Exploring financing options for ecommerce companies

TL;DR

• Ecommerce financing falls into two buckets: short-term options (like credit lines, working capital loans, and merchant cash advances) that help you manage cash flow, and long-term options (like term loans, SBA loans, and equity financing) that fund bigger growth moves.
• Short-term financing covers the gap between when you pay for inventory and when revenue comes in. It keeps operations, marketing, and your supply chain running smoothly.
• Merchant cash advances get you capital fast, but are often the most expensive option since repayments scale with your daily sales volume.
• Equity financing (including venture capital) gives you growth capital in exchange for ownership in your company, which can work well for high-growth startups that plan to raise in stages.
• The right financing mix depends on your business goals, credit profile, how quickly you convert inventory to revenue, and how much dilution or debt you're comfortable taking on.

Starting and growing an ecommerce company requires a healthy inflow of funds — and that’s where ecommerce financing comes in. Ecommerce financing is the capital that online companies secure to start or grow the business. This type of funding can make it possible to make essential purchases, invest in research and development, cover payroll during lulls, and support any other business goal needing an infusion of cash.  

Both short- and long-term financing can support an ecommerce startup’s success and longevity. Short-term funding — like business credit cards, a business line of credit, and working capital loans — can help meet your business’s immediate needs and ensure smooth daily operations and steady cash flow. Long-term investments, like equity financing and long-term loans, can help fund your company well into the future, while supporting strategic development and sustained growth. 

Finding the right mix of ecommerce financing can help your company grow while maintaining healthy profit margins — so let’s take a look at the options.

Wondering if the time has come for your ecommerce business to get a cash injection? Here are the benefits of securing funding for your ecommerce business, plus signs that your startup is ready for financing.

Managing cash flow 

If you’re having trouble managing cash flow, that’s a sign your startup could benefit from financing. Having sufficient working capital will help your company to cover day-to-day operational expenses during slow sales periods, navigate unexpected costs, and prepare for busier sales months, without financial strain. Ecommerce funding can also help bridge the extended cash conversion cycle between upfront stock and inventory purchases and anticipated sales.

Navigating supply chain disruptions and inventory shortages

Supply chain disruptions can lead to a cascade of other business problems, including inventory shortages. If you’re experiencing this, ecommerce financing can buy your startup time to secure new suppliers and diversify your supply chain. It also can make it possible to invest in more efficient systems that reduce costs and improve delivery times. Investing in these facets of your business now will help you to establish a strong foundation, so you’ll be able to maintain optimal inventory levels to meet customer demand and prevent stockouts — and weather any future supply chain interruptions.

Upgrading and integrating new technology 

Securing funding can help your company invest in the latest technology and software to enhance your ecommerce platform's performance and functionality, while improving user experience. Integrating more advanced tools and systems can streamline operations, increase efficiency, and help with scaling. Plus, keeping your company’s tech up-to-date is also essential for staying on top of cybersecurity and regulations compliance.

Marketing and customer acquisition

If your startup is ready to welcome your first customers or grow your customer base, ecommerce financing can help cover costs as you ramp up your marketing efforts with campaigns designed to attract, concert, and retain customers. Investing in customer acquisition strategies can drive traffic, boost sales, and keep your online store top-of-mind for your current and potential customers.

The goal of short-term ecommerce financing is to boost working capital, provide an immediate cash flow, and cover operational expenses. This type of funding also helps bridge any gap caused by delayed receivables, allowing for timely payroll processing and  inventory purchases. Though raising venture capital can be the right fit for some startups, there are many alternative financing options, too, including these short-term ecommerce funding options, each with differing fees and repayment terms.

Business line of credit

If you’re looking for ecommerce funding, but you’re not sure exactly how much capital your company will need, consider a business line of credit. With a loan, you’ll get a set amount of capital upfront as a lump sum, but with a business line of credit, you’ll have the flexibility to draw funds only as needed, up to the credit limit. Similar to a credit card, you’ll only owe interest on the funds you use, and, once you’ve repaid the used funds you can borrow again on a revolving basis. Having a business line of credit can be helpful with covering unexpected business expenses or opportunities. Downsides include potentially high interest rates and late payment fees, as well as the potential risk of accidentally overborrowing.

Short-term loans

Working capital loans provide a lump sum upfront, making this type of short-term loan suitable for funding immediate needs, like covering daily operational expenses and maintaining a healthy cash flow during periods of low revenue or high expenditure. This ecommerce financing option can be structured as a term loan with fixed payments or as a business line of credit. It may have shorter repayment terms than other types of business loans.

