post by:
Michael Goldstein
There are few things more important to an ecommerce business than funding. You can have an excellent business idea, a great work ethic, superior products, great advertising campaigns drawn up… but if you have no funding, you won’t be able to do anything about those exceptional qualities. Money makes the world go ‘round, they say, and that’s especially true in the ecommerce world.
To get your business off the ground, you need funding. And luckily, as ecommerce has grown and become more and more important to consumers, plenty of funding options have appeared. You no longer need to walk into a bank to pursue a traditional business loan (unless you want to, of course). There are lots of different funding routes you can go for – it’s up to you to decide which one best suits your business and your goals.
But with so many different options to pick from, how can you even know where to begin? We’ll agree that it can feel a bit overwhelming. To help you out, let’s take a look at all the ecommerce funding choices that exist. Before we get into that, though, let’s get you up to speed by reviewing some of the frequently asked questions about ecommerce funding.
Why is ecommerce funding so important?
Let’s start at the very beginning by talking about what makes finding funding so important in ecommerce.
It seems like everyone these days is trying to get into the ecommerce game, and we’re here for it. The fact that it is so accessible is great – everyone should be able to sell online if they want to, and services like Shopify have made it incredibly easy to do so. But this also creates an issue: lots of sellers create stores without much funding on hand. They sell a few items, get a bit of money, and the process repeats… without ever changing.
Let’s imagine that you’re selling homemade mugs in your ecommerce store. You set up your shop, list 5 mugs, and sell out. If you have some of your own money to spend on supplies, you might be able to sell 5 more, but you likely won’t ever be able to sell more than that. Once you realize you can sell 5, you’ll want to sell 10, right? But you can’t do that without money for supplies to make 5 more mugs – and you won’t be able to move those extra mugs without money for advertisements to get more customers.
Another reason why funding is so important for ecommerce businesses is because it reduces the strain on the business owner. If you have no outside funding for your shop, you will be paying for everything. That means that maintenance, returns, shipping, supplies – all of that will be paid for by money out of your own bank account. That’s not a sustainable model. Sure, if your business is incredibly profitable, you might be able to make that work. But you won’t have a highly profitable business until you build your company for years… and you’re going to need funding to make that work.
Finally, funding allows you to innovate at a much higher pace. If you have more money, you can invest more into product designs, customer experience, fast shipping, and various other improvements that will make your store more successful. Without money to spend on your business, it will always remain the same, and businesses that don’t innovate inevitably get left behind.
Of course, most of this is intuitive. Sure, you can theoretically run an ecommerce business without funding, but you probably already understand that this will be more time-intensive, difficult, and frustrating. If you want to make ecommerce more than a hobby, though, it’s time to find some funding. But how does that work, exactly?
Great question.
How does ecommerce funding work?
Let’s make one thing clear: ecommerce funding isn’t free money (well, most of the time). Although it may sound like your ticket to freedom and riches, deciding to pursue outside funding is something that you should carefully consider before diving into it. If you don’t feel like you will be able to pay the money back, you should wait until your financial situation is more stable.
But don’t worry: it’s not generally too difficult to get funding and pay it back. In general, ecommerce funding works by working with another group – generally a bank, but sometimes independent firms – who will advance you cash that you can use to build your business. Sometimes you just need to pay this money back in small amounts over a long period of time – other times you need to make larger payments. Carefully choosing a method that fits your finances is the most important challenge of the entire funding process.
Of course, there are also funding options that don’t require you to pay money back. You may be able to find investors willing to put their money on the line simply because they want your business to succeed. That’s the ideal situation. More likely, though, investors will want something in return even if they don’t want money. Equity is the most common exchange you can make with investors.
For the most part, you are free to use the funds however you’d like once you receive them. Each funding source will differ, of course, but most aren’t too restrictive. There is generally just one key stipulation: the money has to go towards your business. That means you can’t ask for a cash loan and then buy yourself a car. Instead, the money should go towards expenses like shipping, payroll, or any of those other costs that are directly linked to your business.
What to consider when pursuing ecommerce funding
That was a quick overview of how most ecommerce funding options work. Yes, it’s quite simple. The challenging part, though, is selecting the perfect option for your business.
Why your business needs funding
The first step in picking funding is taking a long, hard look at your business to see what you need to use your ecommerce funding for.
Your business’ timeline
To begin, start by thinking about your timeline. Are you short on cash and dealing with issues in your supply chain that need to be fixed right now? If so, that will help you cross off any options that will take a long time to deliver the funds to you. Or are you just hoping to slowly ramp up how much money you have in preparation for growth in the future? If that’s the case, you can pursue options that will deliver money at a slower pace.
Where the money will go
Another key factor to consider is where the money will be going. While most funding services don’t care whether the money goes to your shipping department or to the bills your supplier sends you, you should still think this through so you can have a more specific spending timeline. Knowing where the money will be going will also help you decide how much money you need, as your shipping costs likely differ quite a bit from your recurring software fees.
The amount of funding needed
That brings us to what is perhaps the most important part of the entire equation: the amount of funding that you want. Getting $100 for your ecommerce business is relatively easy… getting $100,000 is a bit more difficult. Still, don’t undersell yourself. If you need a certain amount to make your business plan work, don’t start looking for options that will give you far less. Look at your finances, make a solid plan for how much funding you require, and try your best to get that amount. Having a specific number in your head will be an incredibly helpful resource while comparing all the different funding options that exist.
