Financial readiness can be a daunting prospect for any entrepreneur setting up shop online. When you enter the world of e-commerce for the first time on the selling side of things, the need to make initial outlays of your own may represent the make-or-break point at which dreams collide with practical reality.
Fortunately, e-commerce entrepreneurs at all levels of experience have multiple options for financing their businesses — here are a few of the most effective:
The tried-and-true entrepreneurial formula of setting aside earnings from your day job to put toward a new business is as relevant as ever in the e-commerce era. Many successful e-commerce businesses start as side hustles whose initial funding comes from the business owner’s existing source of primary income as well as savings from previous jobs.
And the best part?
Once your e-commerce business begins generating revenue of its own, more money becomes available to sink back into the business. Then, with the right combination of skill, luck, and dedication, income from the side business can gradually approach a level that makes the day job less and less necessary.
The advantages of this practice (sometimes known as ‘bootstrapping’) lie in its sheer flexibility. As a solo operation, you are free to keep the stress of additional financial transactions to a minimum, leaving you with more time and mental energy to focus on business growth.
2. Debt-Based Financing
Depending on the size and scope of your e-commerce business, you might want to consider turning to some of the more traditional forms of financing on which entrepreneurs have relied for decades.
Generally, these methods will involve incurring a debt to a financial institution. Debt-oriented financing might take the form of a term loan, in which a specific amount is borrowed at a specific interest rate, or a line of credit, in which the business owner is liable only for the amount advanced (and accompanying interest) within a larger range of available funds.
Or consider the similar possibility of a credit card designed with small businesses in mind, offering perks like cash back to those who are ready to take on the responsibility of a new credit account.
Of course, getting a traditional business loan may not be easy, as banks may have requirements in place that prevent your particular e-commerce business from qualifying — for example, requiring tangible assets as collateral.
However, keep in mind that we live in a rapidly changing world: U.S. retail e-commerce sales totaled more than $250 billion for the second quarter of 2022 alone. Under these circumstances, more and more financial institutions will seek to get in on the financing phases of potentially profitable online enterprises.
3. Equity-Based Financing
Another effective way for e-commerce entrepreneurs to obtain financing is by offering the lender a percentage of ownership in the business. This practice is somewhat less traditional — and more flexible — than commercial loans or credit.
Equity financing could be as simple as selling a stake in the business to family or trusted friends who believe in the value of the underlying idea. However, if the idea is strong enough, you may also be able to impress financial firms or individuals known as angel investors, who make it their business to provide startup capital to small businesses in exchange for equity.
You may even wish to engage the services of a venture-capital firm, which also tend to be equity-based but which may provide additional value in terms of expert guidance. (Capital VC, for example, was instrumental to the success of B2C e-commerce success story Dollar Shave Club).
Keep in mind that, even if friends or family take on an investment role in your e-commerce business, some degree of formality should remain in place. So, be sure to consult legal counsel and get the terms of your financial arrangement in writing.
4. Invoice Factoring
After your e-commerce business gets off the ground and finds its groove, you will likely find yourself in a position to tap into even more financing options. A great example of this can be found in the realm of invoice factoring.
Under this approach, a business owner with an established customer base effectively sells invoices or purchase orders before receiving payment on them, thus borrowing against the expected amount due and ensuring quicker access to funds. This method is similar to inventory financing in that the business owner uses an existing asset as collateral for funding.
Financing against invoices or inventory — also known as trade financing — is gaining ground as an alternative to debt- and equity-based borrowing. In fact, a growing number of companies specialize in invoice financing for small-and medium-sized businesses, including startup e-commerce operations.
At the same time, keep in mind that the involvement of third-party financing companies will generally come with specific standards or requirements — think creditworthiness — that your business must meet before funds can be advanced.
E-commerce financing also benefits from the emergence of new methods that promise even more potential flexibility to the business owner. As a case in point, consider the growth of online crowdfunding platforms, which has occurred almost entirely within the last two decades. Big names include Kickstarter and Indiegogo, but a number of other crowdfunding websites have been launched with the funding needs of entrepreneurs in mind.
Crowdfunding offers a couple of benefits that simply cannot be found in other methods of financing. For one thing, the willingness of the public to invest in your business idea says a lot about the strength of the idea, especially when it comes to serving previously untapped markets.
Furthermore, crowdfunding enables a business owner to raise funds relatively quickly, thus bypassing the time-consuming application processes that accompany financing through banks or financial firms.
Crowdfunding can be equity-based or take the form of peer-to-peer lending. So, as a general rule of thumb, expect the inherent advantages and disadvantages of both forms of financing to come into play.
The Main Takeaway …
No matter where you are in your e-commerce journey, you will rarely have a shortage of financing options at your fingertips. If your business involves manufactured goods and your financing needs have been met, you may also wish to consider the benefits of an end-to-end solution.
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