With the globalization and cut-throat competition in the market, many retailers are running online businesses. That’s because consumers are reliant on the Internet. Customers around the globe spend approximately $2.6 trillion to purchase retail goods online; the figures are likely to increase in 2019.
Since online retail is consumer-centric, businesses need to maximize the customer experience to achieve their end goals. They might have to market a product/service or invest in inventory, which often requires funds to overcome all business challenges.
Income is not always readily available. At some point in time, every business suffers from this problem, but it doesn’t have to come at the cost of closure of your business. There are several options available through which a retailer can survive the financial slump.
Mentioned below are seven options you can consider for financing your online retail business.
Line of Credit
A ‘line of credit’ is set between a bank and a retailer. There is a limit set on the amount which can be borrowed. E-commerce retailers can borrow as much money as it needs until it exceeds the threshold. Once you have repaid the borrowed amount only then you can borrow more.
Line of credit is set through some conditions and requirements that the retailer should fulfill. Interest payments are charged, and secured credit line demands for collateral against the credit.
It offers flexibility – they don’t have to use the whole borrowed amount because interest would only be charged on the amount you’ve used. You can utilize the credit line efficiently by using the borrowed funds on a day-to-day basis and resort to the credit line only when needed. Lenders would always prefer to work with businesses that have a good reputation in the market and some financial stability to repay loans.
Pro Tip: It helps to make purchases when online retailers have no funds at hand.
Inventory Financing
The inventory of an online retailer is extremely valuable because it can serve as collateral against loans and a secured line of credit. Many businesses take part in ‘inventory financing’ because they believe their money is bounded in their inventory.
There are some requirements for inventory financing:
- Just like other methods of funding, a good credit score is needed.
- Record of inventory that you wish to finance along with its valuations.
- Show your business performance and repayment plan. Only then will lenders offer the amount of money you can borrow.
- Finally, inventory must be in a promising condition.
The process of inventory financing is quite simple — it flows from the manufacturer to the distributor (if there is any) and to the dealer. Inventory financing would help you overcome the changes that you might face in your cash flow since there would be more cash coming into the business.
Pro Tip: In case you have unused inventory lying in the backyard, you can utilize it for financing your business.
Small Business Loans
These loans are offered by the lenders to finance a small business. In exchange for the loans, the lender charges interest rates on small business loans. The interest rate would depend on the loan amount.
Since it’s a loan, you have to offer repayments after a certain period. Due to their non-complex nature and low-cost options, these loans are preferred by retailers expanding their e-commerce business. It is easy to acquire a small business loan, as there are some simple requirements to fulfill.
- Complete all the legal and financial requirements of the lender by providing all the necessary documents.
- Ensure the lender about your regular business performance.
- Being an online retailer, you would have to develop an excellent credit score.
Small business loans are given in massive amounts. SBA guarantees 85% of the small business loans that are less than $150,000, making it a great source of finance. However, these loans are not offered to new retailers; you need to have some years of industry exposure to acquiring these loans. Obtaining a loan would be feasible for retailers with a good credit score.
Pro Tip: Apply for these loans if your business is performing well or you have developed a potential credit score over time.
Crowdfunding
Crowdfunding is different from the traditional funding method, where the business seeks to acquire a loan from banks. Crowdfunding involves ‘many’ individuals who contribute small funds and help you raise capital for your business. It consists of websites that serve a great purpose when it comes to achieving your financial goals, and they come in many forms.
Peer to peer lending comes under debt-crowdfunding. Borrowing is done with the understanding that all investors would be paid back all the money they have lent out with interest.
For start-up businesses, there is reward-crowdfunding which provides investors with non-cash rewards as a return gift for investing in the business. In return for investing in a project, online retailers reward investors with free products, based on the funding they offer.
Equity-crowdfunding works like venture capital investors. It helps you raise funds, and in return, you have to offer them a share in your business.
Donation-crowdfunding is just like an investor donating to your business so you can fund your business, just like charity.
Therefore, crowdfunding is the sole financing option that doesn’t require the need to provide financial facts and figures, unlike traditional bank loans.
Pro Tip: Try to raise capital through reward-crowdfunding as it is the most suitable option for an online retailer.
Merchant Cash Advance
A merchant cash advance is considered a loan, but it’s not. That’s because, with a merchant cash advance, an institute finances your business and in return, you offer them some percentage of your sales – whether they are debit sales or credit sales, including some additional fees. The payments are made daily through the retailer’s credit card.
Merchant cash advances work in 4 simple steps (as shown above), which makes financing a smooth experience. It’s an excellent financing option because:
- There’s no need for a collateral
- No restrictions involved
- Not necessary to have a good credit score
Proof of ‘identification’ and ‘source of income’ is all that is required to qualify. However, a merchant cash advance can cause disturbances in cash flow due to outflows. The traditional fees charged are also higher than the interest payments made on loans.
Pro Tip: If you don’t have a good credit score, then this would be the best option to use for financing.
Invoice Financing
Invoice financing is a type of borrowing where the money is borrowed against the invoices which are due from customers. In simpler terms, money is borrowed with accounts receivable – payment due from customers is used as collateral. The lender in return charges fees for the amount borrowed.
Invoice financing occurs when customers have made credit purchases; the investors buy the invoices from the seller. When customers pay, it goes directly to the investor who has purchased the invoices. It is very beneficial for retails because:
- It improves the cash flow of business
- It makes funds available for daily expenses
With minimal risks involved, an investor would buy an invoice depending on the credibility of the customer through records.
Pro Tip: Customers take much time to pay; if these are charged reasonably by investors, then this is your best source of finance.
Commercial Loans
Retailers can acquire commercial loans when they seek huge loans for potential investments, such as introducing a new software system or buying some equipment. Commercial loans are obtained from banks.
To acquire these loans, online retailers must make a ‘down-payment’ – this is 25% or 30% of the total amount you must borrow. Once you make the down-payment, you’ll proceed with the loan.
Down-payment is charged in case a retailer fails to repay, they would at least have some amount of money. Interest is charged on commercial loans – the interest rate would be lower for a reputable, market-oriented retailer.
Usually, small banks give more commercial loans as compared to large banks. To qualify for a loan from a small bank, you need to have a good credit score with acceptable proof of your income.
Pro Tip: One of the most common and reliable sources of finance, it offers a reasonable rate of interest.
Final Verdict
Online retailers are growing due to the success of online platforms. Every business needs funding either for a start-up or to continue developing a thriving business. If you’re unsure, you can look at these seven ways of financing for an online retailer.