Merchant cash advances (MCA)

Originating in the restaurant and the hospitality sectors, merchant cash advances (MCAs) are a form of revenue-based financing that provides businesses with a lump-sum cash advance based on the company's historical and anticipated sales. To repay the lender, you’ll pay a fixed percentage of your daily or weekly sales, referred to as the "remittance." This is automatically deducted until the advance is fully repaid. Getting an MCA can be a quick way to get a cash injection, but take note: This can ultimately be a pricey option. If your business performs well and brings in high sales, that means the remittance will be high, too. So, it can end up being more costly than other short-term financing options.

Business credit cards

Business credit cards offer quick access to revolving credit, allowing companies to manage short-term expenses and earn rewards, like points, airline miles, or cashback. Credit cards also provide the convenience of immediate purchasing power, which builds credit history and makes it easier to qualify for other ecommerce financing options in the future. However, some business credit cards charge high interest rates on unpaid balances. The risk of accumulating debt can make this form of short-term financing a risky choice.

Inventory financing

As the term suggests, inventory financing is a type of ecommerce business funding used to purchase inventory, and can take a variety of forms, including business credit cards, inventory-secured loans, an inventory line of credit, and revenue-based financing. By financing inventory purchases, ecommerce businesses can preserve cash flow, prepare for spikes in demand, and access capital without giving up ownership (as is the case with equity financing). With revenue-based inventory financing, you’ll have repayment flexibility, since repayments are based on sales. So, during periods when sales are slower, you won’t have to worry about a fixed monthly payment. Drawbacks include interest rates that can cut into profits and, with inventory-secured loans, your assets — including your inventory — are at risk if you don't repay the loan. 

Long-term financing is best positioned to support substantial business investments and strategic growth initiatives. It can provide capital for significant projects, such as expanding operations, purchasing major assets, or investing in R&D. With extended repayment terms and opportunities for lower interest rates, long-term financing options — like loans, crowdfunding, and venture capital — enable ecommerce businesses to plan for future growth. 

Long-term business loans

Term loans provide businesses with a lump sum upfront, with a fixed repayment structure and a fixed or variable interest rate. Based on the lifespan of the loan, term loans can be short-term, intermediate-term, or long-term. Your company is responsible for repaying the loan over a set period with regular installments, making long-term loans ideal for financing significant, dream-big investments, like buying a building, purchasing major equipment, or business expansion projects. Predictable repayment schedules and lower interest rates (compared to short-term loans) can make long-term loans a cost-effective choice. However, these loans require a long financial commitment, and qualifying for large amounts of capital can be challenging if your business has a limited credit history, as is often the case with early-stage startups.

SBA loans

Backed by the Small Business Administration, SBA loans are available to creditworthy, for-profit businesses that do business in the U.S. Options range from microloans (up to $50,000) to long-term, fixed-rate financing (up to $5 million) for major fixed assets. These loans generally include flexible overhead requirements and favorable rates and fees. Some SBA loans also come with ongoing small business support, making them suitable as long-term funding for ecommerce businesses companies. Attractive terms and lower interest rates reduce the cost of borrowing, but lengthy and complex application processes and stringent eligibility requirements can be challenging for some startups to meet. 

Crowdfunding

With crowdfunding, businesses can raise small amounts of money from a large number of people, like the avid supporters of your ecommerce business. Online platforms — such as WeFunder, Kickstarter, or IndieGogo — simplify the process. This type of ecommerce funding can be a way to finance R&D and manufacturing costs for a new product, for example. By drumming up excitement around a new product, you can get early buy-in to validate new product ideas, while increasing customer engagement and building a community of supporters.

Equity financing

In short, equity financing is a way for ecommerce startups to raise funds from investors by selling shares in the company. So, when pursuing this type of funding means giving up ownership stakes in your company. Venture capital is a type of equity financing, more common among early-stage startups with high growth potential, that involves investors, such as angel investors or investment firms, backing the company in exchange for equity stakes. Though venture capital isn’t a form of long-term funding and should only be used until your startup hits its next big milestone, this type of financial backing can help set your business up for longer-term success.

For a deeper dive, read our guide, Venture Capital 101. Looking for investors? Check out Mercury’s investor database.

Venture debt

If your ecommerce startup has recently raised venture capital, you may qualify for venture debt — specifically, venture term loans. Startups with a high-grown potential can be strong candidates for these loans. Typically worth 30% to 50% of your previous funding round, venture debt can be helpful for financing growth and extending runway. Since you’ll compensate venture lenders with stock warrants, your company will get slightly diluted (usually by less than 0.5%). As with any business loan, you’ll repay venture term loans over time, with interest.

Choosing the best ecommerce financing options for your startup depends on several factors, including your business goals, what your startup’s credit profile looks like, and the time you’re willing to invest in the financing process. Understanding these factors will help you select the most suitable financing option for your company’s unique needs and ambitions.