Fortunately, there are other financing options beyond traditional bank loans. Here’s a quick overview:
Family and friends
Close personal contacts offer flexible terms, favourable interest rates, and often allow to stretch the payback period indefinitely, until business cash flows are steady enough to pay off the debt. But even if friends and family are informal lenders, it is advisable to strive for professionalism in such dealings. Be transparent and let them know where the money will go, how and when it will be repaid, and what risks are involved.
Of course, one drawback is the potential impact on the relationship. It is therefore best to always put things in black and white to prevent future conflicts.
But while it’s okay to tap family and friends initially, when formal funding sources are less accessible, it is not advisable to depend solely on this network as you grow your business. During the business lifecycle, various capital requirements will arise, and you will eventually need to seek out other sources.
Peer-to-peer (P2P) Lending
In the case of P2P,e-commerce sellers won’t necessarily need to go through the loan application process. You have to create a public profile on a P2P platform, and lenders will reach out if they think you’re a good fit for them. Your profile should include information around your credit score and clear funding objectives. It should be enticing enough and make investors feel at ease about lending you money.
P2P sites match investors with the right businesses through a bidding process. E-commerce sellers can sift through offers and review the different terms and interest rates to determine the best fit.
Merchant Cash Advances
Cash advances from merchants are an uncomplicated way to get quick cash, especially in urgent situations. They don’t require collateral, and they deliver funds fast, once the application is approved. One drawback, though, is the high interest rate, which depends largely on the risk assessment. The costs can be quite exorbitant, especially for sellers without a solid credit score. You should therefore review the terms, repayment schedules, and fees before making any commitment. Don’t risk falling into a debt trap that will negatively impact cash flows.
Startups can nowadays raise capital from the public in exchange for equity (shares) in the business. Equity crowdfunding platforms allow businesses to raise significant amounts of money quickly—without the painstaking process of pitching to investors individually.
Increasingly, newer fintech startups are offering revenue-based financing for e-commerce sellers.They plug into your e-commerce data streams to assess risk, and may sometimes require you to flow payments through specific channels, but they would then lend your business a multiple of your monthly revenue streams.
For Yev Ivanko, VP of Acquisitions atRainforest, equity financing entails less risk, compared to a loan, as there are no fixed repayments. “Equity holders share risks equally between themselves, proportionally to their shareholding,” he says.“However, by reducing downside risk, the owners also give away some of the upside.”