If you’re in the ecommerce business, you’re going to need cash to grow, stay competitive, and, ultimately, succeed.
Maybe you’ll need more inventory. Perhaps you’ll need to fund a new marketing campaign or upgrade the backend of your site to handle more customers. Regardless, there’s one thing that’s certain – you’ll need capital every step of the way.
In this article, we’ll look at 4 ecommerce financing options tailored to startups, along with some of their pros and cons. Whether you just signed up for Shopify or looking to scale your existing venture, understanding these financing avenues is key to unlocking the full potential of your online business.
1. Bootstrapping
It can be a pain trying to demonstrate that your business is profitable or secure the collateral for a loan. Even more so if your business is just getting off the ground.
That’s why bootstrapping, or using personal resources, is one of the most popular financing options for startups. In fact, around three-quarters of startups say that they used personal savings as their initial capital when first starting their business.
The biggest advantage of bootstrapping is you can bypass jumping through the hoops needed for a loan or venture capital. In those cases, you either have to saddle your business with debt in the early stages or give up some equity. It lets you keep more control over the financial future of your ecommerce shop.
Plus, you don’t need to deal with the lengthy application process that comes with loans or credit lines. So, if you can rely on personal savings, assets, or friends/family that help out, then bootstrapping is by far one of the best financing solutions for a startup to use.
Here are some tips and tricks to be successful in bootstrapping:
Learn the core skills of your business. That way, you can save money on paying for extra help through employees or contractors.
Tap into networking opportunities on platforms like LinkedIn, Reddit, and other social media sites for free resources, advice, and connections.
Set up a solid business budget and stick to it while also setting aside a small emergency fund for unexpected issues.
Keep focused on your startup dream and stay resilient no matter what challenges come your way.
2. Venture Capital and Angel Investors
Venture Capital (VC) and angel investors are two other financing options that we’ve decided to lump into one entry. The only real difference is that one is a group and the other is an individual.
VCs are typically pooled money from investors that they then take and invest into a company that shows high growth potential. It’s been one of the more common ways ecommerce startups can get an injection of capital to help fuel their initiatives.
The money usually comes at the cost of a significant portion of equity though. And if you want them to take the chance on you, you’ll need to have solid fundamentals and show a clear profitability path.
Whereas angel investors will use their own funds for investments instead of pooling it with others. But you’ll still need to give up a piece of your business to bring them on board.
However, angel investors are an attractive option because they are more flexible and willing to take risks on more innovative ideas. That makes them a great partner to have in the early stages of funding.
Here are some tips to think about when trying to secure this type of funding:
Focus on giving concise and focused pitches show them data but try to tell a story because they want to invest in you.
Highlight your value proposition sets you apart from the competition? How will you disrupt the current market?
Online resources like investment databases are a fantastic place to find VC and angel investors.
Don’t be afraid of rough questions about your competitive edge market opportunities, business model, and more.
If you reach out through social media – remember personalization is key!
3. Crowdfunding
Since the advent of sites like Kickstarter, crowdfunding is more popular these days than ever. It’s the process of connecting directly with potential customers to both raise funds and boost brand visibility at the same time. Typically, you can showcase a product or the site you’re looking to build, and invite people to donate to help bring it to life.
The downside is that it’s hard to get traction. And there have been many scams over the years, so people are more cautious about where they spend money.
But you can follow these best practices when thinking about crowdfunding:
Your value proposition should clearly show what makes your business unique and why people should believe in it.
Understand your target audience. What are their pain points? What’s your solution? How can you create a marketing campaign that truly speaks to them?
Make sure your crowdfunding page gives as much detail as possible. That will give backers more confidence.
The awards to backers need to be tangible and match the amount donated.
Don’t forget to show off your ecommerce startup. Use visual assets building brand awareness with prototypes, demos, logs, videos, etc.
4. Bank Loans and Lines of Credit
Finally, we have the most traditional financing methods available to ecommerce startups. A loan is borrowing a specific amount of the bank that gets repaid over time with interest on top.
A line of credit, on the other hand, is a predetermined amount of money you can access when you need it. You’ll still pay interest but it’s a bit more flexible since you can pay the minimum if your situation calls for it.
Tips for bank loans and lines of credit:
If you manage debt correctly, you’ll keep a strong credit score and history.
Show lenders a comprehensive business plan that outlines your objectives, strategies, and financial projections.
Don’t be afraid to shop around for better terms and interest rates.
You’ll need collateral – either inventory, equipment, or something similar – to secure the loan.
Conclusion
Ecommerce startups have 4 distinct financing options with their own advantages and drawbacks. Bootstrapping offers autonomy and flexibility. VCs and angel investors can give you a serious cash injection if you’re willing to give up equity.
Crowdfunding is more grassroots and you can build a strong following, but it can be challenging to pull off. Bank loans and lines of credit are the most predictable but typically have a lot of barriers in place.
Picking the right one depends on your financial situation and needs. Hopefully, this article makes the choice easier.
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