments.
- You pay interest only on the credit you use.
- You can use it to improve your business credit rating.
- It has lower interests and fees compared to other options.
- The application process can be complicated due to the documents you have to produce.
- Your debts can spiral out of control if you miss repayments.
In some cases, you need to look inward to find that capital you’re looking for. Bootstrapping involves using your personal cash and the company’s cash flow to fuel growth.
One main advantage you gain from this type of funding is that it helps you retain 100% ownership of your business. With this, you can determine the direction of your operations without unnecessary interference.
You’ve probably heard stories of founders who went against all odds and built their businesses without borrowing money. A popular bootstrapping example is Sara Blakely’s Spanx, an American underwear brand.
She started the company with $5,000 and has built it into hundreds of millions of dollars.
However, these are exceptions rather than the rule. Depending on bootstrapping alone can limit your cash flow and, consequently, affect the growth of your business.
- You’ll retain 100% ownership and decision-making of your business.
- No extra time spend on funding from other channels.
- Your personal money will often be insufficient to help your business achieve its goals.
- It can take a long time to achieve your goals.
- One person is more likely to make drastic decisions that affect your business negatively.
5. Family and friends funding
Even at the inception of your ecommerce store, you should have friends and family who are excited about your idea. Naturally, they want to buy your products/service and tell as many people as possible.
This is normal. In fact, if you can’t get your friends and family excited, you need to revisit your idea.
So, while you’re trying to temper expectations, your loved ones may firmly believe you’ll be challenging big names in 10 years. In that case, they can fund your business to see you try.
If they are rich, you can get enough funds to build a solid foundation for your idea.
However, this type of funding is informal, and you need to be clear about the terms. For example, is it a loan or a gift?
If it’s a loan, you have to agree on a payback plan and follow it. Otherwise, you can breed resentment with people who love you.
- There’s usually no interest attached.
- There’s little to no paperwork.
- The funding may be insufficient to achieve your goals.
- They might want to be part of the decision-making process.
6. Small business administration (SBA) loan
Beyond yourself and family and friends, the U.S. small business administration also has a provision for funding. In this arrangement, SBA partners with lenders to ensure small businesses can access loans. You can borrow as low as $500 and as high as $5.5 million.
Here, SBA acts as the intermediary to make the loan easier for both the lender and the business. SBA partners with reputable lenders while ensuring that businesses are qualified to obtain loans.
Apart from that, SBA has counselors that can provide the information you need about having good records, finding the right lender, paying back your loans, red flags from lenders, and more.
However, SBA loans are usually unavailable for new businesses. This is because you need a solid financial track record over a few years.
After all, the SBA wants to see your business’s capability to pay back the loan. Again, with the procedures involved, an SBA loan can take time before you have the funds. So, you can’t use it for an urgent business need.
Another issue you can have as an ecommerce business is if you export products to other countries and you need to finance it. Unfortunately, many lenders see export loans as risky and are reluctant to grant these loans to businesses.
But, thanks to SBA, some programs make it easier for small businesses to obtain export loans.
- There’s access to reputable lenders.
- Makes provisions for obtaining export loans.
- It’s not easy to obtain for new businesses.
- It takes time to get approval.
7. Inventory financing
As an ecommerce business, you have to ensure that you always have inventory. Because, without inventory, you have no business.
But what happens when you’re approaching a busy season and you know your inventory will be insufficient? That’s when inventory financing can be a necessity.
Inventory financing has two forms: inventory loans and inventory lines of credit. An inventory loan is a lump sum to purchase inventory, while an inventory line of credit is an amount available to your business.
With the line of credit, you only pay interest on the amount of money you use while you incur interest on all the lump sum in an inventory loan.
For inventory financing, your current inventory will serve as your collateral. Before approval, your lender may visit your physical store to ensure your inventory is in good condition.
With this funding option, you can easily meet your ecommerce store needs during a busy shopping season.
- Your business credit rating may not matter much since your inventory is the collateral.
