A Beginner’s Guide to E-commerce Funding

While popular e‑commerce platforms like Shopify and BigCommerce have made starting an online shop easier than ever before, there are still many challenges that e‑commerce business owners face.

Like all new businesses, e‑commerce founders need funding to start and grow their businesses. E‑commerce funding helps online sellers get that cash injection to build their online shop, launch a strong marketing campaign, and ensure that they have enough inventory to cover demand.

But, getting funding isn’t always straightforward. This beginners guide covers the main challenges that e‑commerce founders face and 10 ways to fund an e‑commerce business.

The challenges facing e‑commerce brands

While e‑commerce is rising globally, building an e‑commerce business still comes with challenges. Here are four of the main obstacles that online shop owners face:

Lack of capital

Lack of capital is one of the biggest barriers to e‑commerce growth. Unlike service-based online businesses, you need capital to set up your online platform, get your marketing going, and, of course, acquire inventory.

Standing out from the competition

Online shoppers have a myriad of options to choose from these days. A simple search for something like a laptop provides thousands of options. So, how do you make your brand stand out?

e‑commerce brands need to figure out how to get their brand and products to stand out from the crowd and generate quality leads that turn into loyal customers.

Finding the right products to sell

e‑commerce business owners need to find the right products to sell. Knowing which products will work best usually comes from experience and a certain level of business acumen that new e‑commerce founders may not have yet.

Often, the best way to find the most profitable products is through trial and error—which can be a costly process.

Marketing

Marketing is essential for all e‑commerce businesses. But it’s not free. Whether you’re doing YouTube marketing, social media campaigns, or paid ads, they all require funding to get started.

Apart from funding for marketing, e‑commerce brands also need to figure out what marketing strategies work best for their brand and get the resources to do the marketing. Thankfully, with the help of social media engagement tools, there are ways to make e‑commerce marketing a bit more manageable.

When is the right time to raise business funding for your e‑commerce brand?

There is no “perfect” time to start raising business funding. The questions you should be asking are what you need funding for and how much you need. Are you looking to revamp your online shop? Do you need to boost your online advertising or stock up your inventory?

e‑commerce funding can help take your business to the next level, but you need to be clear on how first. Once you’re clear on your goals, then you can start thinking about applying for e‑commerce loans.

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10 ways to get funding for e‑commerce businesses

Let’s take a look at ten of the most popular e‑commerce funding options.

Revenue-based funding

Revenue-based funding (also referred to as revenue-share financing) is a newer business funding model that’s become popular with e‑commerce businesses.

e‑commerce business owners can borrow between £10,000 and £5,000,000 in as little as 24 hours. You then pay back a proportion of your turnover each month until the entire loan is paid off.

Pros

No business plan needed
No credit score required
Repayments based on your revenue (either variable or with a flat fee)
Maintain full ownership and decision-making power for your business

Cons

Required to share access to your business apps and financing software
Previous revenue is required
Required monthly payments

Merchant cash advance

Merchant cash advance providers advance clients up to six months’ credit and debit card turnover ranging between £5,000 and £500,000. Lenders deduct a set percentage every day of your credit and debit card receipts.

Pros

Easy to apply for
Quick access to funds
No set repayment amount

Cons

Expensive interest rates
Only a short-term solution

Lines of credit

Sometimes called overdrafts or revolving credit, lines of credit are increasingly popular with online stores as they provide e‑commerce store owners with access to funds when they need them. You get a fixed credit limit based on your level of turnover and can be anything from £2,000 to £1,000,000.

You’ll pay interest on the outstanding amount, and once you pay the borrowed funds back, your line of credit goes back up again – similar to a credit card.

Pros

Constant and immediate access to funds when you need it
Low-interest rates
Flexible repayment options
Few restrictions on the use of funds

Cons

Challenging to get without at least two years of trading history
Low limits if your turnover is low
Difficult to increase your limits

Bank loan

Bank loans are one of the more traditional forms of e‑commerce loans. However, when it comes to early-stage e‑commerce businesses, the chances are pretty low of securing a bank loan due to banks being risk-averse.

