It has always been a challenge for small businesses to get financing. Circumstances worsened when banks tightened their lending criteria five years ago. Most banks lend only to businesses with an established operating history. If you are just starting up an ecommerce business, or, if you find traditional loan terms too stringent, there are other options.
In this article, I will list 10 ways to raise money for your ecommerce business.
Also known as bootstrapping, this works well when you are receiving very low returns on your money and the cost of borrowing is high. You can take money from your 401(k) but withdrawals before age 59½ are subject to penalties that can be steep. It is not advisable to totally empty your retirement or rainy day fund.
The advantages of using personal savings are:
- No costly and complicated applications;
- No interest to pay;
- Ownership of your business is not diluted.
Friends and Family
Friends and family may make an interest free loan or they may ask for interest. While these individuals can be more forgiving than a bank if you can’t pay on time, your relationship with friends and family may become strained if you cannot eventually pay them back. They may also start offering advice as to how to run your business.
This is one of the easier ways to access funds, especially if you have several cards. The downside is that if the interest rates are high and your business cash flow only allows you to make the minimum payments, you will be paying off the cards for a long time at a high cost.
Online networks such as Lending Club and Prosper allow individuals to make unsecured loans to other individuals. Lending Club facilitates business loans of up to $100,000 at rates starting at 5.9 percent with one to five year payback periods. Origination fees apply and interest rates can run up to 29.9 percent for riskier ventures.
Home Equity Loan
Consider this only if you are a homeowner with more than 50 percent of your home’s value as equity (the loan outstanding is less than half the market value of the house). If it is and you have a good credit rating, you could get a loan at an attractive interest rate with your home as collateral. Currently rates range from four to ten percent.
Traditional Bank Loan
These are difficult to secure these days. Banks generally charge fees along with interest and require collateral. Loans are usually one to five years with interest rates ranging from six to nine percent.
Businesses with a track record may also be eligible for a business line of credit, which offers more flexibility as you can borrow against it, pay back, and borrow more up to a limit.
The U.S. Small Business Administration guarantees loans from participating banks, which entices those banks to lend money to qualified applicants. Applying for a loan from the U.S. Small Business Administration involves lots of paperwork. Rates and terms vary based on the type of business. Loan amounts range from $50,000 to $1 million.
Kabbage, a company we profiled previously, offers lines of credit to small businesses. Approval can take as little as five minutes but Kabbage requires a minimum of $2,500 a month in sales and a company has to have been in business for a minimum of one year.
VCs are quite picky about their equity investments. One million dollars is usually the minimum investment and the fees can be quite high. A representative of the VC firm will likely want a seat on your board of directors and will have input into the direction of the company. We’ve addressed venture capital financing previously, at “Venture Capital Firms Bullish on Ecommerce.”
While reward-based crowdfunding sites such as Kickstarter and Indiegogo are available to ecommerce merchants, these platforms are more successful with creative projects and consumer electronic gear. While not true crowdfunding, several ecommerce companies have had success with private placements with accredited investors via general solicitation. This approach is similar to venture capital funding but conducted via an online portal. Wefunder, EarlyShares, and AngelList are examples. See “Ecommerce Companies Raise Funds with New Approach” for details.
Intrastate crowdfunding is another crowdfunding option in several states. Under this option, investment is not limited to accredited investors but only residents of the state where the business is located can invest.
Which Approach is Right for You?
If you want to maintain total control over the direction of your company and expect to have cash flow to make regular payments, a loan is the best choice. If you require a lot of money and feel you can relinquish control, or benefit from the advice of investors, equity is a good option.