Ecommerce Growth
The Definitive Guide to Ecommerce Business Loans
- Written by Samantha Novick
It takes money to make money—even when your entire business runs in the digital world. From website hosting fees to shipping expenses to inventory costs, it all adds up.
When you have limited cash on hand, you risk missing out on prime opportunities to grow. But it doesn’t have to be that way. In this guide, we’re going over everything you need to know about ecommerce business loans:
Ecommerce business loan basics
A business loan is made up of three main components:
Principal: The amount of money you have borrowed, and yet to payback.
Interest rate: The amount a lender charges you to borrow money, expressed as a percentage.
Fees: Depending on the lender, you may be charged additional fees—these fees may be deducted upfront or over the life of your loan. More on this later.
This information (as well as the frequency of payments) will help you calculate the annual percentage rate or “APR.”
APR is the best metric for making apples-to-apples comparisons of different loans. Why? It takes into account all the costs associated with borrowing—including interest and any additional fees or charges. The annual percentage rate tells you the true cost of borrowing money per year.
If the APR is not identified clearly in your offer, ask your lender directly, figure it out yourself using a spreadsheet (or an online calculator), or employ both tactics for good measure.
When you’re considering ecommerce business loan offers—and we’ll talk more about this soon—there are some common terms that will come up. Here’s a cheat sheet for your reference:
Factor rate. The amount a lender charges you to borrow money expressed as a decimal. Typically used instead of an interest rate only for short-term financing products like merchant cash advances or invoice factoring.
Fixed interest rate. The interest rate will remain the same throughout the life of the loan.
Variable interest rate. The interest rate is subject to change throughout the life of the loan, with any adjustments typically based on a benchmark figure called the prime rate. Also known as “floating” or “adjustable” rate.
Secured loan. A loan backed by collateral or an asset, which puts more risk on the borrower. In case of default, the lender can seize the borrower’s collateral or assets. Secured loans typically offer larger loan amounts, lower interest rates, and longer repayment terms. Mortgages and auto loans are examples of secured loans.
Unsecured loan. A loan that is not backed by collateral or an asset, which puts more risk on the lender. Unsecured loans typically offer a faster application process but tend to come with higher interest rates and shorter terms. Personal credit cards and student loans are examples of unsecured loans.
Personal guarantee. An agreement that the business owner will be personally liable if the business can’t pay back its loan.
Lien. A lender’s legal claim to a borrower’s collateral. The lien is terminated once a business repays what it borrowed.
7 types of ecommerce business loans
Not all ecommerce business loans are equal. Some are perfect for fast-scaling businesses, while others help you cover emergencies. And some loans are best when you have little-to-no credit. While others reward excellent credit with larger amounts, lower interest rates, and lengthier repayment terms.
We’ll cover seven different loans to consider using for ecommerce growth:
There’s no “best” loan. You’ll have to find what works best for your business and its unique circumstances. Let’s take a closer look at each.
1. Business term loan
A term loan is your standard loan product. You get an upfront lump sum of cash, which you then typically payback in fixed payments over an agreed-upon period. It’s simple, flexible, and stable—you know what to expect with a term loan.
Loan amount: From several thousand dollars to over $1 million.
Terms: From a few months to 20 years.
Annual percentage rate (APR): Often fixed rates between 5% and 35%.
Advantages:
A predictable repayment schedule with fixed monthly payments makes it easier to budget.
Save money with lower interest rates (for creditworthy borrowers) than other forms of financing.
Borrow larger amounts than other forms of financing.
Get funds in just a few days with an online lender.
Use loan proceeds for pretty much anything.
Disadvantages:
Personal guarantee or collateral often required.
Higher credit requirements than other forms of financing.
Difficult (or impossible) for start-ups to qualify.
Some lenders charge fees.
Months to get approved and funded by a traditional lender.
This business loan is best for: Established ecommerce businesses with a (profitable) plan in mind.
Consider if:
You need a lot of money.
You’re paying down (i.e., consolidating) high-interest debt.
You want a longer repayment period (and lower monthly payments).
You have an investment opportunity.
You’re ready to expand.
2. SBA 7(a) Loans
The Small Business Administration provides financial assistance to businesses by guaranteeing loans made by approved partners. There are multiple programs, but the primary (and most popular) is the 7(a) loan program.
Loan amount: Up to $10 million.
Terms: Up to 7 years for working capital or inventory, up to 10 years for equipment, and up to 25 years for real estate.
Annual percentage rate (APR): Fixed or variable rates, depending on the loan amount and repayment terms.
