Last updated: September 21, 2022
Running an ecommerce business offers great perks such as affordability, flexibility, and low cost. Going forward, ecommerce businesses will keep making great strides as 51% of customers prefer online shopping to walk-in stores. However, just like with any business, working capital finance and business funding plays a big role when you intend to grow your operations.
Despite online commerce businesses having minimal barriers to entry, they still have to deal with huge upfront costs such as stock purchases and shipping costs. In addition, the stiff online competition from other ecommerce businesses demands costly marketing campaigns for customer acquisition. Without adequate working capital to manage inventory and meet the ever-changing customer demands combined with the rapidly changing marketplace, no ecommerce business can remain competitive and carry on indefinitely.
Luckily, it has become easier for businesses to access ecommerce funding as there are multiple ecommerce funding options. A new entrant is revenue-based finance, a secure and flexible way to meet the capital needs of any ecommerce entrepreneur.
Depending on your business goals, it's good to take time to understand and identify which type of ecommerce funding works for you. Here's a guide to some of the best ways you can fund your online store and achieve business growth in the long run.
Table of contents
Bootstrapping
Bootstrapping is when a business owner uses personal funds to run the business. The word bootstrapping comes from the expression, "pulling up by one's own bootstraps." It implies running the business from the ground up without any assistance.
MailChimp, a private bootstrapped company, is on the verge of being acquired for more than $10 billion by Intuit. And, there are even more companies being funded by personal finances. However, it's important to be sure if it's a worthwhile method to meet your business goals.
What are the advantages and disadvantages of bootstrapping?
Going it alone in running your online business shows great tenacity and opens doors to big opportunities. Bootstrapping allows you to have more control of your ecommerce business in terms of the direction and focus of your brand. In addition, you protect your online business from being dragged down by debts since you use your own resources.
On the downside, if there are bumps in the road, such as lower than expected revenues, shipment challenges, or sudden increase in marketing expenses, as the owner, you will take a direct hit. It's a significant financial risk for any entrepreneur.
Crowdfunding
As the name suggests, crowdfunding involves a group of people coming together to raise funds, usually through the internet. Indiegogo and Kickstarter are some of the most popular crowdfunding platforms, which have helped millions of businesses raise capital. They are both rewards-based crowdfunding sites, which means donating in exchange for a reward.
Another site is Crowdcube, which is one of the first equity-based crowdfunding platforms which targets UK businesses to increase their market coverage.
What are the perks and trade-offs of crowdfunding?
Crowdfunding is a less risky way, compared to bootstrapping, to test your online business idea. You avoid investing your resources in an idea that may get rejected. Should the campaign be successful, this could be your breakthrough to penetrate new markets, which were initially impossible. On top of that, you retain your equity or control of the company.
On the other hand, you have to be cautious of someone stealing your untried idea. You could take steps to protect your idea through patents, trademarks, or copyrights. Another risk is it could be a time-consuming and costly venture as there are fees involved. Crowdcube charges a 7% fee on the amount raised, including a completion fee of 0.75%-1.25%.
Grants
A grant is unlike typical ecommerce business loans where you have to pay back in scheduled monthly repayments. However, it comes with some conditions set by the organisation issuing the funds. This means there is a likelihood your application might not be accepted. The pandemic saw the retail and service industry being given priority to access grants of £10,000 if the properties had an annual rateable value of £15,000 or less, and if it fell between £15,001 and £50,999, the grant was £25,000.
What are the benefits and risks of grants?
A grant is a gift of capital to businesses since you don't have to pay it back. You can also access a good amount based on the scale of your intended investment. Winning the grant is a bonus to promoting your business to would-be customers and potential investors.
Even so, it comes with some conditions to attain eligibility, such as the retail and service industry requiring having properties with a minimum annual rateable value to access grants. Since it's open to many business owners, it can be a tough competition. As a whole, you shouldn't be discouraged to pursue this option, provided you do adequate research and meet the expected prerequisites.
