The Best Corporate Loan For Your E-Commerce Business
E-commerce has shown itself to be a tremendously resilient market. This industry kept moving even during the initial lockdown of the pandemic. While other industries slowed down, e-commerce had picked up in demand as people resorted to online shopping to avoid personal contact with other individuals.
This rise in demand represents an opportunity for growth and expansion. It’s not a one-time trend that will fade away once the pandemic has ended. People around the globe have realized the advantages of online shopping and loved them. Demand will continue to peak instead of slowing down. In fact, e-commerce is expected to hit $6.4 billion by 2024.
It’s time to start thinking about possible sources of financing to fund your e-commerce shop’s expansion. Corporate loans are the only means of funding growth. Using your cash reserves to expand will only bring a dent in your cash flow. Financing, on the other hand, improves the flow by increasing working capital and stretching the repayment period.
There are many forms of financing for e-commerce businesses. Below are a few examples.
Purchase Order Financing
A fast-moving e-commerce site needs to keep its inventory adequately stocked. Running out of popular items could mean a loss of potential income. Your customers will be forced to find another provider of that product, and build loyalty to your competitors instead of yourself.
What if you receive a large order from a repeat customer and you don’t have enough stocks for fulfillment? Purchase order financing can help.
Through this loan, lenders will simply finance the new stocks that you’ve ordered from a supplier. You provide them with the vendor invoice, and the lender pays for the order including shipping fees. All that your business has to do is to receive the stocks, dispose of the supply, and pay back the loan.
One advantage of PO financing is that the lender uses the purchase order from your customer as collateral. In other words, the financing is guaranteed by the buyer’s commitment to you to purchase the stocks when they arrive. Lenders will generally look at the reputation of the buyer instead of your credit score.
Inventory financing allows e-commerce businesses to borrow money set against their existing inventory. Just like purchase order invoicing, it doesn’t require a guarantee from the proprietor nor the pledging of multiple assets. All the lender requires is the value of the inventory pledged as collateral.
Lenders will assess the inventory and come up with a loan-to-value ratio. The LTV determines how much of the total value of the inventory will the lender extend as a loan. If the LTV is 90, you will get 90% of the total value of the inventory. So, a seller with an inventory that’s worth $100,000 will receive only $90,000 from the lender.
You could use the forwarded funds to acquire new inventory, especially before huge sales events like Black Friday and Thanksgiving. However, other sellers also have the money for other intentions. They use the loan to pay off existing debts and settle monthly obligations like Shopify fees and electricity, among others.
Inventory financing, however, works only for e-commerce sites that keep their own stocks for fulfillment. Businesses engaged in dropshipping generally do not qualify for these loans because they rely on third-party suppliers to fulfill their orders.
Merchant Cash Advances
Merchant cash advances are revenue-based loans that you pay off with a specific percentage of your credit card sales. There’s less stress in repayment because the repayment amounts are flexible. If your sales drop, the amount you pay also gets reduced.
Cash advance amounts can be worth at least four digits or as high as five digits. However, the provider determines the actual amount by looking at your shops’ daily sales. Providers will also analyze the trends of your sales over an applicable period to quantify your risk profile.
E-commerce shops in Shopify can apply for a merchant cash advance with Shopify Capital. Shopify Capital requires 10% of daily sales remitted as payment for the cash advance. The provider also gives the borrower the option to repay the remaining balance after settling 25% of the advance.
SBA loans are financing guaranteed by the Small Business Administration. These loans are relatively more beneficial for e-commerce shops because of their favorable repayment terms. If approved, you can borrow amounts higher than what most banks and financial institutions offer. The terms are also longer.
SBA loans are available for businesses that fit the criteria set by the Administration that define a small business. Each type of loan has its own set of additional criteria as well. Each of the three loans guaranteed by the SBA is meant to be used for specific purposes as well.
These three loans are, namely:
7(a) loans are the most popular of the SBA’s programs. The borrowing cap is set to $5 million and can be used to plug short-term working capital deficiencies, repay existing debts, and purchase office equipment.
These loans are designed to assist businesses in acquiring assets to sustain growth and expansion. Just like the 7(a) loans, the 504 program lets qualified businesses borrow up to $5 million.
Microloans provide up to $50,000 for micro-enterprises and non-profit organizations. The funds can enable recipients to finance their expansion or to fund startups.
You can apply for these loans through intermediary lenders that the SBA funds directly. Each lender may have its own criteria for approving borrowers as well.
Revolving Credit Line
The revolving credit line offers small businesses a ready source of working capital. E-commerce merchants can use this credit to cover emergency needs like payroll as well as mundane expenses like stock refills, order fulfillment, and many others.
Upon approval of your application, you can automatically receive funds in your account. You can then make use of the cash whenever your business needs to. You don’t have to use the entire amount in one go. If you have $100,000 in your revolving credit line, you can use $25,000 and still have $75,000 available. The $25,000 becomes available again as well when you repay it.
The revolving credit line is very advantageous because of its flexibility since multiple withdrawals from the credit line also have individual due dates. As long as you use the credit line efficiently, your e-commerce business won’t experience cash flow problems caused by successive debt repayments.
Vendor financing is a unique arrangement because it doesn’t involve a lender and a borrower. Instead, it is more of a business-to-business partnership between a vendor and a supplier than a loan.
Vendor financing, also known as trade credit, lets you purchase stocks for your inventory on credit from your supplier. Instead of paying cash up front, you pay within the agreed terms with your vendor. Terms are usually 30 days and up to 45 days.
This trade agreement helps your e-commerce business achieve sustainable growth and is a great alternative to inventory or purchase order financing. You get to purchase stocks whenever needed and not worry about immediate payment.
Make sure that you comply with the agreed payment terms as much as you can. Consecutive non-payment of your dues with the vendor could result in the termination of your credit line. It might even affect your business’ credit score. You can use a spend management software to track and maintain all your bills and expenses and ensure timely payments.
Traditional Term Loans
Term loans are named as such because of their fixed repayment amounts, called “terms” that stretch out over a specific period. Unlike revenue-based financing, these loans don’t adjust to fluctuating sales. You have to pay the same amount regardless of whether your store is experiencing high or low seasons.
When you apply for fixed-term loans, your lender will take a look at your business’ credit score as well as your personal credit score. In some cases, you might have to provide an asset as collateral. The amount that you get to borrow and the interest rate would also depend on the lender’s assessment of your risk factor.
These forms of financing can be used for both short-term and long-term purposes. It’s common for these loans to extend up to 25 years, but some loans mature after only just a year.
Now is definitely the time to either start an e-commerce business or to expand your existing shop. There is considerable demand for products that are available in online shopping. People spurred on by the inconveniences of the lockdown measures and, later on, by the convenience of e-commerce continue to patronize Internet shopping.
Both starting up and expanding a business require a considerable investment. This is where corporate loans can help out. There are various options that you can consider for your e-commerce shop on Shopify and other similar platforms.
You have purchase order and inventory financing, both of which can help your business keep up with the growing demands in e-commerce. You can keep your inventory well-stocked with a trade credit agreement between your shop and your supplier. If you want to leverage your credit card sales, you have the option to take out a merchant cash advance.
The demand for online shopping shows no signs of slowing down and is expected to continue growing in the next five years. With financing, your business can position itself to take advantage of this steady growth as early as now.