Advantages:
Some of the lowest interest rates around.
Borrow larger amounts than other forms of financing.
Accessible for start-ups.
Collateral requirements are flexible, meaning insufficient assets won’t make or break your application (as long as collateral that is reasonably available is offered up).
Disadvantages
Requires collateral (for loans of $25,000 or more) and personal guarantee.
Typically must make a down payment equivalent to 10% to 20% of your loan amount.
Fees can add to the total cost of your loan.
A variable interest rate could increase the cost of borrowing.
Securing a 7(a) loan can be difficult without strong credit or financials.
It often takes months to apply, get approved, and be funded.
This business loan is best for: Ecommerce businesses who can afford to wait, and have significant, longer-term financing needs. Think big-ticket projects, long-term assets, or capital-intensive investments.
Consider if:
You can afford to wait for a loan.
You want a longer repayment period (and lower monthly payments).
You need a large injection of capital.
3. Business credit card
A business credit card is like a personal credit card, but for—you guessed it—businesses.
Use a business credit card for practically any of your business expenses. Like a personal credit card, it’s revolving credit, meaning you get access to the funds again once you pay off the card. This is a great starter option if you have little-to-no credit. Using your card will build your credit score, helping you score bigger loans down the road.
Loan amount: Up to the card’s credit limit (which depends on your creditworthiness).
Terms: Minimum monthly payment.
Annual percentage rate (APR): The average is around 15%.
Advantages:
Get perks like cash back or travel credits.
Pay no interest if you pay your balance in full each month.
Easier to qualify for than other borrowing options.
Disadvantages:
Potential annual fees and usage-based fees.
Often has a high variable interest rate.
A personal guarantee is almost always required.
This business loan is best for: Ecommerce businesses who need access to revolving credit to cover small, short-term gaps in cash.
Consider if:
You can get a 0% APR promotional rate.
Benefits and rewards serve your business needs.
You need a way to separate your business and personal finances.
You only need a small amount of money.
You can pay your balance in full each month.
4. Business line of credit
A business line of credit is revolving credit. You get approved for a specific credit limit, say $100,000, and you can draw funds on an as-needed basis. When you use your line of credit, you only pay interest on the funds you use, not the entire loan. And once you repay the portion you use, you instantly get access to it again.
So, if you used $20,000, you would still have access to $30,000. And once you paid back the $20,000, you would have full access to the $100,000 again.
It’s basically a never-ending loan.
Loan amount: Credit limits can range from several thousand dollars to $1000,000.
Terms: Depends on your draw amount and minimum payments.
Annual percentage rate (APR): Often variable rates ranging from around 7% to 25%.
Advantages:
Only pay interest on the funds you borrow.
Borrow against the same credit line again and again (and again).
Higher borrowing amounts and lower rates than other forms of short-term financing.
Use loan proceeds for pretty much anything.
Disadvantages:
It can require a personal guarantee or collateral.
May have minimum draw requirements.
A variable interest rate could increase the cost of borrowing.
Higher credit requirements than other forms of financing.
Some lenders tack on additional fees and charges.
This business loan is best for: Ecommerce businesses that have ongoing operating expenses that take several months to repay.
Consider if:
You want a safety net in case of emergencies.
You have regular, short-term financing needs.
You need funding for an ongoing project.
5. Invoice factoring
With most B2C orders, you receive the payment soon (if not immediately) after the sale. But with large B2B orders, you sometimes won’t see the cash for 90 days or more after the purchase.
Invoice factoring lets you sell your IOUs in exchange for cash now. You sell the outstanding invoices to the factor at a discount, who then takes over the collection process. Once your customer pays up, the factoring company passes you the remaining balance (minus fees).
While you don’t get the full value of your outstanding invoices, you do get instant cash and don’t have to waste time chasing down customers.
Loan amount: Depends on your outstanding invoices and the factor’s credit limit
Annual percentage rate (APR): Factor rates often ranging from 0.5% to 6% of the invoice amount every 30 days, with equivalent APRs ranging from 28% to 60%
Advantages
Offers quick help if you’re in a cash crunch.
Easier to qualify for with less-than-stellar credit (instead, based on your client’s credit).
Typically unsecured.
It gives you the financial ability to work with big companies that generally take longer to pay.
Disadvantages
More expensive compared to other forms of financing.
You may be liable for unpaid invoices (recourse factoring).
Your customers may not be comfortable with a third party being involved.
The longer it takes your customer to pay, the more you’ll pay in fees.