What makes your business attractive to funders
Finally, before you start pursuing funding, you should think about what qualities your business has that might make you appealing to different funding sources. Do you have a really strong credit score that you can leverage for a loan? If so, keep that in mind. Do you have a proven track record of business success – or are you already making lots of sales with your current business? That can help a lot. If you don’t have anything concrete like that, try to think of a spin you can put on your business idea that will make it seem appealing. Highlighting your best qualities is an important part of this entire process!
The different kinds of ecommerce funding
Back in the day, you used to get a loan, get some investors, or get lost. But now the Internet has opened the door, and there are many routes you can use to get funding for your ecommerce business. Before we jump into the best examples of each, let’s briefly define them so that you have baseline knowledge about your options.
The first option – that you don’t need to go over very much – is called bootstrapping. This is when you “pull yourself up by your bootstraps” and use your own funds to keep your business afloat. You can sell things, dip into your savings, or even beg your parents for money to make this option work. But hey, we’re trying to get away from bootstrapping, right?
Another path that people go down is small business grants. The beautiful thing about grants is that they usually don’t need to be repaid – you are given money simply because an individual or a group believes in the power of your business. Unfortunately, grants are few and far between, and the process to get the money is often lengthy and complicated. At the end of the day, relying on grants to fund your business isn’t a great idea because it’s simply not a reliable source of cash. You can’t realistically expect to win a new grant every month.
Still, being constantly on the lookout for grants (especially local ones) is a great way to potentially supplement other funding methods. It doesn’t take much effort to watch for ones that might apply to you, and some of them have relatively simple applications. There’s no harm in hoping that a grant might suit you, but you should avoid using them as your sole method of funding… unless your business has some type of humanitarian slant to it that could really catch the eyes of grant committees.
Next up, we have crowdfunding. Crowdfunding is a modern way of getting money for an idea by getting small donations from hundreds or thousands of investors. Crowdfunding campaigns sometimes give out rewards to those who decide to donate, but most donors are just good samaritans who want to see a project get to completion. They are tossing their money towards your business because it matches their passions or interests. For the most part, you don’t owe them anything aside from trying your best to make your business succeed.
Of course, sites like GoFundMe are filled with crowdfunding campaigns, and many don’t go anywhere. For a more reliable method of funding, consider debt financing. This is one of the most common routes that business owners go down, and there are tons of services in this niche. It essentially involves borrowing money from a source, taking on debt, and then paying back that debt at a later date. You may incur interest over time, or you may not. It just depends on the state of the funding agreement.
Similar to debt financing is equity financing. In the case of equity financing, you don’t take on debt at all. Instead, you give up partial ownership of your business in exchange for money. This largely refers to finding investors who want a piece of your company and promising them equity in exchange for their cash. It’s a technique as old as business itself, and it still works quite well for modern ecommerce shops.
Finally, we have revenue-share financing. As you might expect, this is when an ecommerce business obtains funding in exchange for part of the revenue that they then make. This is great for investors, as they can get a huge return on their investment if their money helps create a lot of sales. It’s also great for business owners, as they don’t have to promise any money that they haven’t already made. You’ll only give the investors money if you also make money. Think of it as the ultimate win-win scenario.
Whew, okay, that was a lot. Now that you understand the basics, let’s dive into specifics.
Which ecommerce funding method should you use?
As you can see, there are multiple different ways to secure funding for your ecommerce business. You’re probably wondering which you should use, right? Well, there’s not an easy answer to that question. Each funding method has its use, and you want to be ready to use any and all at different points in the progression of your business. Still, each type of business will benefit from these methods in different ways, so let’s discuss the best fits.
Bootstrapping is largely going to be the preferred method for those that are running their ecommerce store as a hobby while still working a normal day job. Once you start trying to make your ecommerce business your career, it will require much more money than you probably have laying around. For that reason, we recommend bootstrapping only for ecommerce enthusiasts rather than serious entrepreneurs.
Grants are tricky. Because each grant has different criteria, it’s hard to say which business will benefit the most from them. One grant might fit you perfectly while another might sound like the complete opposite of your business. We recommend grants for business owners with strong local presence simply because that will help them stand out the most when a local grant pops up.
Crowdfunding, on the other hand, is perfect for those that have a business idea with the potential to go viral. If you are just hoping to sell hand towels at a slight price increase, you won’t have any luck with this method. That’s because it’s not exciting to the average donor. If your business idea is incredibly creative, original, or emotional, crowdfunding could work. We recommend this method for those with viral business plans… or anyone with some serious Internet marketing chops that could make a boring hand towel business into the newest meme.
Debt financing is a much more traditional method of getting funding, and it’s the one that most business owners are going to feel the most comfortable with. While taking on debt can be stressful, it gets you cash quickly – and it’s guaranteed to work. You won’t need to worry about finding investors or praying that a marketing campaign makes your crowdfunding idea catch some steam. For that reason, we recommend debt financing for those who need money quickly and don’t want to stress about their funding process not working out.
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Equity financing is very similar to debt financing, but it usually takes much longer to work out. Debt financing just involves going to the bank or working with an online financing firm – equity financing, on the other hand, will have you searching for investors, giving presentations, and working on long negotiations. It can be tiring, and you won’t get your money very fast. But there are some major upsides. We recommend equity financing for those that are looking to build lifelong relationships that will help grow the business over a long period of time. We also recommend this method for those business owners with a strong rolodex of potential investors!
And then there’s revenue-share financing. There are lots of reasons why you might consider going this route, but keep in mind that you will literally be sharing your revenue. If your business ends up being a massive success, you might feel frustrated giving away a portion of the profits that feel like they should belong to you. With that in mind, we recommend this funding method for business owners that want to keep control of their entire business and don’t want to incur debt.