An e-commerce business is a lot like any other business in that it requires the owner to have an idea, commit time and money, and take risks. All good ideas will require sizeable funding.
E-commerce is no different. It requires a sizeable amount of initial funding to get started. In an e-commerce setup, funding can be used for product inventory costs, transaction costs, and marketing. This guide will give you a step-by-step method to fund your e-commerce business.
How to Fund an E-commerce Business
You can use the following means to kickstart your e-commerce business financially:
1. Get Funding From Friends and Family
Friends and family are usually the first places you will look for funding. They already know you and trust that you can run a successful business.
You will have to convince them that what you are doing will work, especially if you don’t have any previous experience with e-commerce.
You will also need to assure them that you understand the risks involved and how much time and effort you are willing to put in.
For friends and family to provide you with the funds, you may need to give them a substantial return on their investment.
2. Find a Appropriate Lender
A reputable lender will offer you an interest rate that is not too high or too low. There are various types of lenders: banks, credit unions, and pawnshops.
The first question you need to ask yourself is, “How will I repay the loan?” It is a viable option if you can repay the loan with scheduled payments over two years or less. If not, please refrain. It may choke your business in the long run.
The lender will also very likely ask for collateral.
Collateral does not have to be physical. It can be stock certificates or the share of stock.
When you choose a lender, make sure they understand your business model and the risks involved with starting an e-commerce business.
The lender should also have a good idea of the value of what you have to offer as collateral.
3. Get a Small Business Loan
Applying for small business loans can be your best bet for getting funding for marketing, inventory, and other expenses involved in starting an e-commerce business.
Small business loans are available from community banks, credit unions, and even online lenders like Kabbage.
You will have to go through a process to get a small business loan from a bank. Usually, the bank will ask to see the starting capital, collateral, and maybe a guarantor.
As an owner of an e-commerce business, you may want to consider getting a loan from a good ecommerce bank like Chase. Chase is arguably the best bank for ecommerce business.
4. Get an SBA Loan
If you are looking for a long-term funding option, the SBA may be a great avenue to explore.
It offers loans that range from $50,000 to $5 million.
The SBA offers many different loan types, including startup business, business expansion, working capital loans, real estate acquisition or construction loans, and disaster loans. Loans can take anywhere from 10 days to six months to get approval. The SBA insures and guarantees loans to a certain percentage so that if you cannot repay the loan, the bank or lender will not lose as much money as they would have.
The cost of an SBA loan is based on the amount of money being borrowed, your credit score, and your assets.
Crowdfunding is the best way to get your funding. It is the process of raising money from many people or organizations through the electronic use of social media sites, crowdfunding platforms, such as Kickstarter and IndieGoGo, websites, and email. It is different from advertising, but it also attracts attention to a product or service.
In crowdfunding, people use social media platforms such as Facebook and Twitter to raise awareness of their business. Crowdfunding on these channels can help reach the right people at the right time to fund your business.
Crowdfunding sites are free to use, and you can scroll through thousands of people who have used their platform for crowdfunding campaigns. You can also see how much they have raised for their businesses.
How Crowdfunding Works
To understand how crowdfunding works, you must understand the agreement terms between the business owner and the crowd funders. Here are the two most common terms used in crowdfunding:
Reward-based crowdfunding refers to all donation or equity-based forms of crowdfunding where the return on investment is not made. Instead, campaigners offer a suitable reward to those who pledge money towards their campaign.
Rewards can be anything from an exclusive T-shirt to dinner with the creators or even an original painting. The idea behind reward-based crowdfunding is that the incentive of ownership in a product that hasn’t been released yet, or supporting a cause you believe in, is enough to motivate people to invest their money.
Equity crowdfunding is a form of donation-based crowdfunding where investors receive shares in the companies being promoted or financed. Investors have the right to dividends if the company is profitable after the closing of the investment period.
Equity crowdfunding is considered the pure form of crowdfunding and the most effective in raising funding. However, equity-based projects rarely reach seed funding targets because they require commitment from those who invest, which potential investors see as a hurdle.
Crowdfunding is by far the best way to raise funds for small, new businesses.
You’ll need to promote your project using social media most of the time, but then you’ll find other people who have great projects doing the same thing as you.
The Potential Benefits of Using a Crowdfunding Platform
- It gives you exposure to many different types of people: As it involves reaching out to people, crowdfunding will give you access to people from all walks of life. Some of them may even end up becoming investors in your startup or even customers.
- Gets your name out there: Crowdfunding can be beneficial to small businesses and startups. It can be challenging for these businesses to raise awareness and gain exposure without any existing connections in the industry. However, crowdfunding can help change the narrative.
- Rewards may be used as a marketing tool: In reward-based crowdfunding, the money you raise for your project is mainly used as investment capital to pay for the rewards you have offered.
- Expands your network: The people who invest in your business will not just be customers. They will become a part of your network.
- Inexpensive: It doesn’t require any advertising and press release distribution costs. Crowdfunding can be very affordable for any small business.
- No middlemen involved: Crowdfunding platforms are used by startups or established businesses to get in touch with potential investors. There is no broker or middleman involved, so the transaction costs are lower.
The Potential Risks of Using Online Crowdfunding
- Not reaching your target: A business may fail to reach its target investors with crowdfunding. This is because of inclusivity. Failure to reach a target can be devastating for any fundraiser. After all, if you don’t reach your goal, what’s the point in going ahead with the project?
- Legalities of crowdfunding: Crowdfundings are emerging as a new way to raise money. Due to this, it involves many legal obstacles. For instance, it is illegal to get money from investors without incentives in most countries. In the USA, crowdfunding only became legal in 2016.
- Negative reputation: Resorting to crowdfunding as a funding source could send the wrong message. Potential customers may view you as incapable of meeting their demands.
The unique thing about e-commerce is that you need to have a product to sell. If you are starting and don’t have enough capital, you may consider starting with a few products to earn money until your business is established.
Start with a business plan or proposal and make sure that your start-up products meet the following criteria:
- Good quality of material
- Low production cost
- Low risk of new technology
- Unique when compared to competitors’ products
- Easy to sell
- Able to sell at a profit
You can sell such a good product online to get funding.
There are many ways to get startup funding for your e-commerce business. They range from donations from friends and relatives to loans from financial institutions. But without a doubt, crowdfunding stands out above the rest. It is the best way to get startup funding for your business. The main reason is that you get all the money from multiple people. All you need is a good idea that supports a cause. You would be amazed by how easy it is to get funding for a business using crowdfunding.