How to fund your e-commerce business without risking everything so you can grow your business

One of the hardest things in an eCommerce business is having enough capital (money) to buy all of the things you need: inventory, supplies, perhaps payroll, shipping costs, etc.

In this article I want to go over some of the benefits of using funding, a few of the pitfalls.

Fortunately, there is a kaleidoscope of options to help fund your business.

Benefits of Using Funding – Capital is the lifeblood of any business. Organic growth is slow – funding via credit cards / loans speeds this process up.

Establishing a history with a loan company sets you up with options if an incredible opportunity comes up. Using funding effectively is a skill, and if you are presented with an opportunity you don’t immediately have the cash for but have no funding immediately available, you may miss your opportunity.

Pitfalls/Cons of Using Funding – It is expensive. Unless you are creatively using credit cards as mentioned below, you will have a lot costs, primarily from interest incurred. Organic growth without funding is slower, but less costly and easier to manage.

It’s one more thing to manage and worry about. You have a lot to think about as a business owner, and sometimes adding just one more thing isn’t worth the benefit that whatever that funding provides.

Bottom Line – Whether to use it or not is a decision the business owner has to make. It your projection is that take the funding will allow you to make significantly more profit than you would other or allow you to grow your business to set you up for future profit, it’s probably the right time to do it. The best rule is “don’t invest in a maybe” – if whatever you will use the funding for is risky, shy away from the project. That loan will require repayment whether your plan works or not

I have used all of the mentioned below except for a SBA loan / Bank Long-term business loan

Personal Credit Card

Barrier to Entry – Low

Cost – Low or High

Functionality – High

Overview: Using a personal credit card to fund a business is a very easy way to have funding immediately for your business. Most people already have one, and if you don’t, it’s easy to get one. There are two major benefits to using a credit card to fund your business

Pros:

  1. The cost of using this type of funding can essentially be FREE. In fact, when you factor in credit card points / cash back / travel credit, they are really paying you to use their card. However, you have to be paying your full statement balance each month or this becomes an expensive funding source as the interest rates are high. But if you pay off the entire balance by the due date, there is no interest rate.
  2. Almost every vendor / supplier in an eCommerce business accepts credit cards. High Functionality.

Cons:

  1. Using a personal credit card means you are lumping your business’ credit into your own. The credit departments just view all the spending on this card as your personal purchases, which can negatively effect your credit score.
  2. This is (or should be) limited to only a short term option. To take advantage of the benefit of “free funding”, you have to turn over the inventory you purchase on a personal credit card within 30-45 days to recoup all of your money
  3. Unless you are very strict about only purchasing for business on a “Personal credit card” , accounting can become extremely messy. Our recommendation is to never mix spending between business and personal on any credit card.

Business Credit Card

Barrier to Entry – Low/Medium

Cost – Low

Functionality – High

Overview: Similar in function to a personal credit card, but with some added business benefits.

Pros:

  1. The cost of using this type of funding can essentially be FREE. In fact, when you factor in credit card points / cash back / travel credit, they are really paying you to use their card. However, you have to be paying your full statement balance each month or this becomes an expensive funding source as the interest rates are high. But if you pay off the entire balance by the due date, there is no interest rate
  2. Almost every vendor / supplier in an eCommerce business accepts credit cards. High Functionality
  3. Generally higher cashback rates for business credit cards.
  4. The spend on this card is unequivocally “business spend”. Most (not all) cards do not report to  a personal credit bureu or only do so until you have an established history with them.

Cons:

  1. These are generally more difficult to get approved for compared to a personal ,or non-business, card. Some companies want 1-2 years of business history before approving. However, we have found American Express’ business plum card and business rewards cash back cards to be easy to get, even for new business’
  2. This is (or should be) limited to only a short term option. To take advantage of the benefit of “free funding”, you have to turn over the inventory you purchase on a personal credit card within 30-45 days to recoup all of your money.

Line of Credit

Barrier to Entry – High

Cost – Medium

Functionality – High

Overview: Typically given by banks offering a business suite of services after you have established some business history (1-2 years). Lines of credit allow you to withdraw money very quickly (in my experience about 2-24 hours) to finance your business.

