Ecommerce Financing: A Guide To Getting The Funding You Need

September 1, 2022 by Adam Hoeksema

Any startup looking to experience rapid growth needs a dramatic injection of capital, from one source or another. For most companies, this means taking up bank loans or reaching out to investors, and there are plenty of options for this. 

For eCommerce startup funding, however, things are a little different. The strange nature of the cashflow situations with online sellers, and the unpredictable market behavior in relation to record inflation put lenders and investors on the back foot, and create issues for eCommerce companies looking for financing. 

Still, there are ways to navigate the options, and we’re going to take a look at them in this piece. In order to find the right route for your eCommerce financing, you’ll want to know what makes eCommerce different, what the current options are, and what you’re willing to sacrifice to make use of them. 

What is Different About eCommerce Financing?

If you’re looking to expand your eCommerce business, you might find that many capital sources won’t be willing to take the same risks to supply eCommerce financing as they would with more traditional businesses. 

In fact, with recent inflation impacting consumers more than many have experienced in their lifetimes, eCommerce is taking a hit and funders are reporting losses and are consequently becoming more hesitant to commit to new investments. 

ecommerce startup funding

eCommerce companies already have highly irregular cashflows, which means that they’re not considered in the same way as traditional brick-and-mortar stores. Still, eCommerce businesses need funding as much as any other company, and they are eligible for it; there are just some differences relating to how to find it. 

Traditionally, funding comes to businesses after significant background credit checks and other vetting procedures. One of the ways in which eCommerce funding can differ from this is in the way that some funders base a company’s eligibility solely on their sales. 

Considerations Before Applying for eCommerce Funding

The type of funding you’re looking for depends on more than your chosen market and products. In order to ensure you get the right kind of funding for the best deal, you’re going to want to know the answer to the following questions:

  • How much money do you need? This might seem like an obvious one, but it can be hard to calculate. It’s tempting to ask for as much as you can get, but this comes with additional risks, and the more you ask for, the smaller your options for sources become. Investors will also need to see an accurate estimate of what you’re going to be using the money for, and this means doing your homework.
  • How soon do you need the money? Providers will be able to provide capital with differing levels of urgency depending on several factors. These include the amount of paperwork or checks required, the amount of capital you’re asking for, and the urgency of it. You’ll need to know your timeline, your deadlines, your run rate, and any other factors relating to how where the money needs to be, and when.  
  • How does your financial background look? If you’re a founder, your personal financial history as well as that of your company will be called into question when applying for eCommerce funding. Different platforms will have different requirements in regards to this, and a bad history or poorly-kept records will contribute significantly to disqualifying you from their capital. Remember, there will be funding options for eCommerce that don’t need your credit score, but they will still need your company’s financial papers to be in order.
  • What are you going to use the money for? This is another matter of record keeping; you’ll need to know your payroll, marketing budgets, inventory, outreach strategies, etc. And you’ll need to have detailed records of what this amounts to over what kind of time frame. These records should account for projections of growth and scaling from the money you’re asking for, too. 
  • Is this money for a one-time or ongoing payment? If you’re looking to expand your inventory, you may be looking for a lump sum, but if you’re expanding your team, you’re going to be looking for an ongoing payment. This will affect where you are most likely to find your eCommerce financing, so it’s important to be sure of this before you reach out. 
  • What are you offering? This is the big one. One way or another, you’re going to have to sacrifice something. Loans come with interest and personal risk, investments come with equity. If you already have investors or shareholders then this also affects whom you can source capital from.  

Some of these questions will be easier to answer than others, but you should ensure you’ve got your head around them before you spend time hunting for capital. We actually have a a guide that outlines 5 key assumptions you'll need to know for your ecommerce startup to help answer these questions! Once you have a good understanding of your needs, you’re going to be in a better place to choose from the available options. 

The Different Types of eCommerce Startup Funding

Knowing how much you need, when you need it, and what you’re going to use it for is a good starting point, however, with all of these points in mind, we’ll be able to go over which source of funding will be right for you, but before we do, let’s take a look at some of the options out there. 

There are five main sources of income for eCommerce startups. Each with its pros and cons. Here’s a brief look at all of them:

Bootstrapping

If you’re reading about sources of eCommerce startup funding, chances are you don’t have a savings account that you can dip into for this option, but bootstrapping, or self-funding, can be done in other ways. The two main ways that don’t involve cash you’ve already got are credit cards and side gigs. 

The benefits and drawbacks of both of these options should be immediately obvious, so there’s no need to go into too much detail, but it’s worth pointing out that there is still some 0% credit card offers around, some for up to 24 months, so consider making use of these to get yourself off the ground. 

ecommerce funding

Be very aware of their enormous interest rates when the offer expires, to make sure your return makes financial sense, whether or not your end up having to pay interest on that money. 

Selling platforms like PayPal, Amazon, Shopify

These platforms also offer lending to vendors with high enough sales. The convenience of borrowing from any of these providers comes from their criteria being tied entirely to your online sales. They will typically lend something along the lines of 10% of your annual revenue as long as it’s above a certain threshold, and this money can come to you quickly. 

However, this convenience comes at a cost. As you might expect, for a loan with very few stipulations, you’re going to be faced with a heavy interest rate when compared to the much more rigorous process that you would find with a high-street lender. 

One other thing worth mentioning is that many of these lenders only serve US companies, so if you’re based outside the country, you may be out of luck.