You might not be able to pick and choose which invoices you want to factor.
This business loan is best for: B2B ecommerce companies that invoice their customers and want to get paid faster.
Consider if:
You sell to other businesses (B2B).
You have a short-term cash flow gap.
6. Accounts receivables financing (A/R financing)
Accounts receivables financing (aka invoice financing) is a type of loan in which you use your accounts receivables (invoices owed to you) as collateral for a loan or line of credit.
You collect payments from your customers and then repay the lender—which is a major feature that differentiates A/R financing from invoice factoring.
Loan amount: Around 70% to 90% of your accounts receivable.
Terms: From several weeks to years.
Annual percentage rate (APR): May charge on the loan or line of credit, or, you may pay a funding fee based on the loan amount and a daily or weekly rate (equivalent APR ranges from 10% to 80%).
Advantages
Easier to qualify for with less-than-stellar credit (assuming your clients have good credit).
Secured by your invoices, so no additional collateral is required.
Potentially inexpensive compared to other short-term funding options for start-ups or businesses with poor credit.
Disadvantages
More expensive compared to other longer-term forms of financing.
If your clients have poor credit, you might not be able to qualify.
This business loan is best for: Fast-growing ecommerce companies that often have to wait to get paid and have trouble keeping up with demands because of cash flow gaps.
Consider if:
You sell to other businesses (B2B).
You have a short-term cash flow gap.
You want to be in charge of the collection process.
You work with clients with large orders that pay on net-60 or net-90 terms.
You have limited or poor credit.
7. Merchant cash advance
A merchant cash advance (or MCA) is technically not a loan. Instead, you get an advance in return for a percentage (also called the holdback or retrieval rate) of your future credit card sales. It’s trading future money (factor rate included) for present money.
Loan amount: Up to 250% of your expected sales.
Terms: A daily or weekly payment for a portion of your future sales.
Annual Percentage Rate (APR): Factor rates of 1.1 to 1.6, with equivalent APRs ranging from 40% to over 100%.
Advantages
Easier to qualify for than other forms of financing if you have a limited operating history or less-than-stellar credit.
You can get funds in your bank account in just a few hours.
When sales are down, your payments will be less.
Usually unsecured, which means there are no collateral requirements.
Disadvantages
More expensive compared to other forms of financing.
Unpredictable repayments can put a strain on your cash flow.
Confusing fee structures and a lack of transparency.
It can require a personal guarantee or collateral.
This business loan is best for: Ecommerce businesses that need money fast and can’t qualify for other forms of (less expensive) financing.
Consider if:
You’re having trouble getting funding elsewhere.
You’ve been turned down for traditional financing.
Your cash flow can handle daily or weekly repayments.
How to choose the right ecommerce business loan
Not every loan is going to be right for your ecommerce business. With so many different options to pick from, how do you choose the best one? Good question.
Before you go chasing down financing, take some time to make a game plan. By answering a few questions first, you’ll narrow down your options.
1. Do you have a plan for your loan?
A full business plan isn’t typically required for loan applications, but that doesn’t mean you don’t need one. Creating a business plan will help you work through how much money you need, where you plan to put that money to use, how an injection of capital will help you reach your business goals, what your business goals are, and much much more.
This plan will also benefit you when it comes to communicating your plans and explaining your needs to lenders: Are you trying to fund a large inventory purchase, or are you just covering some cash flow gaps here and there?
For big one-time purchases, you’ll likely need something like a term loan with lower interest rates and longer repayment terms. For recurring expenses, a line of credit or business credit card will probably get the job done.
2. How quickly do you need the cash?
Figure out when you need the money. If you have a few weeks to spare, you’ll have more options to choose from.
Remember, quick cash tends to be expensive cash. You pay for speed, and it’s not cheap.
However, if you need immediate cash, waiting around weeks (or even months) on a business loan from the bank isn’t going to work. You’ll be better off with an online lender who can give you a decision and get you funded in just a few days. Sometimes even faster.
3. How much capital do you need?
Determine how much money you’re going to need. Get specific. If you spit out some wide ballpark ranges to your potential lender, they’ll be wary. “I need between $100,000 to $250,000 to fund the project” doesn’t sound quite as confident (or well-thought-out) as “I need $25,000 to open the storefront.”
Consider all costs, including loan fees. It’s better to have a little bit of a cash cushion for any unexpected expenses (which you will inevitably encounter) than to run out of money in the middle of a project.
A business credit card or line of credit will be able to handle most of your day-to-day expenses. But, they won’t be capable of tackling more considerable expenses like bulk inventory purchases or expansion to a brick-and-mortar. If you need big cash, you need big financing—like an SBA loan.
