Imagine you own a small online business or retail store that sells hand-made goods. There are expenses that need to be paid, such as material and labor costs and delivery fees.
The challenge is, it's out of peak season for your product and you need to free up capital to prepare stock for when demand returns. This is where an E-commerce financing company comes in handy.
E-commerce financing offers a cash injection to help cover any expenses - or simply to fuel business growth - until products are sold.
What is E-commerce Financing?
E-commerce financing is a funding service that provides capital to online sellers.
Sometimes accounts receivable and accounts payable don't quite align for online businesses, and that's where they can use E-commerce financing solutions to cover their expenses short-term and fuel growth by investing in more stock or increased marketing activity.
In an E-commerce financing agreement, the business repays the lender directly through their online retail platform - typically as a percentage of their revenue.
How Does E-commerce Financing Work?
In this article, Stenn looks at the key elements of an E-commerce financing agreement to help you gain a more solid understanding.
Who Is Involved in E-commerce Financing?
Firstly, we'll look at the three main actors involved in an E-commerce financing agreement:
- E-commerce Companies - The business that applies for financing, for example, a small business like an e-retailer or online service provider. As an example, let's use a fake company by the name of 'Hats-For-All'
- E-commerce Platform Providers - A digital platform that allows the business to sell its goods, for example, Amazon, Lightspeed, Prestashop, Woo, BigCommerce or Shopify.
- Financers - The institution that provides instant capital funding to the online seller.
The Process of E-commerce Financing - An Example
Think about any time you've bought a product online. You've either used an app, or the website itself. For this example, we'll say a customer buys a hat from 'Hats-For-All' through the Amazon mobile app.
'Hats-For-All' needs liquid capital to cover its manufacturing costs for 600 new hats at a cost of $5,000. 'Hats-For-All' is looking to increase sales through a marketing campaign that has tied up its liquid capital, so it cannot afford to cover its manufacturing costs in the short term. 'Lender Co.' offers 'Hats-For-All' an advanced payment to cover these costs.
Once a request for funding reaches 'Lender Co.', an estimated advanced payment reaches the supplier's (Hats-For-All) bank account. The estimated payment is based on what the supplier needs ($5,000) and what the financing platform is willing to provide (in this example, it is willing to fund the full amount requested).
The supplier then sells their goods to the customer, with the transaction recorded on the E-commerce platform as evidence of goods sold. In this case, the customer receives their custom hat, and the transaction is recorded on Amazon's database as evidence.
The revenue generated from the sale of goods is then collected by the E-commerce marketplace platform (Amazon) and transferred to the E-commerce financing platform (Lender Co.).
Depending on the finance agreement, repayments may be made directly from each E-commerce transaction, or the E-commerce business may repay a percentage of its monthly or weekly revenue.
Key Sectors for E-commerce Financing
There are key business sectors that commonly apply and qualify for E-commerce financing.
Examples of sectors that typically require E-commerce financing include software companies or e-retailers.
Types of E-commerce Financing - and Alternative Financing Services
There are different types of E-commerce lending, and a business may be more suited to one type over another:
- Revenue-based financing - A funding option that allows a business to pay back a loan through a percentage of sales revenue. 'Variable collection' agreements see businesses repay a flexible portion of their revenue until the loan is repaid, plus an agreed fee. 'Flat fee' agreements see a business pledge to pay a fixed amount of their turnover for a set period (for example, 2% for five years) - which can be more attractive in the short-term but expensive long-term.
- Merchant cash advance - E-commerce businesses borrow based on their turnover for a fixed period (e.g., six months), with repayments made automatically each day from their payment receipts.
There is also a range of alternative financial services that are similar to E-commerce financing in that they offer businesses immediate access to liquid capital.
However, these typically differ in how the business qualifies for the service and in the repayment requirements. These include:
- Invoice Financing - When a lender 'buys' a business' unpaid invoices, giving them instant access to the funds they're owed by customers. The finance provider then owns the invoice at its full value, receiving payment directly from the buyer at the expiry of the invoice.
- Asset-Based Lending - An agreement in which businesses borrow money against the value of their stock. If repayments can't be met, the lender seizes the collateral stock.
- Business Loans - A straight lump sum of money to help pay for a business' day-to-day operating or startup costs. This loan must be paid back over an agreed period with interest.
Advantages and Disadvantages of E-commerce Financing
As with any funding service, E-commerce finance comes with its pros and cons. Here, Stenn looks at the benefits and pitfalls online retailers must be aware of:
Benefits of E-commerce Finance
- Immediate Cash Flow - E-commerce financing provides immediate access to liquid capital, helping small to medium-sized online sellers grow through re-investment in stock or increased marketing.
- Build Credit History - Through proof that the business is able to repay loans on time each month.
- Reduce the Cash Conversion Cycle - by speeding up the process of accessing cash flow for stock instead of waiting on demand and customer payment.
- Maintain Control - Repayments are made as cash or as a percentage of revenue, meaning the business maintains complete control, compared with alternative funding solutions in which businesses relinquish a stake in return for a loan.
Disadvantages of E-commerce finance
- Expensive Interest Rates - Revenue-based funding can cost up to 12% of the business' monthly revenue, which can represent a costly repayment figure compared with alternative lending solutions.
- Application Criteria - E-commerce financing services typically have restrictive application criteria, for example, the business must be an online-only retailer using a recognised E-commerce platform such as Amazon.
How Can I Apply for E-commerce Financing?
Businesses must meet a few basic requirements to be eligible for E-commerce financing.
The first is that it must operate online, selling products through an E-commerce marketing platform (like Amazon or Alibaba).
Then, the business must meet the financial requirements set by the funding provider. This typically includes a credit assessment, with the business required to disclose its monthly or annual revenue to prove its repayment credentials.
Frequently Asked Questions (FAQs)
- What Types of E-commerce Lending are There?
Some of the most popular types of E-commerce financing agreements include revenue-based funding with a flat fee, revenue-based funding with a variable fee and merchant cash advances. These financing agreements simply differ in how the E-commerce repays the finance provider.
- What Can E-commerce Financing Funds Be Used for?
There is no single requirement for how an E-commerce financing must be used. Some of the common uses for E-commerce finance include investing in more stock, user acquisition and marketing.
Access Immediate Liquid Capital with Stenn
Does your business trade internationally with capital tied up in delayed payment terms? Stenn gives businesses instant access to liquid capital to fuel growth and avoid bad credit by converting invoices into cash.
Get financed now or find out more about alternative financing options in our Resource Hub.
About the Authors
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
Check the financing limit available on your deal or go straight to Stenn's easy online application form.
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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.