E-Commerce Business Loans: What Sellers Need to Know

Since Amazon.com started selling books online in 1995, the world has embraced the benefits of e-commerce. In 2023, global retail e-commerce sales reached an estimated $5.8 trillion. It's projected that sales will reach over $8 trillion by 2027.

While there’s a lot that has changed from those early days of Amazon selling books, what hasn’t changed, not for the lack of trying, is e-commerce businesses struggling to secure funding.

In this first of two articles, I’ll define an e-commerce loan, how an e-commerce business loan works, the pros and cons, and the best candidates for getting traditional funding support.

What is an E-Commerce Business Loan?

The concept of small business financing is pretty straightforward: if a business qualifies, it gains access to working capital that will be paid back at some point.

In practice, small business financing comes in various structures and repayment terms. This may seem minor, but the exact terms of a financing agreement make the difference between a small to midsized business (SMB) that scales and one that struggles to make ends meet.

When applying for a traditional business loan, providers (typically banks and credit unions) assess the health of the business and the likelihood that the loan will be paid back in a timely fashion. Lenders also want to know what assets can be used as collateral in case a business can’t afford to repay the loan.

Many online retailers look to financing to support things such as purchasing inventory, spending on marketing efforts, developing new products, upgrading infrastructure, and buying equipment.

How Does a Traditional E-Commerce Business Loan Work?

Online merchants usually apply for a loan with a bank or credit union. There are also lending companies that focus solely on the e-commerce industry. The provider requests financial information about the business such as past financial statements, business plan, assets, and working capital. They may even ask for a personal credit score.

Once approved, the lender sets out the loan terms, repayment schedule, interest rate, and any collateral that the online business is expected to provide. Usually, lenders also place limits on how the funds can be used. And they typically require a personal guarantee from the business owner or owners.

Benefits of E-Commerce Loans

• If an online business qualifies for a traditional loan from a financial institution, there will likely be a large amount of money approved at a lower interest rate.
• Traditional loans are often structured with multiyear repayment schedules, giving e-commerce borrowers more time to repay the loan.
• Many commercial lenders offer APR discounts and other incentives if a business owner brings all of their financial business, such as a checking account or merchant processing services, to the institution.

Disadvantages of E-Commerce Loans

• Most banks have firm ideas about the types of businesses that make good borrowers. If a business doesn’t fall into a designation, it’s challenging to qualify. The application and underwriting processes are designed to fit “accepted” categories.
• Part of how banks determine whether a business is qualified for a loan is through a lot of financial documentation. That can mean months’ worth of bank statements, credit history, and proof of collateral.
• Many lenders require online sellers to have a minimum of three years of business history to be eligible for a traditional loan. As such, e-commerce startup loans can be difficult to come by, even if sales and cash flow are strong.
• It can take months or more for the bank to process the application, approve the loan, and disburse the funds. E-commerce moves fast; banks don’t.
• Most online merchants don’t own significant assets, which disqualifies them as they can’t meet the collateral requirements.

Who Are the Best Candidates for an E-Commerce Business Loan?

The odds of receiving financial support from an institution increase if the business has 24 months or more of history of strong sales and predictable revenue streams. These types of businesses have the operational maturity to embrace the application process and the financial patience to wait for the funding to come through. If an e-commerce business has recently launched or is struggling to achieve consistent sales numbers or profitability, the traditional borrowing route may not be an option.

Receiving financial support from an institution is just one funding avenue for online businesses. It’s essential to be fully aware of all the options. In the second article, I’ll discuss alternatives such as business credit cards, lines of credit, SBA loans, revenue-based financing, and others. Stay tuned.

Eric S. Youngstrom is founder and CEO of Austin-based Onramp Funds, an innovative funding provider that supports the growth of eCommerce businesses.