Crowd Funding

This method brings a much more personal touch to your eCommerce financing options. There are numerous sites that are set up for crowdfunding, most of which work around the process of connecting vendors to investors via online profiles. 

This means investors can browse for companies that match their principles and pick investment opportunities that they want to support. Individual investors make good use of these platforms, so this is a way to make more personal connections with people who share similar ideals. 

These investors are of course still looking to make a return, so the cost you’ll incur will depend on what you need. You can offer interest rates of your choosing, and it stands to reason that the higher rates you offer, the more funding you're likely to find. 

Do your due diligence when selecting a crowdfunding site, as some have been known to poorly vet their companies and receive a lot of complaints as a result. 

Angels and VC Investors

These are some of the most common startup funding options for conventional businesses, and they’re still available to provide eCommerce financing if you know where to look. While for the previous two options, the eCommerce financing comes in the form of a loan, angels and venture capitalists will be looking to actually give you the money. 

As you know, this will require a share of your equity, and the riskier the investment, the higher that share is likely to be. The major difference between angels and VC investors relates both to the stage of the company they’re investing in (and therefore the amount invested) and whether it’s an individual investor or a group or firm. Either way, the principle is the same. 

A huge benefit to getting an investment rather than a loan is that there’s no personal financial risk involved. The money is tied to the company, so even if your business fails, you aren’t on the hook to pay that money back, as you would be with any of the loan options. The downside is that you will lose some control over the direction of your business when involving other shareholders.

Banks and other Loan Providers

Finally, if you’re set on a loan, it’s still worth considering banks, simply for the advantage of paying the lowest interest rates available. If you’re approved, banks are likely to offer the best deals in terms of repayment schedules and interest rates. 

They also have the option of offering credit lines, which can be a great benefit to eCommerce companies with their irregular cash flows, and we’ll go over why in the next section. If you can get approval, this is one of the more flexible sources of eCommerce funding you should consider. 

However, that’s a big ‘if’. Young eCommerce startups don’t have a lot of collateral and aren’t an attractive investment to most banks, so you may find that you have to shop around for a long time, jump through countless hoops, and still don’t get approval for bank loans. 

From all these options, it’s clear you’ve got some calculations to do. You’ve got to weigh up what you’re able to offer, what you’re willing to offer, and what you want for the direction of your company, against how much you need, how quickly, and on what repayment principle. 

How to Choose the right form of eCommerce Funding for your Project

The choice of your eCommerce funding sources really is a matter of weighing up your options. Unfortunately, the best deals are the hardest to come by, and for most people in the online commerce industry, the options are limited to high-interest funds or heavy equity sacrifices. 

For you, the choices will likely amount to a summary of what’s been covered in this article, and this begins with the understanding of what you have and what you need. 

If you need funding in a hurry, you can count out bank loans. If you don’t want to give up equity, you can also count out angels and VC funders. This would leave you with crowdfunding options, which may give you a decent interest rate, or working with any of the selling platforms you may already be using. 

Selling platforms will have access already to a lot of the sales data they need to make a decision on your account. This means, that if you’re in a hurry, these are likely the best options. If you can wait a little longer, the next-best option would probably be crowdfunding.

If you’re happy to give up some equity and have time to spend finding the right investor, you may also be able to find angels on crowdfunding platforms. Otherwise, it’s a good idea to research carefully to make the most out of this option.

Individual investors bring with them a wealth of expertise and may be very interested in contributing more than just money to your project. On the other hand, they may not want to get involved at all. If you’re going to be giving away equity, be sure to shop around for someone who might be able to help you with networks, advice, and possibly even distribution channels. 

If you have the time to shop around and you’re not too keen on giving up that equity, you might be able to find a bank loan. Keep in mind, your inventory isn’t going to be much use as collateral to a bank, so chances are slim that you’ll get a loan attached to your company assets; you may need to secure it to something more personal.

A term loan from a bank is a set amount, paid back over a set period. This is probably not ideal for a company whose cash flow is so irregular because you don’t want to be paying interest on money that you won’t always need. Therefore, it might be worth investigating a method that suits the nature of eCommerce funding. 

This is where credit lines come in. For this, the bank sets the maximum amount that you can borrow, and you can take from that amount as-needed. This means you only pay for the money that you need when you need it. 

Of course, all of this comes back to that ‘if’ we mentioned in the previous section. These loans, as perfect as they sound, are a lot harder to get approval for than other options. One way to improve your chances significantly is to make sure your financial papers are in order. 

For any bank worth its salt, the criteria you’ll have to fill for a loan should include a robust business plan. And out of all of that, the most significant section will be your company finances. 

Without accurate and professional financial projections, you hardly stand a chance with the banks. at ProjectionHub we offer specially-designed financial projection templates for eCommerce companies, designed to help with applying for financing. 

These templates can be used as-is or customized based on your specific company details and can bring a professional look to your business plan that shows investors or banks that you’re serious about what you do. 

Conclusion

Even though the world of eCommerce financing can be a little tricky to navigate, there are still numerous options out there. Choosing one is about knowing what you need and how fast you need it, and then, if you’re going to jump through a lot of hoops, being prepared with your paperwork. 

There are easy routes that come with higher interest rates, or more complex routes that offer the best deals but take time and are not guaranteed. Then there are the classic investment routes which might fall somewhere in between but will almost certainly come with an equity cost. 

The right eCommerce startup funding path for you will depend on your understanding of your company and its needs. From there, do your research, make sure your financial documents are in order and start applying! 

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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