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5 Most Effective eCommerce Finance Options

Financing a business is always a challenge, but the good news is if you are at the stage of seeking finance it means you are growing!

A common factor among every business is that at some stage we all need capital. From a young startup trying to get off the ground, to a thriving business looking to expand, money is at the center.

Without access to funding, the consequences can be fatal. Research shows that 90% of start-ups fail within their first four years. This is largely due to a lack of reliable funding for growth and expansion. How does one become one of the successful 10%?

The great news is that there are many financing options available. However, what’s most important is that you weigh up your options and choose the right option for your company. It isn’t one size fits all so you should analyze your business and the available options to make the best choice.

In this blog, we’ve compiled 5 tried-and-true techniques to finance your eCommerce business. Let’s check them out!

When is the right time to raise eCommerce finance?

An important question to ask yourself is “when is the right time to raise funding for your business?”

If you decide to raise money too early, you may run into problems such as; being unprepared or undervaluing your business.

If you decide to raise money too late, you may miss the opportunity to grow.

The difficult thing is that there is no correct time to start raising business funding. The most important thing is to have a clear goal, and a strategic plan put in place as to how these new funds you’ll require to achieve your goal.

5 Ways to Finance an eCommerce Business

Not every funding model is right for every business! Choosing the right eCommerce finance for you is essential to effectively grow and increase profits.

Not every type of funding will suit your business and some types make better sense at different stages of a business’s life.

We’ll explore 5 of the most effective funding solutions for eCommerce businesses to identify which type of financing is right for you.

 

#1 Revenue-Based Financing

Revenue-based financing is an exciting new kid on the block in the eCommerce financing world.

It is a funding method for businesses to raise capital from investors. The investors in turn receive a percentage of the company’s ongoing gross revenues as repayment for the money they invested.

It is becoming extremely popular among eCommerce businesses as an accessible form of low-risk capital. Investor’s decisions to provide revenue-based finance are usually backed by data. While this means your business must show that it is viable and profit-making, it also means that if you receive the funding you know that the investor believes you will succeed.

Businesses receive necessary cash without losing any control of their business or incurring debt. Investors receive a regular share of the business’s income until a predetermined amount has been paid back.

There are lots of great reasons to choose revenue-based financing including:

  • Quick approval
  • No guarantor required
  • Flat fee repayments

These are only a few of the reasons that highlight how easy and cheap it is to acquire this type of financing for businesses. As we’ll learn about later in the article other finance options are costlier (loans) or dilute your company (investors). With revenue-based financing, you keep full control of your business, have access to the funding needed to grow, and pay back a flat fee based on your revenue.

There is an endless amount of success stories of businesses receiving revenue-based financing and going forward to generate millions!

In our opinion, this is the smartest eCommerce finance option available for any business looking to grow.

#2 – Bootstrapping

Bootstrapping a term used to describe the process of building a company from the ground up using personal savings. The term originates from the phrase “pulling up by one’s own bootstraps”, which implied an obviously impossible feat.

Bootstrapping is common among startups, however, it is often a romanticized method of financing a business.

It is a tough path to choose for many reasons.  It places all the financial risk on the entrepreneurs themselves and can cause bankruptcy in failed cases.

Having limited resources can inhibit business growth, prevent proper marketing, and sometimes undermine the quality or integrity of the product or service envisioned.

However, done properly, bootstrapping allows the entrepreneur to retain 100% ownership, and 100% control, over the company.

 

#3 Grants

Another great option for startups or small businesses are grants.

A grant is essentially “free money” that’s given to a business usually by the government, a company, or a philanthropist.

As a business, you don’t have to pay grants back. They’re often given to incentivize job creation, sustainability projects or to increase economic benefits for local communities. They are sometimes given to provide smaller businesses a helping hand to be competitive in the market.

Grant availability often depends on factors such as; the location in which the business was founded, specific types of businesses or causes, or particular community groups.

As you probably expect, the headline of “free money” attracts a lot of businesses! Competition for grants is high as everybody wants free financing. So although it is free, you’ll have to really work for it by research and pitching to attain this type of funding.

While it may not be a full solution, it’s definitely worth checking out to see if you are eligible for any grants for your business.

#4 Equity-Based Financing

While bootstrapping and grants may provide adequate funding for smaller businesses, eventually you may become too large for these options to be feasible.

Unfortunately, as your need for larger amounts of money grows, the loss of control allows grows. Equity financing is a process where you sell a percentage of ownership of your business to someone in exchange for capital.

This is usually done when businesses need money to pay bills or require funds to invest in their growth. By selling “shares” of their business, a company is effectively selling ownership in their company in return for funding.

The most common types of equity finance are:

  • Angel Investors
  • Private Equity
  • Venture Capital firms
  • Initial Public Offering

These terms all refer to the two methods of equity financing: the private placement of stock with investors (Angel, Private Equity, VC) and public stock offerings (IPO).

This type of finance is typical for many companies, and it is often used several times during the process of reaching business maturity.

#5 Debt Financing

Debt financing is another common method of funding a business. It involves incurring debt to generate revenue for your business. The most common type of debt financing is a loan.

In return for receiving the money, the business must incrementally repay the principal to the lender including interest on the debt. This method allows businesses to receive a lump sum of cash upfront, and the lender earns interest on the repayments.

In essence debt financing is the opposite of equity financing; in one, you take on debt to raise finance, in the other, you sell stock to raise finance.

The most common types of debt finance are:

  • Business credit cards
  • Loans
  • Lines of credit

Debt finance, similar to bootstrapping, can be dangerous as it places the business in debt to grow. You must bank (pardon the pun!) on your business growing enough to be able to repay the lender. Otherwise, you may risk bankruptcy.

Conclusion

Hopefully, this blog has shown you that it’s worth carefully considering your options when choosing a method to finance your business.

Financing can seem daunting. Putting your own money on the line, putting yourself in debt, or losing a piece of the company you built are all scary thoughts.

However, picking the right eCommerce finance strategy will put your business in a strong financial position.

This is the cornerstone of a successful business and will help towards future growth and success.

If you are interested in revenue-based financing for your business, check out Optily Advance to grow your business now!

We wish you the very best of luck! 🚀