Pro Tip: Just because you say you need $100,000, doesn’t mean your lender will necessarily give you that amount. Lenders will use information from your financial statements and any other documents you provide to determine an amount that they think you can actually afford.
One of the most common metrics utilized is the debt service coverage ratio, or DSCR. DSCR is a comparison of the amount of cash you have on hand to your current annual debt obligation. Lenders use DSCR to evaluate your capacity to pay back a loan.
Net operating income if your profit before paying any debts. Here’s a net operating income formula to determine yours:
Net Operating Income = Revenue – [Cost of Goods Sold (COGs) + Operating Expenses]
Annual debt obligations is the money required for the year to meet debt obligations like loan principal, loan interest, loan fees, and, if applicable, lease payments.
So as an example, if your business has a net operating income of $300,000 and annual debt payments of $100,000, your DSCR would be 3. You could pay your debts three times over based on your cash situation. While you might be able to get away with a DSCR of 1.15, most lenders are looking at a DSCR of 1.25 or higher.
Calculating your DSCR can help estimate how much you can afford, and how much you might qualify for.
4. Are you comfortable with the terms and costs?
Ask yourself what you’re willing to pay for a loan, and make sure to request an amortization schedule from your lender.
Also, think about the terms. Longer repayment terms usually result in lower monthly payments. But you’ll pay more over the life of the loan. Are you comfortable locking yourself into a 5-year loan? Or would you be better off getting some quick cash and paying for it over 6 to 12 months?
How to use your loan to grow your ecommerce business
When you’re stuck financing your expenses with your sales, growth becomes restrictive. In some cases, you may actually end up losing cash, customers, and opportunities. Business loans can help with this—as long as you focus your funds on growth.
Here are a few key ways you can use your funding strategically to grow your business.
Purchasing inventory
More capital could help you to invest in more inventory. If your business is scaling, it can become a challenge to keep up inventory levels to sustain the growth.
With more products on hand, you can meet growing customer demand. If you have crazy seasonal surges, more inventory can help you maximize profits. An injection of capital can also help you cover warehouse expenses.
Expanding to brick-and-mortar
Certain products sell well online, while others do better in stores—and some do well in both. If you’re looking to expand your operations to a brick and mortar, or even test the waters with a pop-up shop, a business loan can make it happen.
Hiring key employees
When it was just you and your blossoming idea, it was manageable for you to handle every aspect of your business. Hard, but doable. Eventually, however, you’re going to need help. Marketing methods mature, taxes get trickier, and scaling operations becomes a logistical nightmare. When that time comes, a loan can help you hire and keep top talent.
Upgrading your software
Automation is a must-have for ecommerce businesses. Ecommerce tools can help you find products, manage inventory, ship purchases, and more. Without the right software, scaling your ecommerce business is nearly impossible. And without any software, the only way you grow is by investing more time, and time is a finite resource.
Manage your bookkeeping with QuickBooks, stay on top of your tasks with Asana, sync inventory and automate your shipping with Veeqo, nail your email marketing with Klaviyo, and manage your social media program with Buffer. It’s a lot of software, but it can do incredible things for your business.
Marketing your business
Unless customers regularly visit your website on their own (unlikely), every sale will have attached marketing or advertising expenses. Whether your customer clicked an email campaign, banner ad, social media influencer mention, or blog post, those clicks cost money. A loan can help you really dive into digital marketing and advertising. More marketing leads to more data, and more data enables you to nail your approach and drive up your profit margins.
Boosting your cash flow
Sometimes, cash flow is what holds businesses, especially small businesses, back. Even if your business is in good financial shape, you may still deal with cash constraints. Or your incoming revenue simply might not be enough to invest in business growth. A loan helps make sure business never slows down even if you’re waiting on payments.
Going multichannel
If you’re only selling on your website, there’s a good chance you’re missing out on other opportunities to boost revenue. Beyond brick-and-mortar, some channels to consider include:
Marketplaces like Amazon, Jet, and eBay.
Social media platforms like Instagram and Pinterest.
A loan can help you make the upfront investment so your bottom line can reap the benefits.
Be smart about your ecommerce business loan
If you want to build your inventory, hire more employees, or expand your marketing campaigns and your revenue isn’t there yet, you can take out an ecommerce business loan to make that happen—just be sure to review the options above and make sure you’re choosing the right loan to grow your business. Another way to grow your business is by using an ecommerce ERP.
