If you require financing for your e-commerce business, you generally have two options: debt or equity financing.
So, which is the best for your company, and how are these different? Let us find out below.
Debt financing solutions for your eCommerce business
The traditional loan involves borrowing and repaying the money with interest over a specified period. This is known as debt financing. This type of financing can be obtained from banks, SBAs, online lenders, and business credit cards.
- Loans from banks: Traditional banks give business loans to big, established companies. The loan amounts range from $1,000 to $1 million. Interest rates are usually low, and there are fixed monthly payments. There needs to be a higher approval rate for small, online, and eCommerce businesses. The application process can take months, as applicants have to demonstrate profitability, have good credit, and write a business plan.
- Loans from the SBA: An SBA loan is a bank loan guaranteed by the Small Business Administration. As part of their 7(a) program, they offer term loans of up to $5 million over 7-25 years. You can get up to 85% in the SBA guarantee if your loan is approved and funded. The SBA will require collateral if the loan exceeds $350k. A lot depends on the loan size when applying for an uncollateralized SBA loan. When needed, an SBA lender will require specific profitability, personal/business credit, outstanding debt, and collateral.
- Business loans online: Several online business lenders offer small-dollar loans (usually $5,000 to $250,000) with a high approval rate, fast application processing, and quick funding. The interest rates charged by these institutions are generally higher than those charged by banks, and they often require daily payments. It is most beneficial for owners who can justify the cost of these loans to receive a worthy return on their investments.
- Credit cards for businesses: Credit cards are another form of debt financing that are not loans. Businesses use business lines of credit to fund startup costs and early-stage growth, but credit limits are low. It can get expensive if you do not pay your credit card balance in full or by the due date.
Equity Financing solutions for Your eCommerce business
The term “equity financing” refers to raising money by selling shares of your company to investors. It’s a fun way to raise money. Angel investors, venture capitalists, and small business investment companies usually fund eCommerce businesses.
- Angel investment: You get seed funding from angel investors to get your business. Most of the time, they invest their money to help you get started. An angel investor can be a friend, a family member, or someone with investment credentials.
- Venture capital: A venture capitalist (or VC) generally invests in startups and small businesses with high growth potential to either acquire them or steer them toward public markets.
- Small business investment companies (SBICs): Small Business Investment Companies are privately owned investment firms licensed and regulated by the Small Business Administration. The typical investment ranges from $100,000 to $5 million.
Equity financing: what are the pros and cons?
Pros:
- Liability without limitation: When you invest, investors assume the risk, reducing your company’s liability exposure.
- Using less credit: Equity investors do not care about credit scores, so you can get funding even if you have bad or no credit.
- No payment obligations: You can control your cash flow better since you won’t be tied to daily or monthly payments.
- An expert’s advice: Many equity investors offer advice and guidance to help your business go from strength to strength.
Cons:
- Less ownership & control: Having equity investors as partial owners of your company is a requirement of equity financing. You will be able to involve them in the decisions you make regarding your business operations and management.
- A lengthy process: Compiling financial documents, preparing investor presentations, waiting through due diligence processes, and more are all involved in getting equity financing.
- Share profits: Equity investors will receive a portion of your earnings since they own a part of your company.
If you are an online seller experiencing rapid growth, equity financing is a great option. It is always a good idea to think things through before signing anything. Different types of businesses have other short-term and long-term goals. You need to understand and decide how much control you will give up over your company and how much power investors will have.