Online businesses, and especially startups, will often come up against a number of barriers when looking to borrow from traditional banks. For those that do manage to secure funding from a bank, the length of loan and repayment terms are not always a good fit for an online business model, demonstrating the inflexibility of legacy banking systems.
Businesses that operate online are facing significant challenges when it comes to borrowing, putting them at real risk of failure due to financial exclusion. Big banks can no longer provide the flexibility online ecommerce businesses need when it comes to lending. Many online companies are seasonal and making the same repayments during quieter periods can result in cash flow being severely impacted. Short term loans are uncommon with traditional lenders, while arranging any form of lending with such a provider can take months – time that agile online businesses simply don’t have.
Without access to funding, consequences can be dire. Research shows that 90% of start-ups fail within their first four years, but even when online businesses do make it over this hurdle, they will likely need additional working capital in order to continue to grow.
The good news is that new providers are stepping in to bridge the gap between what banks can do and what businesses need from their bank. Here are five financing options that online businesses may want to consider.
1. Peer to peer (P2P) lending
Peer to peer loans work by allowing businesses to borrow cash from investors, often through a specialist online lending platform. After a speedy application process, loan decisions can be made in minutes. And if approved, access to funding is given much more quickly through P2P lending than through a bank. Terms are typically more flexible than those provided by banks, and range from as little as one month to five years. However, repayments are fixed, which may not be ideal for online businesses, who experience times when cash flow is tight.
While the APR may be lower when compared to traditional lenders, new online businesses may still struggle to secure funding, as some investors will require a minimum annual turnover.
2. Angel investors
Angel investment can be a great way for an online business to get off the ground – especially as they provide more favourable terms when compared to traditional lenders. But pitching an idea to an experienced investor is unlikely to be enough for them to hand over their cash.
Preparation is key when it comes to securing funding through these means, which can be a drawn out process. Expect to put together pitch decks with detailed market research as well as projected financials.
If accepted, as well as financing a business, angel investors can also provide advice and opportunities that would have been far more difficult to pursue without their connections.
Crowdfunding comes in many forms.
Debt crowdfunding is essentially P2P lending in the sense that investors will be paid back, with interest, the money they lend to an online business.
Reward crowdfunding is popular with startups as it provides backers with a non-financial benefit to thank them for investing. Often utilised by bands and developers offering merchandise and early access to a game, it can also be used by online businesses, particularly those operating in ecommerce, by rewarding the investor with free products.
Equity crowdfunding, AKA seed capital, works by giving investors shares in their business.
Donation crowdfunding offers the investor no reward (financial or otherwise), nor share-based return, and is based around people donating because they want to, rather than investing to get something back. As with charity, it’s about feeling good knowing a business venture they believed in is succeeding.
While some forms of crowdfunding require the business that is seeking the funding to really sell itself in order to demonstrate why backers should part with their money, in most instances crowdfunding offers a way to raise cash without having to provide the financial facts and figures a traditional bank, P2P lender, or angel investor would require.
4. Flexible financing from FinTechs
Another way ecommerce business can access financing is via their Payment Service Provider. Sometimes referred to as a ‘merchant cash advance’, a Payment Service Provider can offer lending by deducting a percentage of the merchant’s daily flow until the loan is paid off in full. Effectively, the borrower repays the loan when their customers pay them.
This provides a quick and easy way for an online business to secure a short-term, flexible loan that is based on business success, so during busier periods, the money borrowed can be repaid more quickly. Because of the way in which this lending model works, if a loan is taking longer to pay back, there are typically no late payment fees or penalties applied.
5. Receivables Factoring
Also known as ‘accounts receivable factoring’, Receivables Factoring provides a cash advance against invoices and payments an online business is expecting to be fulfilled in the near future. Settlement cycles, especially those from online marketplaces, can cause significant issues for small ecommerce companies who need a quick cash injection, hindering growth.
Receivables Factoring is a short-term commitment that provides online businesses with fast access to funds, helping them to reinvest and free up capital when they need it most.
Finance for online and ecommerce businesses is changing
Access to affordable, flexible business finance could easily mean the difference between an online business failing or succeeding, expanding, and exceeding its potential, benefiting the global economy as it does so.
To find out more, download our white paper, ‘The epic business loan battle: SMEs fighting for finance’.