Since the start of the pandemic, there has been a major shift in shopping trends.
Ecommerce is booming and, with 49% of global consumers shop online more now than they did before, it looks as though retail may have changed for good.
To help meet increased demand, you’ve probably thought about investing more in ads, inventory, or building out the team. All of that takes capital, and sometimes the revenue you generate from customers isn’t enough.
Sometimes you’ll need an ecommerce loan.
In this guide, we’ll look through the different types of ecommerce loans to help you find out which funding type is right for you.
What is an ecommerce loan?
Ecommerce loans help you cover any expenses that come with running an ecommerce business. Just like other business loans, this type of finance lets you borrow capital and pay it back over a set period of time. You won’t need to give up equity but you may need to offer your personal or business assets as collateral.
Repayment periods vary in length and are dependent on your loan type and loan provider. It’s important to find a repayment plan that works for your business.
How ecommerce business loans work
Most ecommerce loans require your business to have a strong credit score. If you don’t have one, lenders can request for the loan to be secured with personal or business collateral.
Your repayment of the loan is usually paid via automatic monthly payments, however other lenders will want a daily or weekly repayment schedule.
If you manage to make your repayments on time you could see a boost to your credit score, helping you to secure future financing for larger amounts.
You can use most ecommerce loans to:
- Cover various marketing expenses such as advertising and influencer campaigns
- Upgrade your website
- Pay for operational expenses like payroll, shipping, or software
- Stay on top of processing and platform fees
- Purchase inventory
- Grow your team!
But before taking on any funding option, including ecommerce loans, you should know how much money you need and how you plan to use it.
The pros and cons of ecommerce business loans
All ecommerce business loans have different terms, so it’s important to look closely at each offer. Let’s look at some of the main pros and cons.
- No dilution-: Keep ownership of your business when securing the funding you need
- No restrictions on capital allocation: - Most lenders don’t have strict requirements on how to use your loan.
- Access to capital: Secure a large sum of capital or recurring funding.
- High interest rates: Many loans have high interest ratesStrict credit requirements: Many lenders require a good credit score
- Collateral requirements - Some lenders require collateral or a personal guarantee
How to qualify for an ecommerce business loan
Although requirements vary from lender to lender, most look at your business credit score.
If you have good credit you’re likely to qualify for more funding options and can secure lower interest rates and fees. The reverse is true of those with a poor business credit score.
Your business will also have to show a trading history of at least six months, in most cases, in order to be considered for a loan.
However, providers such as Uncapped offer revenue based finance, which doesn’t require a credit check or personal guarantees. Instead, they look at your back-end business systems to forecast future revenue.
The different types of ecommerce business loans
An ecommerce loan is not a single financing option. There’s a lot of different types of ecommerce loans out there! Let’s go through each of them.
Fixed-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.
Basically every lender - old and new - will offer their version of a fixed-term loan. It’s down to you to find the right one for your business.
In some cases, this decision is made easy. Traditional lenders are less likely to lend to young businesses with a limited trading history.
Meanwhile, many online lenders offer higher interest loans that serve less established businesses.The average APR for fixed-term loans can range from 7% to over 30% depending on your loan provider.
The advantages of fixed-term loans include:
- Having freedom over how you spend the loan
- Committing to a predictable repayment schedule
- Being able to borrow a lot of capital at once
Who are fixed-term loans for?
Fixed-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. Fixed-term loans are also good for businesses looking to take on a new opportunity or expand their current operations.
This is one of the most affordable options for ecommerce businesses, but you may need to show you’ve got a good credit score and offer a personal guarantee to
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 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.
Who are lines of credit for?
A line of credit is best for businesses looking for short term funding to ease cash flow and help them cover operational expenses.
If you 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 offer up to $5 million and the repayment period is 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 startups. However, SBA loans still have strict qualifications and may require a personal guarantee or collateral. Some lenders may also 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 be approved for since they have a longer application process, and you need a great credit profile to qualify.
Who are SBA loans for?
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 larger tranche 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.
Who is equipment financing for?
This type of financing only works for ecommerce businesses who need to purchase equipment to create the goods they sell. For example, if you’re a maternity fashion brand, you may need equipment to help you manufacture or design your products. If you need funds to do other activities, you’ll have to look elsewhere.
Business credit cards have lots in common with your personal credit card. You can make purchases for your business and repay any debt in monthly instalments.
Although not technically a loan, this is another option that gives you access to short-term funding.
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 your customers.
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.
Who are business credit cards for?
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 access to a small amount of short-term funding, 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.
Who is inventory financing for?
Inventory financing is a good option for businesses who want to purchase stock in bulk ahead of a high selling period or to secure a great deal on inventory. To learn more, you can read our article about inventory financing.
Take advantage of the good relationship you have with vendors and ask them if you can purchase your inventory now and pay them later with a trade line. This works similar to a line of credit, and gives you more flexibility over your finances.
Who is a trade line for?
Trade lines are a solid route for businesses who have established healthy relationships with long-standing vendors. The longer the relationship you have, the more likely they are to trust that you can and will pay after you have the inventory in hand.
Choosing the right ecommerce loan for your business
When it comes to ecommerce business loans, there’s no one best option. Finding the right provider depends on how much finance you need, how quickly, and at what cost.
If you have good credit and need capital for various business expenses, a fixed-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 revenue based finance, a line of credit or business credit cards.
When you’re ready to apply for an ecommerce loan, you should prepare your credit score, financial accounts, and any assets you have on hand to use as collateral if need be. A well thought-out plan often combines different types of ecommerce loans.
Ultimately, each ecommerce loan has its own repayment structures, interest rates and financial covenants, so 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’ll stand the best chance of finding the ecommerce loan that’s right for you.