Since the start of the pandemic, we’ve seen a major boom in ecommerce. In fact, 49% of global consumers shop online more now than they did pre-COVID-19.
As a result, your online business may be selling more than ever, and need the funding to start up or expand your ecommerce channels. Learning about loans for ecommerce businesses can help you decide exactly what kind of funding you need.
What is an ecommerce loan?
Ecommerce loans are a category of loans relevant to online sellers that help cover any expenses that come with running an ecommerce business. This type of funding can help your online business grow, and in hard times, it provides the cash you need to cover expenses and keep your business up and running.
Although online businesses don’t have to pay for some of the same expenses as brick and mortar stores, like rent or utilities, you’ll still need to cover expenses like inventory, shipping, and fees to service providers such as Amazon or Shopify.
Ecommerce loans are a type of debt financing where you borrow capital and agree to pay it back over a set period of time. You don’t give up any equity but you may have to put your personal credit or business assets on the line. These loans can have either a short term or long term repayment period depending on which option you choose.
The different types of ecommerce loan
An ecommerce loan is not one specific financing option, but a variety of financing options that work best for online sellers.These options typically have the most reasonable turnaround, interest rates, and qualifications for ecommerce businesses.
Term loans are the most standard loan option. You borrow capital from a lender, and agree to pay it back with fixed repayments, over a set period of time. These loans typically have the lowest interest rates but often require strict qualifications. Term loans are mostly offered through Banks and credit unions. You can also find term loans from online lenders, but they’re likely to charge a higher interest rate.
Unfortunately, many lenders have strict credit or business performance requirements for borrowers, and don’t typically accept start-ups.
Term loans are great if you need a large sum of capital that you plan to use for various business expenses. The average APR for term loans can range from 7% to over 30% depending on your loan provider.
The advantages of a term loan are that they have little to no restrictions, a predictable repayment schedule, and allow you to borrow large amounts of capital at once. Additionally, term loans work best for established businesses who know how they’re going to spend the incoming capital.
If you're looking for a large injection of capital with a long-term repayment schedule, this could be a great fit for your business. Term loans are also great for businesses looking to take on a new opportunity or expand their current operations.
This is often one of the most affordable options for ecommerce businesses, but you’ll need great credit in order to qualify.
Lines of credit
With a line of credit, you borrow money up to a pre-approved credit limit. You can draw cash and deposit repayments as long as you’re within your limit, and you only pay interest on the capital you actually put to use.
The APR for a line of credit can range anywhere from 3% to 80% and lenders may let you borrow up to $500,000 depending on your qualifications.
A line of credit typically allows you to borrow a larger amount of capital with lower rates compared to business credit cards and other short term options. Lenders usually have minimum draw requirements, and some even require a personal guarantee.
A line of credit is the best for businesses looking to cover operational expenses with the help of short term funding they can use as they need. If you want to be prepared for emergency expenses or just need a short term funding solution to support an ongoing project, a line of credit could be the right option for you.
Available in the US only, SBA loans operate similar to term loans, but are guaranteed by the US Small Business Administration. They are offered through specific providers such as participating banks, credit unions, and even some online lenders.
These loans can go up to $5 million and the repayment period can last as long as 7 to 25 years depending on how you plan to use your loan.
SBA loans tend to have a low APR ranging from 5% to 11%. Unlike term loans, these are actually open to start-ups. Unfortunately, SBA loans still have strict qualifications and may require a personal guarantee or even collateral. Some lenders may even require a down payment of 10% to 20%, and charge additional fees that can increase your total borrowing costs.
These loans can be difficult to get since they have a longer application process, and you need a great credit profile to qualify.
SBA loans are great for businesses with strong credit and long term funding needs, who don’t need immediate or emergency funding.If you are ok with having a longer repayment period or need a large amount of funding, this could be a great choice for you.
Equipment financing is when a lender provides the capital you need to purchase new equipment, and uses that equipment as collateral while you repay your loan.
Using your new equipment as collateral can potentially reduce the amount of interest you pay. Equipment financing can have an APR anywhere from 2% to 20% and repayment terms of 1 to 25 years.
Business credit cards work a lot like your personal credit card. You can make purchases for your business and repay with monthly payments.
This is not technically a loan but another option you can consider to have access to ongoing funding for emergencies or unexpected opportunities.
These credit cards tend to have a high APR but allow you to earn rewards you can put toward your business. Your rewards, or points, can be redeemed for cash back, travel expenditures or even gifts for employees.