Pros:

  1. Lines of credit should carry a much lower interest rate than almost all of the funding options in this article. I opened mine at 9%, $50,000 limit and after establishing some history with the bank was able to get it to about 6.5% – 7% with a $125,000 limit.
  2. Some Lines of Credit have options where the only payment due each month is the interest on the loan. This is great for a longer term inventory buy.
  3. You take what you need, when you need it. If you don’t need the money, you can carry a zero balance and accrue no interest.
  4. This is great back-up to your credit-card spending. If you see you are going to carry a balance on a credit card, you can withdraw what you need from your credit line at 1/3 – ½ of the interest you would accrue on the card.

Cons:

    Lines of credit have a high barrier to open compared to the other funding sources in this article. In my experience banks want a minimum of 2 years tax returns to put your business in consideration for this

Short Term “Business Lending” Loan

Barrier to Entry – Low

Cost – High

Functionality – Medium

Overview: These are the “Payday Loans” of the Business Industry. If you don’t pay close enough attention to the interest / fees on this, you can get hurt quickly. With that being said, I have used these in the past for short-term / busy-season funding needs or when I was new in the business and didn’t have many other funding options. If you negotiate enough with these companies, you can sometimes get a very competitive rate.

Pros:

  1. Many of these companies don’t require much of a business history. You won’t be able to get them if you are brand new, but with 6-12 months of business history you can usually get something.
  2. You take what you need, when you need it. If you don’t need the money, you can carry a zero balance and accrue no interest.

Cons:

  1. The interest rates on this funding option is going to be as high or higher than most of the credit cards you would open.
  2. Most are set up on a fee structure instead of an interest structure. This fee is usually charge at the beginning of the loan or in certain increments that disincentivizes paying it back early.

A few options I like for this:

Kabbage – Fee based structure, but you do pay less in fees if you pay the loan back early. The fees are assessed on the same day every month you have the loan open, whether you owe $5 or $50,000, the fee is the same. But if you pay the entire balance early, you pay less in fees.

Loanbuilder – Rates similar to Kabbage (in my experience) but no reward for paying back early. Their fee on the loan is charged when the loan is disturbed and is owe in it’s entirety even if you pay the loan back early.

           **-I have found that after establishing a business history with them, my second loan had a significantly lower rate.

Amazon Lending

Barrier to Entry – Medium

Cost – High

Functionality – Medium

Overview: Amazon Lending offers loans to sellers based on sales and performance history. A notification will show up on your home screen when you have a loan offer.

Pros:

  1. Simplicity – The loan payments are taken directly from your accrued sales. For example, if your payment is $8000 every two weeks and you have $16000 accrued from your sales over that two weeks period, Amazon will only disburse $8000 to you.
  2. No way to prove this one, but I think doing business with Amazon in this manner puts you in higher esteem with them. There may be benefits from a seller support / account reinstatement perspective if you have a loan with them or have in the past. Again, no way to prove it, just a theory.
  3. This in an interest-based loan, not fee based. You pay a lot less in interest if you pay it back early. I usually take these on a six-month terms and pay them back in 2-4 months.

Cons:

  1. The interest rates on this funding option is on the higher end.
  2. This also requires some business history. Amazon goes through period where they aggressively push this program, so I have seen / heard from sellers who have gotten loan offers for as low at 5k total. This tells me that they are open to working with newer sellers.

Small Business Association / Long Term Bank Loan

Barrier to Entry – High

Cost – Medium

Functionality – Medium

Overview: Similar to the short-term business loan mentioned above with the difference being it is not short term. This is longer term loan (think 2-5 years) with a lower monthly payment and usually a lower interest rate.

Pros:

  1. Cost – This will be one of the lower cost options out there in terms of both interest and cashflow. The interest will much less than the short term loan and will have a longer payback which will mean a lower monthly payment. This can be a very valuable “pro” in terms of cashflow, which is critical to a new business.
  2. Loan Size – These can be very big loans. I have associates who have gotten as much as $500,000 in capital. If you have big, long-term plans, and SBA is probably the way to go.

Cons:

    Application Period – This is most in-depth process you will encounter for your funding options.  Most of the time you will need a well-thought out business plan with your application. This is a good thing – everyone should have a business plan. But if you need the money quickly and don’t have one yet, it can be considered a “con”

Thanks for reading our content Just remember to weigh your options carefully and don’t take funding to invest in a “maybe”, and your path will be paved on your way to a successful, growing business.

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