post by:
Carmen Marks
If you’re an e-commerce business owner looking to grow your business, you may be in a position where a cash injection is needed. Growing your business can come at a fairly substantial financial price which means acquiring additional funding might be your only choice.
When it comes to getting some extra cash into your business, most e-commerce business owners look at three main options – selling some assets, taking out a high-interest loan, or giving up equity in your business in return for some funding. While all of these could give you the financial help you need, none of them put you in a particularly enjoyable position long-term. In particular, if you manage to find an investor to join your business in return for equity, giving up some of the business you worked so hard to create is not usually a nice thing to do.
There is another option for getting extra cash into your business though – non-equity funding. This can be extremely useful for business owners as they get the funding they need to continue growing their business but also keep 100% ownership and control of their business. Obviously, the money will need to be paid back at some point so it’s not a completely risk-free funding option but, if you’re an e-commerce business owner looking for funding without having to give up part of your business, non-equity funding could be a viable option for you.
Why Choose Non-Equity Funding Over A Venture Capitalist?
If you decide to go with non-equity funding, you maintain complete control of your business. You don’t have to work with investors and you won’t need to compromise on operational elements of your business – things will still be done by you in the way you want to do them. This wouldn’t be the case with a venture capitalist.
When a venture capitalist invests in a business, they not only take a chunk of equity, they also get pretty heavily involved in the running of the business. They might be involved in the recruitment of senior staff members, they might be involved with strategic aims and processes, and they might want to oversee a lot of the operational running of the business as a whole. This does make sense if you consider that they have invested money into your business and they now want it to be as successful as possible to enhance their money-making capabilities.
Investors (particularly venture capitalists) want to make a profit above anything else. If that means changing the aims, values, and processes of your business, then they will be prepared to do it. By going for non-equity funding, you can avoid having to work with investors. You can keep your business on the same road you have steered it on from day one and you won’t need to change its course unless you decide you want to.
Despite all of this, non-equity funding does come with some downsides too. One of the biggest potential downsides is that some lenders will require an upfront fee before releasing any funds to you. This is always a difficult thing to do as you are spending more money to get the money you desperately need to help expand and grow. Another downside to non-equity funding is that the amount of funding you can secure for your business can be quite a lot less than a venture capitalist could offer. As a venture capitalist will counteract the risk of investment by taking equity in your business, they are usually willing to invest more money. Venture capitalists also have access to a huge pool of money so multi-million dollar investments are definitely possible – with non-equity funding, funding will likely be a lot lower than this.
Non-equity funding is becoming an increasingly popular way of financing business growth. With startups and small business owners sometimes struggling to get by, non-equity funding could be their saving grace that keeps their business alive and operational. Considering that 90% of all startups fail, being able to get much-needed cash into your business when you need it could actually be the difference between success and failure.
Getting Non-Equity Capital Funding
A Bank
One of the first places you might look to get non-equity capital funding is a bank. Banks can give out loans without having any equity given to them in return. For example, a business loan is, in principle, not too different from a personal loan. So let’s say you wanted to take a $6000 loan out to buy a new car. The bank wouldn’t expect to own and use the car during certain periods of time in return for their loan. Instead, you make repayments to the bank that include interest on the initial loan amount. You get the money you need to buy your new car, the bank gets its money back and a little more due to the interest added, and you still have complete ownership and control of your car.
This is effectively how a business loan from a bank would work. The bank would lend you the money you need and you simply make the agreed payments back to them until the loan is repaid in full. No equity changes hands and everything in your business continues as normal.
As great as this sounds, it’s not quite as simple as that though. If you’re running a new business, a bank will see it as a huge risk to lend you money as there is no way of knowing if you’ll be able to pay it back in the long term. Unless you have near-perfect credit, you might struggle to obtain the funds you need from a bank.
If you are able to secure non-equity capital funding from a bank, it’s a good idea to thoroughly read through all paperwork to make sure you’re getting a good deal on interest rates, fees, and the repayment schedule.
Non-equity funding options from a bank include loans, credit cards, and lines of credit.
