post by:
Carmen Marks
Ecommerce businesses require a lot of attention—meaning funding. Rent, inventory, and payroll can’t wait for outstanding balances to be paid. Sometimes you need a loan to get through the dip in cashflow. We’re here to discuss the options available to you, so you can continue to grow a healthy business.
What Is A Working Capital Loan?
A working capital loan is money borrowed from a traditional bank or lender. Their loan finances your daily business operations. It’s meant for short-term, so concentrate on things like rent, inventory, debt payments, and payroll. Since it’s usually short-term contracts, the interest can be lower than a long-term loan would be. If you’re a seasonal business, this would be great since you see dips in cashflow every year. If you are an ecommerce business that has outstanding-invoices, loans like this will help you keep up until those payments are paid in full. In short, it supplies you with cash when your cashflow isn’t flowing.
Types Of Working Capital Loans
Great solution for: your short-term finance goals.
Benefits: Easier to obtain than a traditional loan. It helps you keep up on your inventory and plan product launches in advance.
Interest rates: lower than typical loans.
Once you sell your inventory, pay back the loan with the proceeds. Easy, right? Without inventory financing, customers won’t get their products. If they don’t have their products…you get what I’m saying.
Great solution for: if you’re in need of fast cash.
Benefits: Unlike most loans, they won’t dictate how you spend the borrowed money. If you want to spend it on inventory, go for it. If you want to use it for rent, they don’t mind.
Interest rates: It’s paid back with a percentage of every debit and credit card sale, so it’s easier than ever to keep track of that loan.
Great solution for: Sellers looking for a short-term loan.
Benefits: Personal loans are easier to be approved for than business loans. Traditional banks and lenders both offer personal loan options, so there’s no shortage of places to contact. And if you only need it for a short time, your approval rate may go up. It’s worth a try if you’ve exhausted your other options.
Interest rates: Depends on your credit history, so this can be a good or bad option for you.
Great solution for: If your credit history is good and not in a high-risk venture.
Benefits: Secured loans are easier to get than unsecured ones.
Interest rates: Since it’s secured, their interest rates are typically lower than average. However, this loan requires collateral, such as a mortgage or car loan. If your credit history is good, then you won’t have any trouble getting approved at a traditional bank.
SBA Loans
Great solution for: Those who do not qualify for traditional funding.
Benefits: Some loan companies have access to mentorship, so if you’re struggling, reach out for help.
Interest rates: Often, they have lower interest rates and generous repayment term. Down side? They usually have a say in how you’re spending the business loan.
Term Loans
Great solution for: Sellers looking for short-term loans that are tailor-made to fit their unique business needs
Benefits: Not limited to inventory or supply chain funding only. The loan can be used for day-to-day operations.
Interest rates: Interest rates vary depending on what you need, how long, and your credit history.
Business Lines Of Credit
Great solution for: Sellers interested on a continual flow of cash.
Benefits: Instead of receiving a lump sum that you have to pay off monthly, you can get a line of credit. You can draw from this account whenever you need the extra cash.
Interest rates: Credit limits and interest rates range
Invoice Factoring
Great solution for: Sellers that don’t want to wait for those outstanding balances to come in.
Benefits: They give you a portion of the invoices’ worth and they collect the rest when the payments are processed.
Interest rates: Can move between 1%-6%. Make sure to check there are no hidden fees.
When Should You Apply For a Loan?
You should apply for a working capital loan when you have a dip in cashflow. Seasonal ecommerce businesses use these types of loans to keep up with rent and monthly payments during the off months. Manufacturing costs are often higher during the slow months, but production costs need to be paid, right? Short-term loans like these will get you through the fluctuating cashflow. Are you simply struggling to keep up with the day to day? Maybe it’s time to reach out for help, so you can concentrate on growing your business instead of just surviving.
How Do You Find The Right One?
First thing is first—determine how much you need, how long you need it, and how much you can afford in monthly payments.
From there, gather all the required documentation and check your credit score. This will determine where you should apply, and your chances of approval at the companies you choose.
Research the banks and lenders. They each offer their own plans, interest rates, and repayment terms. Find the ones that seem right for you, and don’t be afraid to reach out to ask questions before applying. Once you’re ready, apply. Good luck!