In e-commerce, borrowing is often essential to secure and strengthen the company’s liquidity. Here, online merchants have to find the right capital provider for e-commerce and consider some aspects.
In the current article, we would like to explain to you which capital providers come into question in online retail, to what extent alternative financing solutions differ from classic bank loans and why these are a good choice.
The crisis calls for stable liquidity
According to a study by Adobe, online spending in 2021 was approximately $83 billion, an increase of 77% over 2020. Due to the pandemic, people’s buying behavior has changed, which in turn means that online retailers have to respond to a change in demand. With many stores closing, interest in online purchases increased tremendously. At the same time, customers were paying more attention to prices, resulting in lower demand for some retailers, but significantly higher demand for others. It is not uncommon for a cash flow problem to arise when demand unexpectedly increases, making debt financing necessary to secure liquidity.
Online sellers need adequate e-commerce financing to:
- To store sufficient stock and to be able to deliver goods
- purchase and launch new products on the market
- Execute processes and systems quickly, safely and efficiently
- to remain competitive
- Salaries and incidental expenses to be paid
Fast-growing companies in particular benefit from financing solutions such as merchandise pre-financing and inventory financing.
The answer to changing demand and logistics
Since many products can be ordered from the comfort of your home and delivered to your door, some have realized the benefits of online commerce. Currently, nearly three-quarters (72%) of consumers shop online once a month.
In contrast, many retailers either made profits or losses during the crisis: 58% of retailers were in the red, with sales up to around 68%, but 31% of retailers had increased sales. However, only one third generated an increase in sales, although this was almost 50%. This was mostly due to a lack of external financing to strengthen liquidity and a change in demand.
“Since the Corona crisis, the cash conversion cycle (length of time it takes to build cash in the company’s working capital) has changed due to supply chain disruptions and the Amazon marketplace.” – Nathan Evans –
Amazon prioritizes deliveries of certain items (e.g., masks, disinfectants) that the marketplace has deemed particularly relevant during the pandemic, thus ensuring the high volume of orders for these goods. However, if merchants sold goods that Amazon deemed less relevant to the pandemic, they experienced problems with warehouse logistics and shipping. They usually had to wait in line and could not sell their products or could only deliver them late. Furthermore, demand for “non-pandemic items” was very low.
A further complication is the payment morale of companies, which has dropped enormously in the face of the Corona crisis, so that last year only one in ten companies (11.5%) paid invoices late or not at all. In addition, previous suppliers dropped out, forcing dealers to find and pay for new ones. Supply and demand for the entire range shifted; logistics – from storage to distribution to transportation – were delayed. This is why additional financial requirements arose for online retailers, which is the reason for previous and current liquidity bottlenecks.
H3 A customized credit offer for e-commerce is necessary
Not infrequently, the lack of tailored financing for e-commerce was the reason for the company’s inability to pay and thus insolvency. As before, a large proportion of online retailers seem to choose the classic route via a bank loan, but especially during the crisis, most were denied this financing route. Banks require collateral and longer review times, but this is a serious problem in e-commerce because capital must be available quickly to make new acquisitions. But especially in a crisis, retailers must remain liquid and be able to meet payment obligations on time – securing liquidity is the be-all and end-all of a company’s existence.
Over time, alternative lenders for e-commerce became better known, which also increased interest in suitable financing solutions. It was quickly realized that these loans were better suited to the needs and characteristics of online commerce, which increased interest in alternative lenders for e-commerce.
When are e-commerce lenders needed?
An e-commerce lender always comes into play when the company’s liquidity cannot be guaranteed in the near future. Fast-growing companies in particular need capital quickly to drive growth and order new goods or replenish inventories. If the new orders cannot be financed by the sales of the goods already sold, liquidity bottlenecks will arise without suitable financing for e-commerce. If the goods come from non-EU countries and have to cover longer delivery routes, long delivery times must be expected, which in turn can lead to major cash flow problems. But whether online retailers have seen sales increase or decrease during the pandemic, capital is needed by many in numerous places.
Lenders in online trade and their peculiarities
Alternative lenders for e-commerce know best the challenges as well as unique characteristics of online businesses and can therefore offer the appropriate financing solutions. So what opportunities and possibilities do e-commerce loans offer you? Lenders for e-commerce offer your customers a more straightforward application process; approve loans faster and provide the capital they need between 24 to 48 hours.
A loan for e-commerce is specifically tailored to online trade and consequently offers better conditions (e.g. advance financing of goods, inventory financing, factoring). Furthermore, the capital can be used mostly for any business purpose, including promotional activities for sales promotion and traffic generation, for the purchase of goods or development of technologies, systems and processes for sales optimization.
- Pre-financing of goods: Pre-finance goods and secure competitive advantages.
- Inventory financing: generate liquidity through the tied-up inventory value; i.e., release liquidity tied up in inventory and use it for other investments.
- Factoring: Sell open receivables to factoring company.
E-commerce loans – What alternative financing options are available?
