Is eCommerce financing right for you? Benefits and examples

The eCommerce market, projected to surpass $8 trillion by 2027, presents a gold rush of opportunity. But to capitalize on this potential, you can add a crucial tool to your arsenal: eCommerce financing.

Imagine you own a small online business or retail store that sells hand-made goods. You manage material costs, labor, and shipping, all while dreaming of your peak season boom. But what happens when the orders slow down, and you need to replenish inventory before the next wave hits?

This is when an eCommerce funding company comes in handy. It offers a cash injection to help you cover expenses – or fuel your business growth – until you sell your products.

What is eCommerce financing?

eCommerce financing is a funding option for web-based merchants. It provides businesses with capital to fuel growth, cover marketing expenses, increase sales, and manage cashflow.

Running an online business comes with its own set of financial demands. Sometimes, the timing of incoming revenue (accounts receivable) and outgoing expenses (accounts payable) doesn't align.

For example, imagine you need to stock up on inventory for a big sale or ramp up your marketing efforts, but funds are tight. eCommerce financing can bridge this gap by providing the capital you need to make it happen.

Repayment is often directly integrated with your online retail platform. Instead of fixed monthly payments, a percentage of your revenue is automatically directed to the lender, making it a flexible and scalable alternative for businesses of all sizes.

Who is involved in eCommerce financing?

There are three main actors involved in an eCommerce financing agreement:

• eCommerce companies: The business that applies for financing. For example, a small business like an e-retailer or online service provider 
• eCommerce platform providers: A digital platform that allows the business to sell its goods. For instance, Amazon, Lightspeed, Prestashop, Woo, BigCommerce, or Shopify
• Financers: The institution that provides instant capital funding to the online seller

An example of eCommerce financing

Let's step into the shoes of Hats-For-All, a trendy hat company selling its stylish headwear on Amazon. Imagine a customer browsing the Amazon app on their phone, stumbling upon the perfect Hats-For-All creation, and clicking "Buy Now." 

Behind the scenes, a chain reaction fueled by eCommerce financing kicks into gear.

The challenge: Hats-For-All is facing a temporary cashflow crunch. They've invested heavily in a promising marketing campaign to boost sales, which has tied up their liquid capital. They need $5,000 to cover the manufacturing costs of 600 new hats to meet anticipated demand.

The solution: Revenue-based financing (RBF) (don’t worry; we’ll discuss it more soon). Hats-For-All partners with GrowthFund, a company specializing in RBF for eCommerce businesses.

Hats-For-All partners with GrowthFund, a company specializing in RBF for eCommerce businesses.

Here's how RBF streamlines the process:

1. Funding request

Hats-For-All connects its Amazon seller, marketing, and baking accounts to GrowthFund's platform. GrowthFund analyzes the business’ sales history, marketing campaign, and other data to assess risk and revenue potential.

2. Agreement and capital infusion

Based on the data, GrowthFund offers Hats-For-All $5,000 in funding. They agree on a fixed percentage of future revenue that Hats-For-All will share until the $5,000 (plus a pre-agreed fee) is repaid.

3. Production and sales surge

Hats-For-All receives the $5,000 and immediately invests in producing the new batch of hats. The marketing campaign gains traction, driving a surge in sales on its Amazon store.

4. Automated revenue sharing

With each hat sale on Amazon, GrowthFund automatically receives the agreed-upon percentage of the revenue. This process continues seamlessly in the background until the initial funding amount and fees are fully repaid.

5. The outcome

RBF empowers Hats-For-All to seize a time-sensitive opportunity, expand its inventory, and capitalize on its marketing investment – all without the burden of fixed monthly loan payments or relinquishing equity.

Read more: 5 email templates to drive eCommerce business growth.

Types of eCommerce financing – and alternative funding services

Not all eCommerce financing is created equal. Different options come with unique structures, repayment terms, and eligibility requirements. Selecting the right one depends on your business's financial situation, growth stage, and risk tolerance.

