The definitive guide to Ecommerce financing

You’ve hit a cash crunch.

You’re not sure exactly how, but you think it was a combination of sluggish sales last month and the deposit you just paid for the next container of stock.

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Coupled with the tax debt the accountant just surprised you with and you’re left feeling anxious as to how you’re going to make next month’s payroll.

If you’re in this scenario, it’s likely you’ve already googled financing facilities. 

And then left even more stressed.

Where do you even start? (HINT: Google is not a great place)

The market for Ecommerce finance has exploded in recent years. Traditional banks are launching new products. New Fintechs have sprouted.

Even payment platforms like Stripe, Paypal and Shopify have capital products.

Everyone wants a piece of this growing sector.

The hard part for you is deciding who to go with. Who has the cheapest rates? What is the best facility for my requirements? 

In this article, I’m going to cut right to the chase and help you navigate the world of Ecommerce financing.

Knowing some basics can save you thousands.

Let’s start with the basics.

The Types of Financing

There are 3 types of Ecommerce business financing:

  • Trade Finance – capital to fund stock purchases
  • Working Capital finance – capital to fund all short-term cash needs
  • Term loans – capital to fund long-term business needs

These loans have different terms and serve different purposes.

1) Trade Finance  

Trade Finance is a type of ‘line of credit’ facility that you use to pay suppliers. It’s mainly used for inventory purchases. It works like this:

  • You upload the supplier invoices you want to be funded, up to the limit of the facility
  • The financier ‘pays’ your supplier
  • You have up to 120 days to pay back the financier, including interest 

2) Working Capital finance

Working Capital Finance is a more broad type of funding, where the financier loans you a lump sum of cash. How you spend the cash is up to you, hence why it’s considered a more flexible form of financing compared to Trade Finance. 

The trade-off for this flexibility is often a higher interest rate.

Repayments terms vary across financiers but are commonly repaid on a % of revenue basis.

3) Term Debt

Term debt is the more traditional form of finance where you borrow a lump sum of money and repay that over a longer period of time, say 3, or even 10 years.

Term loans are commonly used to fund long-term investments in the business, like buying a new warehouse, or a significant investment into international expansion.

4) Credit Cards

I’ve thrown this in here for good measure because credit cards can be a great form of finance. Small business AMEX limits can go up to $150k+, making it flexible, accessible, and cheap – as long as pay it off before within the interest-free period.

The key point here is before jumping ahead with an online lender, firstly understand what type of loan facility you need.  For example, many founders resort to short-term working capital facilities but instead would benefit more from a revolving trade finance facility.

If you’re unsure about the best facility, ask your accountant or finance broker.

Now that you’ve decided the type of facility you need, let’s dive into what to look for when assessing the financiers.

Calculating the cost of debt

To calculate the cost of your financing, you need to factor:

  • The effective interest rate of the loan
  • Any fees and charges.

There may be some math required as there’s often little consistency amongst the financiers. Some charge an annual interest rate. Some take a % of the borrowed amount. 

Whenever you’re assessing the loans and terms, ensuring you’re comparing the effective interest rate.

Information Requirements

The other consideration is the speed of the loan. Many online lenders like Paypal Capital and Shopify Capital can give almost instant offers because they have all of your data. Some have more thorough checks and longer due diligence periods – but have better interest rates.

Whatever you do, ensure you leave enough time and be strategic about your funding choice. You don’t want to be that founder that resorts to “opportunistic lenders” that charge premium interest rates.

In other words, plan ahead. Get this financial foresight by maintaining a cash flow forecast.

How much do you need to borrow?

To quantify exactly how much to borrow, you need a cash flow forecast.

A cash flow forecast will help you understand any working capital gaps in your business and allow you to plan appropriately.

We recommend maintaining a 3-way financial budget in order to forecast your cash flow.

You can learn about that here.

Who is the best financier for my Ecommerce business?

Now that you’re equipped with some fundamental knowledge about financing, let’s review all the lenders in the market.

We’ve compiled an open-sourced database of all the Ecommerce financiers in the Australian, North American and UK markets, outlining the interest rates, repayment terms and any details hiding within the T&Cs.

Grab a copy of the document.

It’s intentionally read-only – feel free to make a copy of the sheet that you can review and edit for yourself.

Summing up

The world of Ecommerce financing can be overwhelming – but doesn’t have to be. Next time you’re in the market for some capital, follow this framework:

  • Understand what the funding is for – is it purely to fund stock purchases, or is it more than that?
  • Calculate exactly how much you need to borrow using a cash flow forecast.
  • Compare the effective interest rate of lenders to ensure you’re getting the best deal possible.
  • Use the open-sourced Ecommerce finance summary to review the financiers suitable for your needs.

If you have any questions, don’t hesitate to contact us.

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