- It’s easier to obtain than a traditional business loan.
- You may have to pay for onsite visits.
- Interest may accumulate if you don’t repay on time.
Essentially, grants are free money. After all, you don’t have to pay interests, nor do you have to consider repayments.
This also means most businesses out there are falling over each other to apply for every grant they’re qualified for. There are many grants based on location, industry, number of years of operations, business size, and other factors.
Usually, entities create grants for a particular cause. Therefore, you can see grants to promote minorities business, small businesses, green businesses, women-owned businesses, and more.
Fortunately, it’s easy to find information about grants online. Likewise, you’ll find the eligibility requirements and the application process.
- There’s no repayment or interest.
- Information about small business grants is easy to find online.
- There are usually strict eligibility requirements for grants.
- The application process is complex.
- You need to specify how you’ll use the grant in your business.
- The competition for grants is tough.
9. Private equity
As the name suggests, private equity funds look to invest in businesses with a common aim: to improve the business and sell it at a profit or get it listed publicly.
There are two private equity fund structures: the limited partnership and the closed-end fund. In the limited partnership, limited partners provide investment capital for your business.
Before approaching a private equity fund, you must research their preferences. For instance, some private equity funds invest in young companies, established companies, or distressed companies.
For a private equity firm to invest in your business, they’ll usually acquire more than 50% shares of your business. This means they’ll determine the overall direction of your company.
- A private equity fund wants your company to grow so that it can make profits.
- It gives your business time to grow as it’s a long-term investment.
- Since your business is private, the pricing of shares is determined by a buyer and seller rather than the market.
- You may have little say in running your business once a private equity fund invests in it.
Frequently Asked Questions:
What happens if you default on a loan?
This will depend on the terms of your loan agreement. For secured loans, your lender can seize the assets you’ve presented as collateral.
For unsecured loans, you may face a lawsuit. Beyond that, your debt will increase due to legal costs, late payment fees, and penalties that you may incur. Moreso, this can damage your business credit score which you want to prevent.
Does a bad credit score affect funding?
Yes and no. For some funding types such as business lines of credit, a bad credit score can hamper your chances of getting the funds approved.
On the other hand, a bad credit score does not affect funding types such as friends and family and crowdfunding. So, the effect of your credit score depends on the funding type.
How can you fund your business if you have no money?
If you have no money, you can present your business idea to your friends and family. They can provide the seed fund to get your business off the ground.
If you’ve started your business, you can take advantage of other funding options such as SBA loans, Business lines of credit, grants, and venture capital.
How do you repay your business loan?
Your business loan repayment depends on your loan terms and agreement. Therefore, ensure that you understand your repayment terms before taking a loan.
Moreover, it’s essential to take a loan that your ecommerce business can repay within the stipulated time.
How do your investors get paid?
It depends on your funding type and your agreement with the lender. For instance, a friend may agree to take a specific percentage of your profits monthly as a result of their investment in your business.
On the other hand, private equity usually makes money when your business becomes public or is bought by a bigger company.
What are popular crowdfunding platforms you can use?
For successful crowdfunding, you need to use popular crowdfunding platforms. These platforms are:
Of course, these platforms have different processes and rules for their crowdfunding campaigns. Therefore, you should thoroughly research a platform before launching a campaign on it.
What’s the difference between venture capital and private equity?
Technically, venture capital is a subset of private equity. But there are key differences. Venture capital investors usually invest in startups with great potential for growth while private equity investors usually go for well-established companies.
Private equity investors usually buy a majority stake in companies, while venture capital investors can hold a minority stake.
Funding your ecommerce business is a vital aspect of running your business. Because without funds, it can be difficult to get your business to achieve your lofty goals.
In this guide, we’ve provided the 9 best ways you can exploit to start getting funds to improve various aspects of your business. And you’ll need these funding vehicles at different stages of your ecommerce business.
What’s your favorite funding option? Let’s know in the comments!