In 2023, Europe and the US are facing a very different economic situation than they were a year ago. There is a cost of living crisis in Europe and North America, inflation is expected to remain high throughout the autumn, and interest rates are still rising.
Ecommerce has been hit from all sides as consumers have decreased expenditure, marketplaces have increased commission and their reserves and business borrowing becomes less affordable. But businesses still need finance to grow. In 2022, 61% of UK firms with turnover between £50,000 and £250,000 sought finance to help with working capital, according to the British Business Bank.
In this new economic world, it’s useful to understand financing options for ecommerce businesses if your marketplace business is still healthy and growing.
What drives your financing decisions?
First, think about what’s behind your financing decisions and what you want to achieve. Do you need more cash flow to buy more inventory, invest in staff or new products, or for a marketing push? Make sure your growth plans are realistic and the numbers stack up – check how much different financing options will cost you (see our table below). This is especially important given that the cost of borrowing is higher than it was 12 months ago. Create cash flow projections to show what impact business finance could have, and stress test against the worst-case scenario.
Which finance type is right for you?
While there may be fewer business finance products on the market than there were 12-18 months ago as lenders become more risk averse against a challenging backdrop, there are still options available. Here is an overview of some of the debt financing options you might consider for your business, including their benefits and downsides.
Revenue-based financing
Also called working capital financing, this is a loan which is paid back directly to the lender out of future revenues from your marketplace sales. There will typically be a fixed repayment target over several years, but there may be repayment flexibility.
Pros:
- You could get a lump sum advanced based on your upcoming earnings that doesn’t require credit checks.
Cons:
- Based on monthly income, not daily sales, so you might end up borrowing more or less than you need.
- Like a standard loan, revenue-based financing counts as debt on your balance sheet.
Traditional loan
A standard business loan lets you borrow a set amount over a fixed term with regular repayments. A fixed-rate loan will cost the same throughout the loan term, while the cost of a variable or floating rate loan changes depending on a benchmark such as the Bank of England base rate. You can opt for an unsecured or secured loan, the latter requires you to offer property, equipment or other assets as collateral which can be seized if you don’t meet repayments. Because secured loans hold less risk for the lender, they will usually cost less.
Pros:
- Fixed term with a set interest rate so you know how much you’ll borrow and repay.
- You can choose a repayment schedule which suits you.
- Some lenders may offer reasonable rates if your business meets their lending criteria.
Cons:
- With a fixed loan amount, you could underestimate or overestimate how much you really need.
- Most banks don’t understand ecommerce. Their criteria are heavily dependent on credit scores and other factors that often have little to do with the way an ecommerce business works.
- You’ll have to pass a credit check.
- A loan is a liability on your balance sheet.
Comparing the cost of financing options
| Storfund | Revenue-based financing | Traditional loan | Credit card | |
|---|---|---|---|---|
| Funding type | 80% of your daily net sales | Lump sum based on predicted future sales | Lump sum over a fixed term | Rolling credit limit |
| Automatic repayment via marketplace? |  |  |  | |
| Contract type | Flexible | Fixed term | Fixed term | Fixed term |
| Fees | Fixed % of net sales, nothing else | Fixed % of sales, other fees may apply | Interest + early/late repayment charges | Interest + late repayment charges |
| Interest |  | | | |
| Debt on balance sheet | | | | |
| Trial period | | | | |
Credit card
With a business credit card, you have the flexibility to make purchases up to a set limit and repay some or all of the balance at a later date. In 2022, 12% of SMEs said they had turned to credit card borrowing within the last few years, compared to 10% who opted for bank loans, according to the British Business Bank’s SME Finance Survey.
Pros:
- Could help you purchase inventory or pay expenses in the short term to improve cash flow.
- Some cards offer rewards such as loyalty points or cashback.
Cons:
- Can be an expensive form of borrowing if you don’t repay in full each month.
- Any outstanding balance will count as a liability on your balance sheet.
- You’ll have to pass a credit check, and might not get the credit limit you need.
- You may pay an annual fee.
Storfund: Immediate payment for your marketplace sales
Factoring is when you sell your outstanding invoices to a lender at a discount in exchange for immediate cash. This is what we do at Storfund. Factoring, also called invoice financing, could see you get paid for your sales within a day, boosting your cash flow and allowing you to restock more quickly.
Pros:
- The amount you receive is flexible and based on your actual sales, so it can be adjusted as your business grows or slows.
- No debt on your balance sheet (an important consideration if you’re thinking of selling your ecommerce business). *Note this may differ depending on the country your business is based in.
- No fixed-term repayments.
- Fast and flexible.
- Designed for ecommerce.
Cons:
- Your fee will be based on your sales volumes, so may not be economical for smaller sellers.
Factoring could cost you 1.5%-2.5% of your profit margin, but could increase your sales and profitability overall.
