E-Commerce Business Loans: A Complete Guide to Financing Your Online Store

If you own an e-commerce business, there may be times when you need more cash than you currently have on hand. This could be due to a time gap between placing a large inventory order and selling your products, a costly new marketing initiative, or the fact that you’re in a growth phase and profits haven’t yet caught up to expenses. What can you do if you’re short on cash flow but need capital to grow your online business?

Thanks to the evolution of e-commerce, web-based merchants have many options for funding. For e-commerce financing, you can seek the same kinds of small business loans that many other businesses apply for.

Read on to learn what types of loans are available to e-commerce companies and how to find the right funding for your needs.

What Are E-Commerce Loans?

An e-commerce loan is any type of small business loan that is used to start or expand an online retail business. It might also provide the funding to add an e-commerce component to a traditional brick-and-mortar business.

An e-commerce loan can be short-term or long-term and comes with varying rates, terms, costs, and required qualifications. You can find e-commerce business loans at banks, through Small Business Administration (SBA) lenders, or via an online lending platform.

How Do E-Commerce Loans Work?

E-commerce business loans work like other types of small business loans. You can find unsecured loans that don’t require collateral or secured loans backed by your business assets or the equipment you’re purchasing. Interest rates can be fixed or variable, with repayment terms lasting up to 25 years.

With a traditional term loan, you would receive the loan amount (principal) and then begin making regular payments (toward principal plus interest) on a predetermined schedule for the life of the loan.

Once you’ve received the proceeds of an e-commerce loan, you can generally use the money for any business need, including buying inventory or equipment, paying staff salaries, renting a warehouse, overhauling your website, or investing in social media marketing. In some cases, however, a loan may have strict requirements for what you can spend the money on, so it’s key to read the fine print before applying.

E-Commerce Financing Options

E-commerce financing is a broad term that covers many types of business loans. Here are some options you may want to consider.

Term Loans

If you get a term loan, your e-commerce business receives a specific lump sum with a fixed or variable interest rate and a defined repayment schedule.

Short-term loans generally have repayment terms between six and 18 months and are often available through online lenders. They tend to be easier to qualify for but come with higher interest rates than long-term loans. Long-term loans, on the other hand, have a repayment period of three years or more.

These loans typically come with higher amounts, lower interest rates, and tougher qualification requirements than short-term loans. They are available through banks, credit unions, and SBA lenders.

Recommended: Average Business Loan Interest Rates

SBA Loans

The SBA participates in a wide range of loan opportunities for e-commerce companies. The SBA itself doesn’t provide the financing but instead works in partnership with banks and other lenders to guarantee a large portion of the loan’s proceeds in the event that the borrower defaults.

Because this reduces the risk to the lender, SBA loans can often offer borrowers low rates, high amounts (up to $5 million), and long repayment terms (as long as 25 years). And with the popular SBA 7(a) loan, you can use the funds toward almost any business expense.

SBA loans can be difficult to obtain, however, due to rigid qualification requirements and an extensive application process. And it can take several months before you have access to the funds.

Recommended: SBA Loan Calculator

Business Lines of Credit

If you’d prefer to have access to cash when you need it rather than getting it all at once, a business line of credit could be a good source of e-commerce financing. You can draw funds whenever you need them up to an agreed-upon credit limit and only pay interest on what you withdraw. Once you’ve paid that back, you can draw from the credit line again. This can make this kind of funding useful for covering expenses that crop up when inventory isn’t moving as quickly or to cover unexpected costs.

Recommended: Business Line of Credit Calculator

Equipment Financing

There are also loans specifically for buying equipment, such as computers that you might need to use in your e-commerce business. With this type of financing, the equipment itself acts as collateral for the loan, which keeps the interest rate low and your other assets (either business or personal) safe. Typically, you would get a quote for the equipment you’d like to buy and a lender would then front you all or a large portion of the cost. Equipment financing can be limiting, however, since you can only use the funds for business-related equipment.

Recommended: Equipment Loan and Financing Calculator

Business Credit Cards

If you need a way to cover dips in cash flow, a business credit card could provide it. You can even use a business credit card as a kind of short-term loan. If you can qualify for a 0.00% intro APR business credit card, you can use the card for a predetermined period without interest. And if you pay off your balance before the end of the introductory period (which may be a year or longer), you don’t have to pay any interest at all. At the same time, you’ll be building valuable business credit along the way, which you’ll need if you want more financing later.

Inventory Financing

If you experience a sudden increase in demand for your products but lack the cash to purchase inventory, you might want to look into inventory financing or purchase order financing. Both are forms of asset-based lending where a financing company advances a large portion of the cost of the production of your goods to the supplier or manufacturer. You’ll pay interest to the lender.

The inventory you are purchasing acts as collateral for the loan, which may help you qualify for lower rates and keep personal and other business assets free from risk. Inventory financing typically won’t cover all of your inventory costs, however, and you often need to have at least one year of business under your belt to qualify.

Trade Credit

Some vendors offer their own credit. If the company you buy your inventory from offers trade credit, you can make your purchases without paying any cash up front. You can pay at a later scheduled date, often in 30, 60, 90, or 120 days. This is like a type of 0.00% financing that can significantly help free up cash flow.

Invoice Factoring

Another possible solution for e-commerce businesses with cash flow issues is invoice factoring. If you send invoices to clients, you can sell your unpaid invoices to a factoring company that buys them at a discount. The factoring company advances you a percentage of the value of your invoices and takes over the collection process. Once your customer pays the outstanding invoice, you receive the money that’s left (minus factor fees and any other charges).