Business credit cards have an average APR of 17%, and charge annual fees. These credit cards are a great opportunity to help establish your business credit since they are easy to qualify for and you don't pay any interest if you pay in full each month.
Business credit cards have minimum monthly payments and are best for businesses who need revolving credit or short term funding that they can access as they go.
If you're looking to build your business credit, and want to start separating your personal and business finances, this may be the best option for you.
Similar to equipment financing, you receive a loan to purchase inventory, and your lender uses that inventory as a collateral to reduce your interest rate or help you qualify for the loan itself.
Take advantage of the positive relationship you have with vendors and ask them to purchase your inventory now and pay later with a trade line. This works similar to a line of credit, and is another good option to build your business’s credit.
How ecommerce loans work
Ecommerce loans are a category of funding options, and not a one-size-fits-all loan product. This type of financing usually either requires you to have strong credit or put your personal credit and assets on the line to qualify.
Ecommerce loans have various repayment structures depending on the actual loan product you choose. Most lenders will require you to make a recurring fixed repayment over a set period of time. These are often automatic monthly payments but some lenders may even require a daily or weekly repayment schedule.
This type of financing can help or hurt your credit depending on your ability to keep up with repayments and qualify for an affordable and worthwhile financing option.
You can use your ecommerce loan to:
- Cover various marketing expenses including advertising, influencer marketing, and other digital strategies.
- Upgrade your website and invest in a full-service ecommerce site with a great user experience and little day to day maintenance.
- Pay for operational expenses like payroll, shipping, or software needed to run your business.
- Stay on top of processing and platform fees so they never sneak up on you or threaten to slow down business.
- Purchase inventory or equipment, and store it in a safe and accessible place.
But before taking on any funding option, you should know how much funding you need and how you plan to use it. Use this information to help you decide on the best option from the lender that’s best-placed to help you meet your business goals.
The pros and cons of ecommerce loans
All ecommerce loans have different terms, so it’s important to closely check each offer. However, there are a number of factors that are common to ecommerce loans that you should consider:
- No equity transaction - Maintain ownership of your business and don’t give up equity just to secure the funding you need.
- Limited restrictions for how to use - Depending on the option you choose, lenders don’t have strict requirements on how to use your loan.
- Access as much funding as you need - Secure a large sum of capital or recurring funding.
- High interest rates or strict credit requirements - Ecommerce businesses face a tradeoff, have good credit or end up paying high interest rates.
- Collateral requirements - Some loans and lenders may require collateral or a personal guarantee which could put your personal and business assets in jeopardy.
How to qualify for ecommerce loans
Although requirements vary from lender to lender, most lenders will at least look into your personal credit and business credit if you have it. Overall, if you have good credit you'll qualify for more funding options and end up paying lower interest rates and fees.
If you have low credit you'll need to pay higher interest rates and provide collateral in order to qualify for the option of your choice.
Most lenders have minimum requirements for the time you've been in business, credit scores and monthly revenue. Keep this in mind to help determine which option makes the most sense for not only your business but for your personal credit as well.
Understand which requirements will make or break your application and only spend time on the ecommerce loans you know you'll qualify for.
Choosing the right ecommerce loan for your company
When it comes to ecommerce business loans, there is not one best option. It all depends on your qualifications and what you are looking for in a financing provider.
If you have good credit and need capital for various business expenses, a term loan or SBA loan could be the right kind of ecommerce loan for you. On the other hand, if you need capital quickly you should look into a line of credit or business credit cards to determine exactly which option is most worthwhile for your situation.
Understand your business goals and credit profile to determine which funding options are reasonable for you and your business.
Create a plan to identify how much capital you need and how you’ll put it to use. Decide if you’re in need of a large sum of capital or revolving credit that you can access as you go.
Additionally, determine if you need the money right away or if you prefer a long-term turnaround time and repayment period.
When you’re ready to apply for an ecommerce loan, you should be familiar with your credit score, business finances, and any assets you have on hand to use as collateral if need be. A well thought-out plan can help you eliminate some lenders and ecommerce loan options that won't work well for your business.
Ultimately, loans for ecommerce businesses are meant to help cover short or long term funding needs for a range of purposes. Since these loans each have specific requirements, repayment structures, and interest rates, it's important to do your research and understand exactly what you're signing up for.
If you have a solid plan in place for how much funding you need and how to use it, you have the best chance at finding an ecommerce loan that can help your business.