Pros

Low-interest rates
Flexible
Maintain full ownership and decision-making power for your business

Cons

Require a business plan and cash flow forecasts
May require personal assets as security
Smaller loan amounts are available

Bank overdraft

By paying a small fee to your bank, you’re granted access to your own line of credit linked to your account every month. Your overdraft will usually be capped at between 1.5 and 2 months’ turnover and rarely goes above £25,000.

Pros

Useful for minor cash flow issues
Borrow the exact amount you need
One of the cheaper forms of business funding

Cons

Your bank can stop your overdraft at any time
Small loan amounts

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Equity investors

Many big e‑commerce businesses have gone the route of equity investing at some point. The idea with equity financing is that you give up some of the equity of your e‑commerce business in exchange for funding.

Equity investors are usually experts in their field, so you’ll not only access funds but also their knowledge, expertise, and professional network to help you grow your business.

Pros

Large cash injection
Access to a wider network of experts and professionals

Cons

Required to give up some equity in your business
Loss of a lot of control of your business
You need to provide a detailed business plan
Legal fees involved can be costly

Crowdfunding

Crowdfunding involves raising capital from people on crowdfunding websites in exchange for discounts, freebies, or early access to your products. Equity can also be offered, but this is less common.

Crowdfunding is particularly popular for start-up and early-stage e‑commerce businesses that are looking to test the market.

Pros

A relatively quick way to secure funding (if you gain momentum)
Maintain full control of your business
Helps raise public awareness of your brand

Cons

A lot of competition from other businesses looking for funding
Requires a considerable amount of marketing
It can give you bad publicity if you aren’t able to deliver on your promises

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Grants

Various types of grants are available on national and local levels, either from the government or through corporations. Depending on your business’s location, grants can be hard to come by and quite challenging to acquire. And, in many cases, the amounts are pretty small. Different grants have various eligibility requirements, which you’ll have to research before applying.

Pros

Essentially “free money” which you don’t have to pay back
Maintain full control over your business

Cons

Long and challenging application process
Require a lot of documentation
Difficult to find
Often competing against many other businesses for the grant

Invoice factoring

Invoice factoring is one of the oldest forms of financing but it’s still very popular. It works by sending an invoice to your factorer when you send an invoice to a third-party platform or marketplace that you know will be delayed in paying you. Your factorer then releases up to 90% of that invoice straight away. When your invoice gets paid from your e‑commerce platform or marketplace, you get the remainder—minus a small fee.

Pros

Less risky
Fast access to cash and maintains your cash flow
Access financing without the risk of debt

Cons

Fees charged eat into your profit
You’ll often need to offer personal assets as security
If an e‑commerce platform refuses to pay an invoice, the factorer will still approach you for it

Asset-based lending

Asset-based lending is great for online shops that create their own products and need machinery to do so. Instead of paying in advance, it works by paying off the machinery or equipment that you need in monthly payments.

Most business equipment and machinery sellers will partner with finance companies to offer asset-based lending to their clients.

Pros

Get the machinery and equipment you need but can’t afford to buy outright
Quick and easy to secure
Lower interest rate
Often allows you to replace machinery and equipment with the newest models

Cons

You don’t own your machinery
Equipment gets repossessed if you don’t keep up with payments

Conclusion

Despite the massive opportunities available to e‑commerce businesses, many challenges come with starting an online shop. Challenges include lack of capital, high competition, choosing the right products to sell, and getting your marketing right.

Getting the right e‑commerce loan is the start of working through these challenges. Business funding options for e‑commerce businesses include revenue-based funding, merchant cash advance, lines of credit, bank loan, bank overdraft, equity investors, crowdfunding, grants, invoice factoring, and asset-based lending.

Before deciding which types of e‑commerce funding to apply for, it’s essential to set your goals on what you need the funding for and exactly how much you need.