For this list, we'll focus on non-dilutive financing options, which means you keep full ownership of your business.

1. Revenue-based financing

This type of eCommerce financing is the one we've seen in our example.

Revenue-based financing offers a flexible funding alternative where repayments are directly tied to your business's monthly revenue. Your payments fluctuate based on your sales performance, making it a potentially attractive option for companies with seasonal sales cycles.

There are two main types of RBF agreements:

• Variable collection: You repay a flexible percentage of your revenue until everything is fully repaid, plus an agreed-upon fee. This percentage typically ranges from 6% to 12% of your gross revenue
• Flat fee: You pledge to pay a fixed percentage of your turnover for a set period (e.g., 2% for 5 years)

Advantages

• Flexible repayments: Your payments adjust to your revenue, easing potential cashflow strain during slower months
• Collateral-free funding: RBF agreements prioritize performance and acknowledge potential revenue fluctuations
• Faster funding: RBF providers often have quicker approval and funding processes compared to traditional banks

Considerations

• Limited investment amounts: Since repayments are tied to performance, financing companies may hesitate to provide larger sums upfront
• Reliance on financial history: Financiers often determine their offers based on a business's past financial performance. This can disadvantage newer businesses or those with less established financial track records

Is traditional financing moving too slowly? Unlock your eCommerce growth now. Get funded in days with revenue-based financing.

2. Merchant cash advance (MCA)

A merchant cash advance provides quick access to funding based on your projected future credit card sales. It's an advance on your future revenue, making it a popular option for businesses needing immediate cashflow.

With MCA, you receive a lump sum upfront based on your projected credit card sales over a fixed period (e.g., 18 months). Repayments are automatically deducted from your daily credit card sales, usually as a percentage of each sale.

Advantages

• Less stringent credit requirements: MCAs typically have more lenient credit requirements compared to traditional loans, so they’re accessible to businesses with limited credit history
• Easy repayment process: Automated deductions from daily sales simplify repayment and eliminate the need for manual deposits

Considerations

• Higher interest rates and fees: MCAs often come with higher costs compared to other financing options
• Debt cycle: If not used strategically, MCAs can lead to a cycle of debt if businesses become reliant on them to cover recurring cashflow gaps

3. Invoice financing (IF)

Invoice financing, also known as factoring, provides businesses immediate access to funds tied up in unpaid invoices. This option can be a valuable tool for managing cashflow, especially for B2B companies with longer invoice payment terms.

This is how invoice financing works: You partner with a factoring company and sell them your outstanding invoices at a discount. The factoring company advances you a percentage of the invoice value upfront and takes on the responsibility of collecting payment from your customers. 

Finally, once the invoice is paid in full, you receive the remaining balance minus the factoring company's fees.

Advantages

• Instant cashflow: Factoring companies can deposit funds within 48 hours of approval. You access funds quickly instead of waiting for customer payments
• No collateral needed: The invoice itself serves as collateral, protecting your other business assets
• Greater chance of approval: Factoring companies focus on the creditworthiness of your customer rather than solely on your business's financials, increasing approval chances

Considerations

• Invoice financing costs: Factoring companies charge service fees, typically a percentage of the factored amount
• Not suitable for all industries: Invoice financing is only applicable to invoices issued to other businesses, not individual consumers

Do you want to know more about IF? Check out 3 situations in which you should use international invoice finance.

4. Asset-based lending

Asset-based lending allows businesses to secure financing using their assets, such as inventory, equipment, or accounts receivable, as collateral. It can be a good option for companies with significant assets but may not qualify for traditional loans based on their financial history.

With asset-based lending, you receive a revolving line of credit or a term loan, usually at a lower interest rate than unsecured loans. While this may initially appear as the ideal eCommerce inventory financing option, the caveat is that if you default on the loan, the lender retains the right to seize and sell the collateral to recoup their losses.