Debt funding
Debt funding is simply using other people's money to support your ecommerce business. It can range from a loan from a friend or family or a credit card. Seeking an ecommerce loan can be a viable alternative as long as you can rely on your revenue numbers and can afford to pay back the interest. You also have to be ready for the bank or lender to analyse your trading history and perform a risk analysis.
What you should know before applying for debt funding
With taking debt, you don't have to worry about losing control of ownership. You can also plan out your cash flow and budget since you have a definite repayment schedule. If the ecommerce business loan is put to good use, it offers great leverage to your business, such as expanding your product portfolio or revamping your website to increase traffic.
You should still be wary of the risks. Aside from having to pay back the ecommerce business loan, it's not always a guarantee you will qualify for a business loan. Banks usually require security and a strong credit score.
Equity funding
Equity funding means, as the business owner, you obtain capital in exchange for a share of your company. There are different sources of equity funding, including angel investing, venture capital, friends and family, and Initial Public Offering (IPOs).
Each one of these sources has its own advantages and disadvantages.
If you go down the angel investing route, be prepared to give up a portion of your ownership for funding. Angel investors can be a great asset as they tend to invest huge amounts in small startups. As part-owners, they will be invested in the success of your business.
Angel investors also bring in tried and tested industry knowledge and experience, giving your ecommerce business a great boost. The main risk of angel investing, besides not having complete control, is the risk of failure as the business is still growing.
Venture capitalists also target startups at the infancy stage. Venture capital firms are heavily invested in growing the business, as they are also part owners. Some may even want to be part of your board of directors. Unfortunately, most venture capital investments fail due to the investment model.
Borrowing from friends and family is much more flexible than venture capital or angel investing. You don't necessarily have to sign over part of your company share. It's also prudent to draw up a customised repayment plan. Ensure you maintain a good business relationship. In addition, if you give out shares, ensure you have a lawyer prepare an agreement which is then signed to avoid future conflicts.
Initial Public Offerings (IPOs) enable the company to raise funds by selling its shares to the public. Going public has its perks, such as having quick access to significant amounts of capital and increasing the value of the brand to the public. Just make sure you are ready to deal with added complications such as obligatory financial reporting to the public and a costly change process.
Revenue-share financing
Revenue-share financing is also referred to as revenue-based lending or revenue-based investing. It is based on the revenue of your business, which means fewer barriers to access. Given that it's still a new entry into the eCommerce financing market, you may be unaware of its popularity among UK digital businesses. Providers like Bloom are pioneering the uptake of revenue-share financing by businesses of all sizes.
What are the costs and benefits of revenue-share financing?
Revenue-share funding can be a great business finance option for your ecommerce business, as you still maintain full ownership and control. Plus, lenders provide flexible repayment plans and charge minimal fees, making it affordable. Bloom offers a single fixed flat fee including no late charges or late fees, making it a trusted lender to work with.
The downside of revenue-share financing is some businesses might not qualify if they don't meet a certain threshold in their revenue projections. It could also shift focus from the wholesome growth of the ecommerce business to just reaching revenue targets.
Bottom line
Funding your ecommerce business doesn’t need to be a headache with the readily available funding options. The funds will help you leverage your market share and brand image as you keep growing. According to Statista, the UK's ecommerce revenue is projected to grow by 3.46% onwards every year, with an expected market volume of £104,747,000 in 2025. This positive outlook offers your business a chance to exponentially grow and expand into new markets beyond the domestic level.
As you take stock of your business, you are better placed to understand your cash flow and inventory needs. Working with Bloom ensures you don't have to worry about not meeting your revenue and profit target. We offer much-needed funding to small ecommerce business owners who might otherwise be locked out of traditional lending. In addition, we have at least an 80% approval rate with minimal requirements. Use Bloom to fund inventory and digital marketing efforts. To learn more about how we can meet your ecommerce finance, contact us today.
Written by
James Hickson is the CEO and Founder of Bloom Financial Group, the winner of numerous industry awards – most recently recognized as FinTech CEO of the year as well as Payment Service of the year by AI Global Media.
Bloom is a European Fintech company focused on small to medium business lending. With their proprietary technology, Bloom offers e-commerce and retail brands access to revenue based funding (between 25,000 EUR and 3M EUR).
