What Online Retailers Need to Know Before Seeking a Loan

Securing funding is a pivotal step for online retailers looking to scale their business, invest in inventory, or expand marketing efforts. However, before applying for a loan, e-commerce merchants must meet certain financial benchmarks and understand key lending criteria to improve their chances of approval. Here’s what online retailers need to have achieved or understood before seeking a loan.

Consistent Revenue: A Baseline for Eligibility

Lenders want to see a track record of consistent revenue before extending financing. A good rule of thumb is having at least $3,000 in sales revenue in a rolling 30-day period. This demonstrates financial stability and assures lenders that the business has a steady stream of income to support repayment. Ideally, merchants should be tracking revenue trends over several months to identify seasonal fluctuations and opportunities for revenue growth.

Building Business Credit

Establishing business credit is crucial for any e-commerce merchant seeking financing. Just as individuals build personal credit, businesses must develop their own credit history to improve their borrowing potential. Some effective ways to build business credit include:

Related story: E-Commerce Funding Options Beyond a Traditional Loan: What Sellers Need to Know

• Business Credit Cards: Opening and responsibly using a business credit card, such as American Express, helps build credit history. Keeping utilization below 30 percent and making on-time payments will positively impact credit scores.
• Supplier Credit Accounts: Many suppliers, like ULINE or other packaging providers, offer net terms that allow merchants to establish a credit account. Consistently meeting payment deadlines strengthens a merchant’s credit profile.
• Credit Builder Programs: Services like Dun & Bradstreet Credit Builder enable online retailers to establish and improve their business credit profile. These programs report payment history to credit bureaus, which can be beneficial when applying for future loans.
• Registering With Credit Bureaus: Ensuring that your business is registered with credit agencies like Experian, Equifax, and Dun & Bradstreet can help lenders access credit worthiness more easily.

Lenders use these credit references to assess a merchant’s reliability in managing debt and financial obligations.

Key Financial Data Points Lenders Assess

Understanding what lenders focus on can help merchants proactively manage their finances before applying for a loan. The primary data points include:

1. Cash Flow Management: Maintaining a healthy cash balance is essential. Draining accounts to zero and waiting for store or marketplace deposits signals financial instability to lenders. A consistently positive cash balance improves loan approval chances. Merchants should consider cash flow forecasting tools to anticipate upcoming expenses and revenue fluctuations.
2. Avoiding Overdrafts: Overdrafts can be a deal-breaker for lenders, as they indicate cash flow mismanagement. Ensuring there are always sufficient funds to cover expenses demonstrates financial responsibility. Setting up low-balance alerts can help prevent overdrafts.
3. Debt-to-Revenue Ratio: A high debt-to-revenue ratio can be a red flag for lenders. Merchants should strive to maintain a balanced ratio that shows they can manage existing financial obligations while taking on additional funding. Ideally, businesses should keep this ratio below 30 percent to improve their loan approval odds.

Understanding Margins at Every Level

One of the most critical aspects of financial health for e-commerce businesses is a thorough understanding of margins — both holistically and on a per-SKU basis. Merchants must:

• Calculate and monitor gross and net profit margins.
• Analyze costs at the SKU level to ensure each product contributes positively to the bottom line.
• Identify and optimize high-margin products while reassessing low-margin items.
• Consider variable costs such as shipping, returns, and marketing expenses that can impact overall profitability.

For example, an online retailer selling apparel may have different margin considerations compared to an electronics seller due to factors such as return rates and seasonal demand. Understanding these nuances will not only help in securing funding but also ensure the long-term profitability of the business.

Final Thoughts

Acquiring a loan can be a game-changer for online retailers, but preparation is key. By maintaining consistent revenue, building business credit, understanding lender-focused data points, and managing margins effectively, e-commerce merchants can significantly enhance their chances of securing the funding they need. Taking these steps proactively will position businesses for growth and financial stability in the competitive e-commerce landscape. Additionally, leveraging financial advisors or business consultants can provide deeper insights into optimizing business operations before approaching lenders.

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