Online businesses that sell through sites like Amazon often have a tough time getting finance through their banks. The lenders on the high street are used to dealing with bricks-and-mortar businesses with physical assets, rather than online-only sellers, and it’s hard to fit the latter into their somewhat rigid criteria.
This is a big problem if you sell on Amazon – getting a loan to buy more stock can help you significantly expand your business, but without the capital to do it you’re stuck where you are. And making a big stock purchase using your cash reserves instead of a loan is a risky strategy, and could prove fatal if something unexpected happens.
Loans for online businesses
As online retail exploded in popularity in the last decade or so, a few lenders emerged who specialise in online retail businesses. Kabbage is the most famous example, offering lines of credit based on online services your business uses — so you can get funding within hours based on data from Amazon, Ebay, PayPal, Sage, Xero, and many more.
Speed is an obvious advantage of this setup; but the ironic downside is that automated credit decisions can be just as rigid as those offered by the banks.
Alternative finance
The alternative finance market offers lots of other solutions for online retail businesses. Choosing which one fits your business depends on lots of factors, but let’s have a look at some of the most common.
Merchant cash advances
Not the catchiest name, but merchant cash advances are useful products for retail businesses. The concept is simple — the loan amount is based on your recent card sales, and repayments are taken as a percentage of future sales at source.
This means a merchant cash advance can be very fast to set up, and the amount you pay back fluctuates with your monthly revenue, so you pay more when times are good, and less when sales are slow. The downside is that merchant cash advances can be quite expensive, and the amount you can borrow is limited by your average monthly turnover — which might be an issue for highly seasonal businesses.
Invoice finance
If online sales are just one aspect of your business and you offer other customers payment terms via invoice, there’s a wide range of invoice finance that could help.
Invoice finance facilities allow you to ‘sell’ your owed invoices, so you get paid sooner for completed work without affecting your customer relationships. Generally, you can get between 75 per cent and 100 per cent of the invoice value (depending on the product, your customer, and your business), then when the customer pays you get the remainder minus fees.
Factoring includes credit control, so you don’t have to worry about chasing your debtor book, while invoice discounting is normally confidential and allows you to carry on managing customers as normal. There are also products known as spot factoring and selective invoice finance, which let you choose specific invoices or specific customers to fund while leaving the rest of your sales ledger unaffected.
Revolving credit facilities
Seasonal businesses often prefer credit facilities to loans because they’re a reassuring safety net that you can use when you need extra cash. Unlike loans, which have a set term and often have fixed monthly repayments, credit facilities are more like overdrafts — the upper limit of what you can borrow is predetermined, but there’s no fixed timeframe and you can dip into the funds whenever you need.
As well as the credit facilities that are set up specifically for online sellers, there’s a variety of alternative providers offering credit facilities which can also work well — some with daily interest calculations, and others with the ability to top up after a specified timeframe has passed.
You can even get a business credit card from some providers – exactly the type of setup that used to be the norm from your high street bank.
Conclusion
As you can see, there are a few different ways to raise finance for online retail businesses, with different pros and cons that may or may not apply to your business. It’s also worth briefly mentioning peer-to-peer loans and trade finance – both of these are possible to get if you’ve got a concrete project to raise money for, although they may not be useful for the average Amazon-based business.
The bottom line is that the old days of relying on your bank are gone — and there are more funding options for Amazon sellers that you might think.
Conrad Ford is chief executive of Funding Options.
Further reading on selling online