Alternative Lenders
Another potential option for e-commerce business owners when it comes to securing non-equity capital funding is alternative lenders. In very simple terms, alternative lending is pretty much any kind of loan that is offered outside of the traditional banking system.
There are some clear advantages to alternative lenders over banks. Probably the biggest advantage is the speed of the application. Many alternative lenders use automated systems that deal with applications for funding. These systems can sometimes actually make the decision as to whether you’re eligible for funding or not based on the information you provide. This can make the entire process very quick as you don’t have to speak to anyone or provide lots of information – the system approves you for funding and then the funds are processed and sent to you. It can be surprising just how quickly you could have access to the funds you need for your business (same-day payouts are possible with some alternative lenders).
Another advantage of alternative lenders is that they tend to have greater flexibility in who they lend money to. For example, a bank will likely refuse to give you a loan if you have anything less than good credit, no clear proof that your business is operating profitably already, and lots of other information relating to you and your business. With alternative lenders, poor credit doesn’t necessarily mean you can’t get funding, lack of business data doesn’t mean you can’t get funding – alternative lenders can provide funding to people and businesses who might not expect to be eligible for it.
Something to keep in mind when considering alternative lenders is that the interest rates you pay on any funding will usually be quite a bit higher than those paid on bank loans. This does make sense though when you think about how much potential risk they are taking in lending you money in the first place.
Alternative lending comes in both non-equity capital funding and equity capital funding too. Non-equity alternative lending includes traditional funding sources such as loans, credit cards, and lines of credit, as well as less traditional models like revenue-based financing. Equity-based alternative lending includes peer-to-peer lending, venture capitalists, and angel investors.
Crowdfunding
Crowdfunding is a relatively new funding concept dating back to around 1997. As the internet has become more and more popular, widespread, and accessible, crowdfunding websites have become more of a viable option for securing funding for your business.
One of the main reasons why crowdfunding can be so successful is that no single person has to give a substantial amount of money. For example, if you’re looking to raise $100 000, this could be done by 100 000 people giving a dollar each. While most people wouldn’t think twice about giving someone a dollar, asking one person to give you $100 000 would be laughable in some situations.
Crowdfunding websites like Kickstarter and Indiegogo allow business owners to share their business ideas, plans, and products with a wide audience even if they haven’t actually launched their business yet. If visitors to these crowdfunding websites like the idea of a business, they can donate money to the owners to help get things moving.
Crowdfunding isn’t always a non-equity capital funding method though as, to encourage people to give money to your crowdfunding project, rewards are offered in return. While these rewards could be personalized versions of your products or other similar items, sometimes small chunks of equity are given away in return for large donations of money.
More than $17 billion is raised each year through crowdfunding so you can certainly gain funding for your business using this method of funding. You do need to be mindful of platform fees though to make sure you don’t get hit with a big chunk of your funding being deducted unexpectedly.
When Is Non-Equity Capital Funding A Good Idea?
Knowing when to look at non-equity capital funding as an option and knowing when it’s probably not your best idea is key to minimizing the amount of stress, worry, and risk you put on yourself and your business.
Startups tend to be the businesses that can get the most benefit from financial support. Funding is often required by startups for inventory, startup costs, marketing, and other unavoidable essential costs associated with starting a new business.
The problem with looking at non-equity capital funding as a startup is that, usually, you don’t have anything to back up the likelihood of your business being successful. It’s too new to show a whole load of data highlighting how profitable it is (or could be), instead, most of the time, you just have an idea, some passion, and a plan of how you think you’ll make things work out. As great as all of these things are, they aren’t always enough to convince someone to give you the funding you need. In this situation, you may have little choice but to resort to equity-based funding methods.
This isn’t always the case though as some lenders will offer very new startups non-equity funding. If you have a business that shows true potential, if you have a successful history in business, or if you are an expert in the industry your business will operate in, you could secure non-equity capital funding and get your business off to a very strong start.
Ultimately, it will probably come down to how much risk lenders think you pose to their investment. If a lender deems your business to be risky, but not risky enough to refuse to lend you any money, then you will have a lot more funding options available to you. If, however, your business is deemed to be high-risk with a real chance of failure, your funding options will be much more limited and you may have to compromise on your plans or accept less funding or less preferred funding options.
