Ecommerce businesses can’t run on hard work alone.

They need cold hard cash to help them succeed. It doesn’t matter if you’re just getting off the ground as a business or trying to scale into something bigger and better— inevitably you will need money to fund marketing activities, inventory, operational costs, hiring, and more.

Most online sellers can’t front working capital on their own so they look for help in the form of ecommerce seller financing. 

In this article, you’ll learn exactly what ecommerce financing is, understand when it’s right for your business and find out the immediate next steps you can take on your financing journey.

That way you can navigate funding your business with confidence.

What is ecommerce financing?

Simply put, ecommerce financing is a funding option for online sellers. 

The working capital you receive from ecommerce financing providers helps you engage in business activities related to growing your online store. It also can regulate your cash flow while you spend a little (or a lot) more than you normally would. 

For example, if you’re launching a marketing campaign to drive more sales or explore new markets, you’ll want to make sure you can cover the costs while still ‘keeping the lights on’ in your digital store.

What’s the endgame for taking on this type of funding? More products sold and more people sold to. 

Common types of ecommerce seller financing

Ecommerce seller financing comes in different forms because the core of what makes it ‘ecommerce financing’ is the business model that uses it rather than the funding provider. Each option offers something slightly different for your business whether it's quick access, flexible terms, integrations with your online store, or capital in exchange for equity.

Some of the most common forms of ecommerce seller financing are:

  • Revenue-based financing
  • Merchant cash advances
  • Business loans
  • Business credit lines
  • Investors (Venture Capitalist or Angel)
  • Marketplace financing

The last on the list, marketplace financing, has become more and more popular due to the number of ecommerce stores that are hosted on sites like Amazon and Shopify. While it’s not a solution for ecommerce businesses who don’t have ‘storefronts’ on the relevant marketplaces, it can be worth looking into for those who do.

Is marketplace financing the new go-to for ecommerce businesses?

If you’re using Amazon or Shopify to sell your products, it can be tempting to turn to them for working capital.

And why not when it cuts down on application times, paperwork and credit checks as well as linking directly to your store and taking repayment automatically from your ecommerce sales? 

Before you jump in, let’s look at why marketplace financing might hinder your online business more than it helps.

How marketplace financing limits marketplace sellers

Marketplace financing from providers such as Amazon Lending and Shopify Capital can limit the freedom and flexibility of ecommerce sellers. Often, they’re invite-only, meaning your ability to borrow is limited to when they offer you access rather than when you most need the capital to grow your business.

If you are considering an Amazon loan offer, you need to think about how this plays into any goals you have for business diversification. 

Their loans can only be used to purchase more inventory on Amazon or on marketing and product promotion with the marketplace, and must be repaid through your Seller Account. That can drastically limit your options for building your store on other platforms or on your own website.

Ultimately, marketplace financing can be great as long as you don’t mind being tied to the marketplace providing the loan. 

How does ecommerce financing work?

Ecommerce seller financing works differently depending on the provider and type you choose. However, there are some things to know which can help guide you whether you’ve chosen the route of online business loans, revenue-based financing or even a merchant cash advance. 

You’ll need to apply in some way

No matter what ecommerce seller financing option you go with, the service provider won’t hand out capital without understanding who you are, what your ecommerce business is, what potential your store has and whether you’re a safe bet.

Let’s look at a few examples.

Applying for loans and business lines of credit

Business loans, whether from a traditional bank or online provider, have a rigorous application process and prefer to lend to established businesses. If you’re a new business struggling to secure a traditional loan, check out our article on startup loans

Some banks have moved to an online application to help streamline the process but it is still time-consuming and requires a lot of documentation before the loan hits your bank account.

For traditional bank loans, you’ll need to put together a business plan that outlines your business, your market, your cash flow to date and projections for future revenue among other information.

Business credit lines also require you to apply but qualification comes down to the status of your existing credit score. The higher your score, the better. Once you have secured a line of credit you can withdraw money as and when you need it but only within the agreed limit.

