In this article, we walk you through the most common financing options along with their potential pros and cons. But first, it's worth covering the questions you should ask yourself before taking on outside capital.
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Most online retailers eventually run into the same question as their business grows: how do I increase liquidity to keep fueling growth? Typical challenges include supply bottlenecks that lead to out-of-stock (OOS) situations, a lack of capital for new products, or insufficient marketing budget. The obvious answer for many merchants is to take out a loan.
In this article, we walk you through the most common financing options along with their potential pros and cons. But first, it's worth covering the questions you should ask yourself before taking on outside capital.
Take the example of two fictional online retailers, “Maria” and “Markus,” who sell umbrellas on Amazon together. Sales are going pretty well, but the two are currently facing a few challenges around their continued growth:
Problem 1: Supply bottlenecks and missing inventory
„In autumn or during longer stretches of bad weather, demand spikes unexpectedly. Our products sell out really fast.“
Problem 2: No liquidity for new products
“We're dependent on our top sellers and have to put most of our liquidity into new orders. It's really hard to test new products and make the business more stable and resilient.
Problem 3: Limited PPC and marketing budget
„We don't have money for big PPC campaigns – we put our margin into buying products. That's why we're not making progress on visibility and branding.“
Bringing in extra funds from third parties looks like a quick and easy fix when you're facing these challenges. But there are key questions you should ask yourself as a business owner before taking on additional outside capital. They include:
If you conclude that external financing is currently a fit for your business, you face the decision of which type of financing best suits your situation. In the following sections, we introduce six of the most common financing types:
This is a debt-free form of financing where an investor puts money into your business and gets an ownership stake in return.
The main upside for you is that you don't have to repay the investment – instead, you give the investors a share of your company's profits. There are no fees or interest, and you aren't personally liable with your assets. That's why this type of financing is especially attractive for startups and SMBs.
Equity financing also comes with some downsides. Since you're giving up part of your company (and along with it, future profits), equity is considered the most expensive form of financing. Personal relationships with investors can also get strained when things don't go as planned. Finally, keep in mind that while there are no direct fees or interest payments, equity can lead to back-payments due to gift tax rules and lost tax revenue.
With this — probably the most common form of financing — you repay the loan with (usually monthly) interest over a set period. The typical interest rate varies depending on the borrower and potential risks, but generally falls between 1% and 10%.
A business loan is generally considered relatively cheap, offers plenty of options to compare, and lets you have a personal point of contact (depending on the bank).
Personal support can be a big plus, but larger banks unfortunately often lack a real understanding of your online business and tend to have more rigid structures and longer decision-making processes. They also require personal liability and fixed payment deadlines. That often frustrates business owners, since extra liquidity is usually needed sooner rather than later.
Finetrading is based on selling invoices. The finetrader acts as an intermediary between supplier and buyer and pre-finances your negotiated order. Repayment of the loan and additional fees happens over a fixed period (usually 2–6 months), typically in monthly installments. Costs usually start at around 0.7% per month on the total amount (roughly a 1.2% effective monthly rate).
Finetraders often know online business models really well and offer very fast payouts and often the option to extend the repayment period.
That said, finetraders require a personal guarantee and a credit check, plus fixed interest rates and fees that come due every month. A finetrader also steps into your existing supplier relationships, which can put you at a competitive disadvantage.
Factoring is the sale of receivables at a discount to a third party — the factor. The factor then becomes the beneficiary of the receivable. Factoring can free up liquidity in two ways: by providing cash upfront, and by releasing tied-up working capital that would otherwise be used to finance outstanding invoices.
Repayment of the loan and fees usually works similarly to finetrading — over a fixed period, typically in monthly installments within 2–6 months. Costs typically start at around 2% on the total amount.
The main upsides are fast processing and payout times, an improvement in your business's creditworthiness, and protection against bad debt. But it can also create issues.
Since the factor now collects receivables from your customers, you're handing control of your customer relationships over to a third party that may be less flexible and customer-focused than you are. On costs, the fixed component in factoring is usually higher than with other financing options. Lastly, factoring is often only available for select industries and B2B companies.
This is a newer form of financing that's becoming more and more popular. It's essentially a loan where the repayment amount is based on a percentage of the company's revenue. Repayment is usually set over a 3–5 month period.
This type of financing can be especially useful for companies that can't get traditional loans from banks or other lenders. At the same time, your business is exposed to less risk: when your revenue drops, you also pay less interest during that period. That gives you a high degree of flexibility around your liquidity.
That flexibility comes at a price. Revenue-based financing is considered very expensive, with costs ranging from 4% to 12% on the total amount, and is only available with a required minimum revenue and a successful risk check. Heads up: fees also depend on what the loan is used for. (Marketing spend is usually the cheapest; growth-related uses like salaries are the most expensive.)
Another solution geared specifically toward online retailers is inventory financing. Here, your goods alone serve as collateral — no additional personal guarantee or liability is required. Your products are evaluated based on e-commerce platform data (e.g. Amazon, eBay, etc.) to assess their sales potential.
Inventory financing isn't tied to a specific use and can be deployed however you like:
To increase your business's liquidity, finance growth and new products, or boost marketing spend. That makes inventory financing especially well-suited for startups and SMBs. Repayment is flexible within the term — usually between 6 and 9 months — and possible at no extra cost. Another big advantage: unlike other financing options, the lender doesn't get involved in your customer or supplier relationships, which protects your competitive position in the market.
Potential drawbacks of this model are that third-party warehousing may sometimes be required and that follow-up loans require a new application. Inventory financing costs run at roughly 1–2% effective monthly interest.
In the end, there's no single right answer for financing and growing your online business. But before you decide to take on additional outside capital, you should critically analyze and assess your current business situation.
If you're looking for more liquidity and a strategic growth partner with a high degree of flexibility and significantly lower risk than traditional lenders, inventory financiers like Myos can be a strong choice. The model is built specifically around the needs of online retailers, and you're only liable with your products — never personally.
Cover image by Kelly Sikkema. Other images by Myos.
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