Advantages

• Accessible to businesses of all sizes: Both small and large companies can leverage their assets to secure financing
• You can combine it with other funding: Asset-based loans can be used alongside other financing options to create a tailored funding strategy
• Flexible loan structure: You can choose between cash advances or lines of credit, providing flexibility based on your needs

Considerations

• Risk of asset seizure: As we've mentioned, failure to repay the loan according to the agreed terms could lead to the lender seizing your assets
• Potential credit score impact: Defaulting on payments can also severely damage your credit rating
• Future financing challenges: Losing assets through default can make it more difficult to qualify for loans or other forms of financing in the future

5. Business loans

Business loans are a common way for businesses to secure funding for various purposes, from covering operational expenses to investing in growth opportunities. These loans provide a lump sum of money upfront that you repay over a fixed term with interest.

It's important to note that "business loan" is a broad category with various types and terms, interest rates, and eligibility requirements. Some common examples include term loans, SBA loans, and microloans.

Advantages

• Predictable repayment schedule: Fixed monthly payments make it easier to budget and manage cashflow
• Potential credit-building tool: Timely payments can contribute to a positive business credit score
• Widely available: Numerous banks and online lenders offer business loans, providing options to compare

Considerations

• Difficult to qualify: Traditional lenders often have stricter eligibility requirements compared to alternative financing options
• Potential personal liability: Lenders may require personal guarantees, putting personal assets at risk in case of default
• Longer approval process: Securing a business loan can take longer due to the underwriting and approval process

💡 While all of these eCommerce funding options fuel your business growth, we believe revenue-based financing stands out as the ideal choice for maximum flexibility and minimal financial strain.

Advantages and disadvantages of eCommerce financing

Just like any other funding service, eCommerce financing has its advantages and disadvantages. We've already touched on some while exploring the different types, but let’s look at the overall benefits and drawbacks that online retailers need to consider.

Advantages of eCommerce finance

• Speed and accessibility: eCommerce financing often boasts faster approval times and less stringent eligibility requirements than traditional bank loans
• Flexible repayment options: eCommerce funding options offer flexible repayment terms tailored to the ebb and flow of online businesses
• Build credit history: Consistently repaying loans on time demonstrates financial responsibility to lenders
• Reduce the cash conversion cycle: Traditional retail often involves a long wait between purchasing inventory and receiving payment from customers
• Maintain Control: Businesses maintain complete control, compared to funding options in which businesses relinquish a stake in return for a loan

Disadvantages of eCommerce finance

• Expensive interest rates: Revenue-based funding can cost up to 12% of the business' monthly revenue, which can represent a costly repayment figure compared with other lending options for eCommerce
• Application criteria: eCommerce financing services typically have restrictive application criteria. For example, the business must be an online-only retailer using a recognized platform such as Amazon

Looking for more alternatives to fund your online store? Discover 7 financing options for Amazon Sellers.

5 questions to ask yourself before you seek eCommerce funding

Just as moving home or buying a new car are major financial decisions that involve a lot of thought, toil, and time, seeking an injection of capital for your eCommerce business is one that shouldn’t be taken lightly. 

Before you commit to any funding path, including eCommerce financing options, consider these questions:

1. What do you need the money for?

For some owners and CEOs, the prospect of tapping into a venture capital market awash with funding for eCommerce businesses is irresistible. After all, according to 2023’s PitchBook report, eCommerce venture capital deals surpassed $30 billion by the end of 2022. Who wouldn’t want a piece of that pie?

Yet, it’s crucial to consider the purpose of your funding application. Specifically, this could be to purchase inventory or improve your eCommerce working capital.

The goal could be a national or international expansion or boosting your broader marketing strategy plans. You might also need the money to improve cashflow during off-peak periods.

Know your reason for receiving funds and keep it clearly in mind throughout the process so that your often hard-won investment isn’t diluted by unintended use.

2. How much investment do you need?

Your specific need for investment is one fundamental question. But it’s also vital to determine the size of the financial boost you’re looking for. 