Applying for revenue-based financing and merchant cash advances

Revenue-based financing is a great option for your ecommerce business because repayment is taken directly from sales and fluctuates based on monthly revenue. That means the application process consists of evaluating your sales history to determine the likelihood of repayment.

Revenue-based financing approval takes only a few days with certain providers while the application process takes only minutes. Uncapped, for example, can lend as much as $10 million in 24 hours. This is possible because qualification is a straightforward and clear process, relying on your sales data as performance indicators. 

Merchant cash advances (MCAs) have a similar qualification process to revenue-based financing. 

MCAs are considered an advance of money against your future sales rather than a type of ecommerce lending. So providers will want to see evidence of strong cash flows and a steady stream of revenue coming into your business. 

Applying for investment from venture capitalists or angel investors

Taking on debt isn’t the only option for an ecommerce business owner. Some choose to go down the investor route either through angel investment or a venture capitalist firm.

Angel investors can be anyone with an interest in investing a large sum of money into your business; friend, family, or stranger. Because they invest in exchange for equity in your business, you have to prove potential for business growth and opportunity in your market. 

Most of the time this proof comes as a pitch deck with supporting documentation. 

Venture capitalists work similarly but on a larger scale and with even greater resources at their disposal such as a network of experts who can help you grow in existing and new markets. 

The process for both can be lengthy because contracts and terms have to be determined and some negotiation on equity percentages may take place.

You receive the funding and put it to use

Once the funds hit your bank account you’ll need to invest it wisely into the business activity of your choice. 

We say ‘wisely’ because how you spend it can dictate whether you’re eligible for funding in the future (based on your ability to repay your loan) or whether you will open further funding options. 

Online businesses often look for growth through paid social media marketing, SEO (search engine optimisation), PPC (pay-per-click) and partnerships. They also can purchase more inventory ahead of high-seasons or hire in business critical skills. With the options explored in this article, the money is yours to do with as you wish. 

You pay your loan off

If your capital comes in the form of an advance or a loan then you will need to consider when repayment begins. 

Repayment terms and interest rates vary by provider.

Banks often offer low interest rates but have strict repayment terms while revenue-based financing is probably your most flexible option. Service providers only take repayment as a percentage of your monthly sales.

Or you prove your ecommerce business a worthwhile investment 

Investors don’t need repayment, they need results. Since they now have equity in your business, they want to see your ecommerce store grow in both size and revenue. Failure to do so may negatively impact your ability to secure future investment or put you on the back foot when negotiating equity.

Don’t worry too much though, your investor(s) will leverage their networks to help in any way they can.

Is financing the right thing for you and your business?

Taking on funding is a big decision. You’re committing to taking on debt that will need to be paid back or giving away equity in your business. So it’s a decision you shouldn’t take lightly.

Here are some things to consider:

  • If you can afford to take on debt
  • How much funding you need
  • How quickly you need access 
  • What you need the money for
  • Where you’re selling (Shopify vs Amazon vs privately hosted, etc)
  • Whether you want flexibility in where you sell
  • What repayment terms you’re comfortable with
  • If you want to sacrifice equity in exchange for capital

Tell me the risks of ecommerce financing for online sellers

While ecommerce financing can unlock opportunities for growth in your business, it’s not without risks.

Here are some of the biggest issues to be aware of:

  • Interest rates can be high (especially with merchant cash advances)
  • Payment terms can be short and tight, creating cash flow problems
  • You could damage your credit score if you struggle to repay
  • You could end up paying more than you thought you would in hidden fees and penalties for late payments.
  • Your lender may demand immediate repayment or take legal action against your business if you can’t pay
  • You could lose control over some aspects of decision making in your business

But it’s not fair to talk about the risks without weighing them against the benefits.

Here’s a chart where you can see at a glance how each option stacks up against the others. 

What can I do next?

If you want to do more research into the individual ecommerce seller financing options, here are some articles that can help:

If you know that you’ll need funding but aren’t sure how to effectively spend it, take inspiration from ecommerce brand Freerider co.

Or, if you’re an ecommerce or Amazon seller ready to turbocharge your business in as little as 24 hours, you can get funded by Uncapped now.