Alternative lending options for e-commerce business

It's no surprise that the e-commerce market is continuing to grow, as more and more people have turned to online shopping in the years following the pandemic.

According to Forbes, e-commerce sales are expected to grow by 10.4 percent in 2023. More and more businesses are moving online, with a 2022 report finding that there are now 580,000 e-commerce-enabled websites in the UK alone.

E-commerce businesses often require significant capital investments to finance their operations, from website development to inventory purchase and logistics management to increased marketing activity to fuel growth.

These investments are especially useful for SMEs, and according to the 2021 Small Business Credit Survey, 37 percent of companies applied for financing in 2021. While traditional bank loans and credit lines might be the initial choice, they aren't always accessible or affordable for online businesses.

There are several reasons why alternative lending options offer better value to e-commerce businesses, such as a lack of collateral compared to traditional brick-and-mortar businesses, having lower credit scores or shorter operating histories, needing a faster cash influx or requiring specialised financing solutions.

Below, I explore the top five alternative lending options for e-commerce businesses...

Asset-based lending

Asset-based lending is a financing method that involves a business using the value of its assets, such as inventory, accounts receivable and fixed assets, to secure lending.

This method is more accessible for companies with a lack of cash flow or cash assets as well as companies with poor credit scores or credit history. It has more flexibility in repayment terms compared to traditional loans, and typically lower interest rates.

Asset-based financing wouldn't suit companies without a certain level of assets to serve as collateral. Since e-commerce businesses typically operate outside of traditional brick-and-mortar stores, there may not be enough physical assets to secure financing through this means.

Additionally, asset-based loans are not a suitable long-term financing solution since you risk losing your collateral if you default on the loan. For businesses that rely on assets such as operational machinery, losing assets could be business-ending.

Revenue-based financing

Revenue-based financing (RBF) involves investors receiving a percentage of the company's ongoing income in exchange for the money they invested.

The repayment terms for RBF are flexible since they are tailored to a company's revenue cycle, so you will only pay back what you can afford. This is attractive compared to inflexible loans that restrict the company's spending in other areas.

Rather than gaining stakes in your company, RBF platforms take a flat fee for providing funds to you. This makes RBF attractive in the short term, but once repayments drag out longer than a year it becomes more expensive than a traditional loan. 

Peer-to-peer lending platforms

Peer-to-peer (P2P) lending platforms allow investors to see a greater ROI while businesses can enjoy lower interest rates compared to conventional loans without the need for collateral.

However, the requirements of a P2P lending platform can be stricter than traditional lenders, for example, the minimum credit score requirement may be higher. If your credit score is too low you might not be offered a loan, or you would miss out on the lower interest rates that make P2P loans more attractive than conventional loans.

P2P lending can also be riskier than traditional loans. The person borrowing your money may make late repayments or default on their loan, depending on which lending platform you choose.

There is a lack of regulation with P2P lending because your contributions are not covered by the Financial Services Compensation Scheme (FSCS), so you can't reclaim any money if your provider encounters financial problems. 

Invoice financing

Invoice financing is a popular funding option that allows suppliers to improve cash flow by receiving advances from a third-party finance provider against unpaid invoices. It provides businesses with quick access to cash without complicated and time-consuming applications.

Invoice discounting or 'recourse financing' is a specific type of invoice financing with one key difference - the supplier receives a cash advance for the invoice but retains responsibility for chasing the Buyer for payment.

Therefore, invoice financing offers suppliers more protection than recourse financing by placing the responsibility of chasing the buyer on the finance provider.

However, one disadvantage of invoice financing is that providers will typically only work with B2B brands, so this option will not suit all e-commerce businesses.

Merchant cash advances

This is a short-term unsecured business loan that typically lasts from six months to a year, supporting companies with an instant cash advance.

Repayments are made based on the percentage of future sales with no minimum payments, which can be beneficial for e-commerce businesses during slow periods.

However, this method puts struggling businesses at greater risk of entering a debt cycle because the annual percentage rate (APR) is significantly higher than traditional loans, even as high as 200 percent.

About the authors

By Kanishka Khanna, Director of Product for Stenn

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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