This might seem obvious, but when funds are readily available, it can be easy to overshoot to a higher total than you initially anticipated. And that means repayment schedules and sizes, or a timeline to prove return on the investment, might be more challenging than you’d like.

A clear idea of your eCommerce business’s financial health is a perfect starting point. Ask yourself:

• How does my cashflow look? 
• What are my revenue projections? 

If you don’t know or can’t get to the answers, you may need some support to paint a sharper picture. Only then can you understand what level of investment you require or help investors understand where your business is headed and why they should commit. So, keep an eye on your financial metrics and KPIs.

3. Are you prepared to trade equity for investment?

If you’re seeking capital from investors, they’ll want answers to many questions. It’s best to give deep thought to these in advance. For example:

• What does your current management structure look like? And do you anticipate this changing? 
• What’s the opportunity in your market? What sets you apart from competitors in your space?

According to Boston Consulting Group research, eCommerce is forecast to account for 41% of global retail sales by 2027. The competition isn’t going away, and investors need to know how your company stands out.

Have you considered whether you’d happily trade some of your business in return for funding? Investors will often require a stake in organizations to have a measure of control and guide growth. Is relinquishing equity something that would sit well with you – or are there other options?

Keep your equity and still secure the funding you need: Non-dilutive funding options, benefits, and different types explained.

4. Do you have a clear strategy for the funds?

You're on the right track if you have good intentions for using the capital that will soon be at your disposal. You've considered the necessary scale of investment and started to explore potential funding sources, perhaps even considering options like eCommerce seller financing.

Now, it's critical to develop a roadmap that will make the money from your chosen eCommerce financing option work as hard as possible for your business.

Make detailed plans that link to your business's growth stages. These plans should account for known future revenue fluctuations as much as possible, however predictive they may be. Then, allocate capital against each step of your plan.

You had a business plan for the early days of your eCommerce venture. Now, you're seeking financial support to solve business problems or maximize multiple opportunities. It's time for a clear new view – one that should encompass where you're headed and how the cash can help you get there.

5. Can someone with experience advise you?

Entrepreneurs find it hard not to feel financial pressure. Indeed, the 2023 Startup Snapshot report reveals that 54% of founders experience significant stress regarding the future of their startups. 

You may add expert advice to your investment if fund managers are prepared to help you spend it wisely. But before you even get to that point, it’s worth seeking support from your network.

Who do you know who’s already been there in the business and has experience they can share? Your peers may have sought investment before and can show you how to make the right choices.

Take the time to answer these questions before approaching lenders or investors. Self-awareness will increase your chances of securing funding and set your eCommerce business on a path toward sustainable growth and success.

Why revenue-based financing is the answer to your eCommerce funding needs

The eCommerce market waits for no one, and neither does your competition. Blink, and you'll miss the opportunity.

Picture a sudden surge in demand. Orders are pouring in, exceeding your wildest expectations. Do you scramble to keep up, stretching your resources thin? Or do you scale effortlessly, meeting the moment with the power of strategic financing?

You need capital that can keep up with the speed of your ambition. You need flexibility, not financial handcuffs. And you sure don't need someone breathing down your neck while you build your dream.

You've got an eCommerce business to grow. And we've got the capital to make it happen.

Here's the deal:

• Get funded fast. We're talking days, not weeks
• Stay in control. No equity headaches, no boardroom battles. You call the shots; we provide the capital. Simple as that
• Win together. Our success is tied to yours. We only win when you win bigger

Apply with Stenn today – and step into the future of eCommerce funding with revenue-based financing.

eCommerce Financing: Frequently Asked Questions (FAQs)

What types of eCommerce lending are there?

Some of the most popular types of eCommerce financing agreements include revenue-based funding with a flat fee, revenue-based funding with a variable fee, and merchant cash advances. These financing agreements differ in how the eCommerce repays the finance provider.

What can eCommerce financing funds be used for?

There’s no single requirement for how eCommerce financing must be used. Some common uses include investing in additional stock, customer acquisition strategies, and marketing initiatives.