Types Of Non-Equity Capital Funding
Some of the different types of non-equity capital funding have already been mentioned. However, to help give you a better understanding of the potential funding options you and your e-commerce business have, the following information could be very useful.
Debt Financing
Many business owners are keen to avoid taking on debt to their business. This makes complete sense but it can actually be a very safe way of funding the growth and development of your business.
As long as you’ve spent time looking at your current situation and you can make accurate predictions about how your business will be performing in the coming months and years, you might be surprised at how able it is to cope with taking on debt. Risk management needs to be used though as missed payments can have costly consequences for your business.
Debt financing comes in several different forms.
Term Loans
Term loans are probably the most straightforward form of debt financing. A lender gives you a loan for an agreed amount and you pay it back over an agreed length of time through regular installments of an agreed amount. Interest is added to the loan but your payments stay the same throughout the loan term.
Term loans tend to be the most expensive form of debt financing as they usually have the highest interest rates.
Lines Of Credit
Lines of credit work pretty differently from a term loan and are more similar to how a credit card works. In very basic terms, they give a business access to an amount of money up to a specific value. The amount available is usually based on cash flow, credit, and the amount of collateral a business has.
The amount of credit available varies depending on your business’s current state but lines of credit can be a very useful funding source to have available to you.
Revenue-Based Financing
Revenue-based financing can be a fantastic way for businesses to get the funding they need without putting excessive financial strain on operations trying to pay it all back. This method of funding involves being given a loan for an agreed amount and paying it back through regular installments. This is different from a term loan though, as you don’t pay back the same amount each installment. Instead, you pay back a pre-agreed percentage of the sales your business has made.
This financing model can be extremely handy as it allows you to pay more off your loan when your business is performing well, but it also allows you to pay back smaller amounts if your business has a bad month. Not having to struggle to make high repayments can keep a business operational rather than running the risk of failure if the money needed isn’t available at the time.
Other Non-Equity Capital Funding Options
In addition to debt financing options, there are also other ways that you can get non-equity capital funding for your business.
Grants, Awards, And Benefits
Sometimes, a business has so much potential and has a vision so promising that they become eligible for certain grants, awards, and benefits. Being given one of these can make a huge difference to a business, particularly one that is still in its early stages.
These grants, awards, and benefits can come from the government or from philanthropic organizations. If your business is eligible for this type of funding, it can help get things moving forwards in a very positive and strong way.
Why Equity Capital Funding Isn’t Always A Good Idea
Sometimes, it might feel like a business has no choice but to consider equity-based funding methods. However, now you have a better understanding of some of the non-equity capital funding options, it might be more clear that there is another way.
Equity capital funding does certainly have a place in the funding world and it can be exactly what you need in certain situations. One of the main problems that can come with giving up equity in return for funding though is that you have to deal with an investor being more involved in your business. This can result in changes being made to how your business operates. While this could be for the best, it could potentially have a detrimental impact on your business.
If you have spent a long time before the launch of your business building up a strong following of people who are highly interested in your business and everything it stands for, even small changes to compromise with an investor could cause your audience to drop and future sales to be negatively impacted.
Another potential issue of investors being involved in your business is the amount of time you may have to spend explaining your actions, your plans, or other aspects of your business to them. They are obviously keen to get a good return on their investment so they want to know how you are planning on making your business as profitable as possible. However, the time spent justifying your actions and your plans to your investors could actually be spent doing much more useful things in your business.
Sometimes, as an e-commerce business owner, saying no to investment might seem like a bad idea but it can be for the best if it prevents making the running of your business more complicated. If you have worked hard to create, launch, and build your business, you’ll likely know it better than anyone else and you’ll be in the best position to know the best ways of moving things forwards. Bringing someone in as an investor will obviously have a positive impact financially but you need to be sure that the financial gain is enough of a benefit to justify potentially changing how your business operates to help keep your investor happy. If you don’t think it does, saying no to a potential investor could be the best thing for you to do.
Non-equity capital funding isn’t always a viable solution for all e-commerce business owners but, if it is, it can be exactly what you need for the benefit of you, your business, and your current and future customers.