As alternative business financing, companies can turn to crowdfunding, angel investors and venture capitalists:
- Crowdfunding: With crowdfunding, a large group of individuals funds the project, but interested parties must expect limited funding amounts and long processing times.
- Angel investors: Angel investors are individuals who invest in startups or small businesses with their personal funds. Borrowers can benefit from flexible contractual arrangements, but must cede a business interest and potentially accept investor say-so rights.
- Venture capitalists: Venture capitalists also invest in start-ups or small companies and provide them with capital. However, a downside of this is inflexible contractual arrangements, loss of full control, delayed decision making, and loss of equity and profit margins.
There are many different e-commerce loans that are tailored to the needs of online commerce. Alternative lenders for e-commerce – such as fulfin – offer financial support along the production and process chain, merchandise, purchasing and inventory, and growth financing.
Finetrading for goods and purchase financing
To order enough goods and keep them in stock, retailers need sufficient capital. One form of short-term financing is finetrading, in which so-called finetraders are used as intermediaries to finance goods. In this case, the finetrader takes the order of goods for its own account, but the goods are delivered to the merchant’s destination. When the merchant releases the invoice, Finetrader takes over the payment of the supplier and the merchant receives an extended payment term until the goods are delivered.
Nevertheless, the terms of delivery are agreed between the dealer and the supplier. If finetrading is implemented properly by the trader, it can increase profit margins and minimize risk of loss. Furthermore, the equity ratio remains stable as the credit rating and creditworthiness are not burdened. Nevertheless, merchants should factor in late bill payment fees with Finetrader. However, these can be offset by better conditions from suppliers, such as cash discounts and rebates.
Prefinancing of goods through factoring
Another method of short-term financing is factoring, whereby liabilities are sold to a factoring company. The company concludes contracts with the seller and the supplier, takes over the supplier receivables from the seller and settles the amount. In addition, the seller can also sell outstanding customer invoices to a company, thereby reinvesting the capital.
Merchandise prefinancing through fulfillment finance Growth financing
However, Fulfin sees itself neither as a factoring company nor as a finetrader, and transfers the necessary capital to borrowers as part of merchandise, purchase or inventory financing without interfering in the merchant’s business as an intermediary.
Fulfillment financing helps retailers to obtain short-term liquidity without third parties acting as intermediaries. Merchandise financing is a flexible short-term loan for up to nine months and ensures that merchants can always reduce debt.
The fact that the financial service provider is not directly involved in the supplier-customer relationship gives the retailer more decision-making freedom and flexibility. Furthermore, more capital than just the purchase price for the goods can be offered. The security is the stock or the pre-financed goods.
Selection criteria for the right lender for e-commerce
When choosing the right e-commerce lender, you should pay attention to several selection criteria:
- Note possible interest
- Available terms and credit amounts
- Which lenders grant partial or full repayment free of charge
- Possible installment breaks during the term
- Minimum and maximum credit amount
- Loans explicitly granted to self-employed persons and online traders
- Customized and alternative forms of financing (inventory and commodity financing)
- Other advantageous conditions
Find reputable lenders for e-commerce
You can’t always tell reputable e-commerce lenders from rogue ones, so do a little research beforehand. Keep the following points in mind:
- Reputable loan providers will not charge you any upfront fees.
- Refrain from aggressive advertising measures (e.g. cold canvassing)
- They waive additional commissions.
- They offer maximum transparency with regard to your conditions.
- Consultations are not billed, but are part of the service.
- The application process is almost self-explanatory
- Briefings and home visits by employees are usually not mandatory.
- If you have any unanswered questions, staff will be available promptly for a free consultation.
- They do not offer any additional contracts (e.g. insurance, building society contracts).
- Residual debt insurance should only be offered as an option, not as a requirement.
FAQ – Capital provider e-commerce
What capital providers are there for e-commerce?
Basically, online retailers can apply for and obtain loans from traditional credit institutions. However, these loans are rarely tailored to the needs of e-commerce, whereas alternative financing such as commodity or inventory financing offer customized solutions.
Why does e-commerce need financing?
Particularly in e-commerce, cash flow problems can quickly arise, making it necessary to secure liquidity with the help of external financing. To remain competitive and guarantee customers timely delivery of goods, online retailers must always remain liquid to buy new merchandise, cover ancillary costs and pay employee salaries. Investments cannot always be made from sales, which is why financing in e-commerce can be essential for securing the company’s existence.
What alternative financing is available for online retailers?
Alternative financing for e-commerce includes finetrading and factoring, as well as purchase, merchandise and inventory financing. These financing solutions can be used to pre-finance goods or release liquidity tied up in inventories.
When does financing make sense in e-commerce?
Financing always makes sense in e-commerce when liquidity is no longer assured in the future. Loans are often necessary not only in the start-up phase, but also in the growth phase. If the stock becomes smaller, products have to be reordered, but the new orders cannot always be covered by the turnover of the goods already sold. If a cash flow problem occurs, debt financing is necessary.
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