No matter what type of products your e-commerce business plans to sell, you need money to produce inventory. If you don’t have cash on hand to complete your inventory order, you’ll need to apply for a loan.
For new e-commerce businesses, this is a common situation. After all, you need to sell products to make money. But before you can sell products, you need to produce them.
This isn’t a problem that will disappear even after you’ve established your e-commerce business, either. After all, restocking inventory costs money, and if you don’t have sufficient cashflow, you may need to take out another loan so you can sell more products and make money.
As it turns out, new e-commerce businesses have several financing options they can use to obtain the necessary cashflow so they can produce inventory. By understanding what these options are and how to successfully obtain funding, e-commerce businesses can set themselves up for success.
Understanding Inventory Loan Options
E-commerce businesses often use a dedicated inventory loan (also sometimes known as inventory financing). These loans are specifically designed for businesses that need to pre-order goods before they can be sold.
With inventory loans, the inventory you’re purchasing — or the assets your business already has on-hand — serve as the collateral for the loan. This can make it easier to obtain than other loan options, because you have actual collateral backing the loan. As a result, obtaining a loan is often less reliant on factors used for obtaining unsecured loans, such as a borrower’s credit score or bank account balances.
Of course, inventory loans aren’t the only options available to new e-commerce businesses. Banks and credit unions offer small business loans at low rates, though with harder qualifying standards. Many of these banks are also now offering loans aimed specifically at e-commerce sellers due to the growth of this sector. The U.S. Small Business Association also offers loan packages, including micro loans of $50,000 or less.
E-commerce businesses could also use a business line of credit. A line of credit is a type of revolving credit that works similar to a credit card. A business has access to a set amount of capital up to the account’s credit limit. The business can borrow money up to that limit as needed and repay the borrowed funds.
This way, you could borrow money repeatedly as you need to order more inventory, without applying for multiple loans (so long as you don’t go over the limit). Eventually, however, lines of credit enter a repayment period in which no more money can be borrowed and the outstanding balance is paid off in fixed monthly payments.
Choosing the Right Type of Inventory Loan
While new e-commerce businesses have several funding options available, there are a few key factors to consider before applying for a loan or line of credit with a bank, credit union or online lender.
Ideally, lenders should provide quick funding. E-commerce retailers often need to replenish supplies quickly so they are ready in time for a high-traffic period, or to obtain manufacturing discounts. Traditional bank loans could take over a month to be funded, while e-commerce focused lenders may provide funding in less than a week.
Because e-commerce inventory is usually sold quickly, it is also better to choose a financing option with a short term length. Ideally, the loan term should be about the same length as the time you expect to be able to sell all the inventory you are ordering with the loan. With a short-term loan, you will likely pay less over the life of the loan due to fewer interest payments.
Of course, before applying for an inventory loan with a traditional or online lender, you must do your due diligence to research a lender’s rates and terms. Researching interest rates, origination fees and repayment terms will help you understand the full cost of the loan and whether it is the best option for obtaining inventory. Look at a lender’s website to evaluate their terms and conditions.
Qualifying for a Loan
Each lender has different qualifications for providing an inventory loan or other form of financing to an e-commerce business. Fortunately, this information is generally made available on their website.
Typically, lenders will require that borrowers meet a minimum credit score threshold, have been in business for six to 12 months, and have a set minimum monthly or annual revenue (often around $10,000 per month).
For new e-commerce businesses, of course, you likely won’t have monthly or annual revenue that you can use to qualify for a loan. Lines of credit may be easier to obtain, but this will be heavily dependent on having a strong credit score.
When applying with lenders that say they cater to e-commerce businesses or individuals trying to start a business, borrowers should be aware that they will likely be viewed as a high-risk investment (similar to a startup). When you’re launching a new e-commerce business, you will likely need to present a business plan in lieu of revenue data. You will likely have to pay a higher interest rate than a more established business would.
Get the Financing Help You Need With Manufactured
An inability to fulfill product demand — or even get your new e-commerce store stocked with products — can be a major detriment to your business. Fortunately, Manufactured can help with PO financing.
With Manufactured, you enjoy expert manufacturing with extended payment terms. You can use your existing financial vendor or one of Manufactured vendors, and advance up to 100 percent of your COGS – PO value + shipping + duties + taxes + transportation. Manufactured funds e-commerce inventory up to 12 weeks after delivery with weekly repayments, and funds credit-approved institutional purchase orders.
With Manufactured, you also enjoy reduced financial risk, as we inspect quality on all products, negotiate pricing with vendors to reduce costs and achieve an average 20 percent savings and assume all inventory risk with the vendor.
With a quality manufacturing and financial partner on your side, you can move forward with confidence in obtaining financing and producing inventory for your e-commerce business.
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