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A Guide to E-commerce Business Loans

Ecommerce Business Loans & Financing Options
Susan Guillory

Susan Guillory

Updated April 22, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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 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 lots of options for funding. For e-commerce financing, you can seek the same kinds of small business loans that many other businesses do. 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 Association (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 anywhere from six months to 25 years.With a traditional term loan, you would receive the loan amount (principle) and then begin making regular payments (principle 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, such as 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.Recommended: A Guide to Liquor Store Loans  

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

A term loan is a kind of financing where your e-commerce business gets a specific amount with a specified repayment schedule based on a fixed or variable rate.Short-term loans generally have six- to 18-month repayment terms 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 two 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.

SBA Loans

The SBA provides 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 offer borrowers low rates, high amounts (up to $5 million) and long repayment terms (as long as 25 years). And with the popular SBA7(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 will have access to the funds.

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 can be a good source of e-commerce financing. You can draw funds whenever you need to make purchases up to an agreed-upon credit limit and only pay interest on what you draw. Once you’ve paid back the loan, you can draw from it again. This can make it useful for covering expenses that crop up when inventory isn’t moving as quickly or to cover unexpected costs.

Equipment Financing

There are also loans specifically for buying equipment, such as computers you might 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. You would typically 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, as you can only use the funds for business-related equipment.

Business Credit Cards

If you need a way to cover dips in cash flow, a business credit card can provide it. You can even use a business credit card as a kind of short term loan. If you can qualify for a 0% intro APR business credit card, you can spend 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-plus), 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 when you want bigger financing later.

Inventory Financing

If you experience a sudden increase in demand for your products but lack the cash to purchase inventory, you may want to look into inventory financing. A form of asset-based lending, a financing company will advance a large portion of the cost of your production 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 keeps 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, or 90 days. This is like a type of 0% financing that can significantly help free up cash flow. 

Invoice Factoring

Another 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 who buys them at a discount. The factoring company advances anywhere from 60% to 95% 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 provides 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. 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. A lender uses a loan-to-value ratio (such as 70% of the value of the asset) to determine how much to loan your e-commerce business.

Applying for E-commerce Financing

There are several steps to applying for a business loan. Here, we 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 up front with a fixed term or more flexible access through a line of credit. A line of credit is helpful for online merchants that anticipate a dip in sales at specific times of 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. Before you jump into applying, it’s a good idea first to check the lender’s minimum requirements. 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 will 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 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 to apply for an e-commerce loan. Which documents will depend on the lender, but never hurts to be over-prepared. Before you get started with the application, 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.Once 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.Once you sign the loan documents, the funds will be deposited into your bank account in as little as one business day.

Comparing Loans Today

Whether you're looking to revamp your website, hire more staff, create a mobile commerce app, or expand your warehouse space, there are loans, advances, and lines of credit available to help your e-commerce business get 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 small business loan rates. With Lantern by SoFi’s online lending tool, you can quickly review and compare small business loan options (including SBA loans, term loans, and lines of credit) that meet your online business’s needs and qualifications. There’s no obligation and you only need to fill out one application.
Photo credit: iStock/fotostorm
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.SOLC0122022

Frequently Asked Questions

Can you get a loan for an e-commerce business?
How do e-commerce websites typically get funding?
Are e-commerce loans different from other small business loans?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the President of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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