Applying for ecommerce loans is the most straightforward option for funding your online business, but how can you tell which loan is best for you?
What you need to know
- There are many loans available to ecommerce businesses, including SBA loans, term loans, and lines of credit. Most can be unsecured, and each has its own risks and benefits.
- Before you apply for a loan, assess your business’s financial health and your financing needs. Match the type of loan to these needs.
- Business loans can have a substantial impact on revenue when used to improve marketing, product development, or employee benefits.
Understanding different types of ecommerce loans
One of the challenges ecommerce businesses face is a lack of property that can be used as collateral, making many secured loans out of reach. Fortunately, there are many types of unsecured loans and secured loans with low collateral requirements available to business owners:
- SBA loans for ecommerce businesses are backed by the U.S. Small Business Administration and typically have lower rates and more business-friendly terms, although approval criteria can be more demanding.
- Term loans are lump sum loans from banking providers that may be secured or unsecured.
- Business lines of credit are revolving loans from banking providers. If you have less collateral, you may be charged a higher interest rate.
- Business credit cards can be used for short-term funding without the ecommerce loan interest rates. Using a credit card for monthly expenses and paying back the full monthly balance will eliminate interest payments.
- Asset-based financing isn’t off the table for ecommerce businesses. Equipment financing and inventory financing are secured forms of debt financing which typically offer better rates and terms than unsecured loans, making them affordable forms of secured financing available to ecommerce businesses.
- Venture capital for online businesses isn’t typically structured the way loans are, as it doesn’t involve debt. Instead, these funds are invested by venture capitalists in return for a stake in the company.
- Crowdfunding is a form of non-debt financing in which you collect a large number of small donations from people, who in return receive rewards or company stake. This is typically using online platforms like Kickstarter and GoFundme.
Assess your business’s financial health
The key financial metrics you’ll need to present when applying for an ecommerce business loan are your credit score and annual revenue. First, each lender has minimum credit score requirements for receiving a loan or line of credit, so check your FICO personal credit score, then check your business credit score with the business credit bureaus. Lenders often also require a certain amount of revenue, which requires you to share your financial statements—ask your bookkeeper or accountant to prepare them before you apply.
Determine your funding needs
After assessing your business’s financial health, your next step is to determine how much money you need to reach your company goals. You don’t have to focus on just one goal—consider using some of your ecommerce loans to invest in advanced marketing tools and inventory expansion. Anything that can increase efficiency or cut costs is typically a good investment.
Calculate the total cost of inventory, marketing, and development for your next period and add a buffer for unexpected expenses. That’ll be the size of loan you should try to get approved for.
Match loan types with your business needs
Align your business needs with the type of loan best suited to meeting those needs. For example, a business line of credit might suit a project with multiple stages, while a term loan would be more appropriate if you need the money all at once. Understand the terms of different loans and loan types and choose based on your business needs.
This is especially important when taking on debt for financing. Maximal growth usually requires extra capital, but debt needs to be repaid—always consider your debt’s impact on revenue, and make sure you’re making enough to repay your loans on top of interest or other fees.
Interest rates and repayment terms vary between loans. Research different loan providers and carefully read the terms and conditions and fees. Flexible repayment options, like lines of credit, are generally preferable to rigid loan repayment terms. Venture capital funding and crowdfunding don’t require repayment at all, but stake or other rewards.
How to apply for a loan as an ecommerce business
Ecommerce businesses apply for loans the same way brick-and-mortar businesses do. First, gather the documentation your lender requires—bank account information, financial statements, legal identification, and revenue or cash flow statements. One of the most common pitfalls in the loan application process is omitting documents or submitting inaccurate paperwork. Underwriters will thoroughly vet your business information, so be honest—don’t fudge numbers to try and receive better loan terms.
How to use a loan for ecommerce growth
There are risks and rewards to using debt for business growth, and they vary with each type of loan. Once you’ve ensured you can comfortably repay your loan, you can use the extra capital for all sorts of purposes:
- Expand your inventory
- Expand or launch a marketing campaign
- Pay vendors or partners
- Hire more staff or improve salary and benefits
- Research and develop new products
See how Bluevine can help you grow your ecommerce business.