Invoice factoring can provide fast funds during cash flow crunches but tends to be more costly than other types of e-commerce financing.

Asset-Based Loan

If you don’t have the credit you need to qualify for a term loan or SBA loan, you may want to consider an asset-based loan. For one of these, you put up collateral in the form of an asset (such as real estate, equipment, or inventory) to secure the loan. This decreases the risk to your lender and can help you qualify for financing you might not otherwise be able to get. Lenders usually look at the loan-to-value ratio (a percentage of the value of the asset) to determine how much to loan your e-commerce business.

Pros and Cons of E-Commerce Loans

Like any kind of business loans, loans for e-commerce businesses can have pluses and minuses for small business owners. Below is a quick rundown.

Pros of E-Commerce Loans	Cons of E-Commerce Loans
Can help businesses manage seasonal business and cash flow issues	Repayments can have long-term budget impact
Paying off the loan regularly can help build a strong business credit history	Not paying back the loan can impact credit and in some cases result in an asset being seized
Allows the business to handle emergencies and take advantage of opportunities	Having too much debt can influence lenders against providing you further funding

Applying for E-Commerce Financing

There are several stages involved in applying for a small business loan. The steps below walk you through the process.

Finding Out Which Kind of Loan You Want

To determine which type of e-commerce financing is the right fit, first consider whether your business needs money upfront with a fixed term or more flexible access through a line of credit.

A line of credit is helpful for online merchants who anticipate a dip in sales at specific times of the year. For one-time larger expenses, consider a fixed-term loan.

Next, you’ll want to look at your qualifications as a borrower, which will impact your options. Lenders typically have guidelines when it comes to credit scores, time in business, and annual revenues. If you have solid credit and strong financials, you may be able to qualify for a low-interest SBA or bank term loan. If you’re just starting out or don’t have strong personal or business credit, you may want to look into a short-term loan from an online lender, inventory financing, invoice factoring, trade credit, or an equipment loan.

How Much of a Loan Do You Need?

This is a critical decision: If you ask for too much, lenders may question your ability to repay. If you ask for too little, you may have trouble completing your business objective and, as a result, fail to see a good return on your investment.

To determine the right loan amount, you may want to draw up a business plan that includes a detailed budget for how you’ll use the loan proceeds, as well as how the money will increase your profits. This will not only help you determine how much you need, but the information can also be used as part of your loan application.

Since the influx of capital likely won’t pay off right away, also look at your cash flow to see how much you can realistically afford to pay each month in loan payments.

Gathering Documents

There are certain documents you’ll need in order to apply for an e-commerce loan. Exactly which ones will be necessary depends on the lender, but it never hurts to be prepared. Before you get started with the application, you may want to have the following on hand:

•   Personal and business information

•   Resume (for you and any other owners)

•   Personal and business tax returns

•   Current personal and business bank statements

•   Financial statements (profit and loss statement, cash flow statement, balance sheet)

•   Information on current loans

•   Proof of collateral (if applicable)

•   Business plan

•   A clear explanation of how you’d use the loan

Applying for Your Loan

Once you’ve decided on the type of loan you want and how much you need, the final step is applying for the loan. Depending on the lender, you may be able to finish the application and upload your supporting documents online in just a few minutes. In some cases, it may be a more extensive and time-consuming process. Also, depending on the lender, it might take as little as a few hours or as long as a few months to get a decision.

If you’re approved, make sure to review the loan agreement carefully to know exactly the terms you’re signing up for. Look closely at the APR. A loan’s APR is the real cost per year of borrowing money because it includes not only interest but also added fees. APR is also the best metric to use as a comparison if you’re evaluating multiple loan offers.

After you sign the loan documents, the funds will be deposited into your bank account in as little as one business day, though again, this may differ by lender.

The Takeaway

Whether you’re looking to revamp your website, hire more staff, create a mobile app, or expand your warehouse space, there are loans, advances, and lines of credit available to help your e-commerce business get the capital it needs to grow and succeed.

To find the best funding solution for your business, it can definitely pay to shop around and compare various small business loan offers.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Can you get a loan for an e-commerce business?

Yes, e-commerce companies have access to traditional small business loans, as well as lines of credit, invoice factoring, inventory and equipment financing, and short-term loans from online lenders. These options can help you cover inventory, marketing, and operational costs as your business grows.

How do e-commerce websites typically get funding?

E-commerce businesses typically get the funds they need via self-funding, investments from friends and family, business lines of credit, business credit cards, inventory financing, Small Business Administration (SBA) loans, and other types of small business loans. Many owners compare multiple offers to find the best rates and terms for their needs.

Are e-commerce loans different from other small business loans?

Generally speaking, no. Loans for e-commerce businesses are usually the same as loans that are available to brick-and-mortar businesses. Lenders review the same factors, such as credit history and revenue, regardless of whether you sell online or not.

What credit score do I need for an e-commerce business loan?

The credit score you need to obtain a business loan for an e-commerce enterprise will depend in large part upon the specific type of business loan you’re applying for and the policies of the lender you’re applying to. In general, lenders are often willing to consider a personal credit score above 640, but some may accept lower scores, especially for secured loans.

What can ecommerce loans be used for?

Many business loans for e-commerce enterprises can be used for any legitimate business purpose. These can include purchasing inventory or equipment, covering payroll, renting commercial space, or marketing costs, among other expenses. Bear in mind that some kinds of e-commerce funding – such as equipment financing – may limit what you can use the funds for.

---

Photo credit: iStock/fotostorm

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

SOSMB-Q226-107