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According to a report from Your Ecommerce Accountant, 2020 was a huge year for new ecommerce business registrations. While many high street businesses were forced to close during the pandemic, more people shifted to online shopping. As a result, 35,589 new ecommerce businesses registered throughout 2020, up 43% from the previous year.
However, this increase means that competition among online businesses is now higher than ever. So if you want your business to stand out, it might be time to invest in it. This guide looks at how to borrow funds through an ecommerce business loan.
An ecommerce loan is simply a business loan that can help your online business grow. You can use the funds to help maintain everyday cash flow requirements, or you can use them to make improvements to your business, whether that’s to buy new products, invest in advertising, hire more staff or create a better online user experience.
An ecommerce loan works in a similar way to any other business loan – you borrow a fixed amount of money and then repay it in monthly instalments over a set term, with interest added on top.
Repayment periods will depend on your loan type and loan provider, but typically they can be anywhere between 3 months and 5 years. There are often no charges if you repay your loan early and the amount you can borrow will typically be between £5,000 and £500,000.
Before you apply for an ecommerce business loan, you’ll need to check you’re eligible. Usually, this means your business will need to be registered in the UK and have been trading for between 6 and 12 months. There will usually be a minimum monthly turnover requirement and you as the business owner will need to be over the age of 18. Being able to demonstrate you have a good history of credit can also increase your chances of acceptance.
Applications can be made online and you’ll need to fill in details about your business, plus personal details about yourself, and state how much you wish to borrow. In most cases, you’ll receive a call back from the provider to discuss your application further, including how much you’ll be able to borrow and the terms of the agreement.
The 3 main types of funding for ecommerce business are secured loans, unsecured loans and merchant cash advances.
Secured loans require you to use an asset as collateral. Often this will be the company itself, but you can also use personal assets such as your home. Because the loan provider has the right to use these assets to get its money back if you’re unable to make your loan repayments, you can usually borrow a larger sum of money with a secured loan and interest rates tend to be lower.
By contrast, an unsecured loan does not require you to use an asset as collateral. For this reason, they are less risky and can be a great way of securing a quick cash injection. However, due to the lender’s lack of security, the lender may take a greater interest in your trading history or ask for a personal guarantee. This is usually a written commitment from the company director (and possibly other stakeholders) to personally pay off the loan if the business defaults on its repayments.
Unsecured loans can be quicker to obtain, but the amount you can borrow will be smaller compared to a secured loan.
A merchant cash advance is designed for smaller businesses that accept debit and credit card payments from customers. It enables businesses to borrow a lump sum and then repay it as a percentage of their customers’ card payments using a card terminal. The amount borrowed is repaid with fees, but repayments fluctuate in line with your income, so you’ll pay more in months when business is booming, and less when you’re not as busy.
Some other ecommerce funding options you could consider for your business are outlined below:
A business grant is an amount of money that’s awarded to a business, usually by the government or other companies, to help it grow. Business grants do not need to be repaid. There are hundreds of grants in the UK which are targeted towards different business requirements, including grants for small and start-up businesses.
Equity crowdfunding can help you raise funds for your business from several investors. You’ll need to list your business on an online platform where investors and members of the public can buy shares in your company. The Financial Conduct Authority (FCA) regulates all equity crowdfunding platforms.
Angel investors, or business angels, are high-net-worth private individuals who are happy to invest their own funds into a small business in return for a minority stake – typically between 10% and 25%. Angel investors can also offer mentoring and support.
A business credit card provides companies with a line of credit up to a set limit. This will usually depend on your company’s turnover and whether you and/or your business has a good credit history.
Business credit cards can be used to make purchases and help your business manage cash flow. They also bring with them a range of other benefits. They can allow you to keep your business and personal expenses separate, assign different cards to employees, track your finances and earn rewards. Some business credit cards even offer 0% purchase periods, enabling you to spread the cost of an item, such as a piece of equipment, over a number of months without paying interest.
Using a business credit card sensibly can also help your company build up a credit history. Just keep in mind that if your business is new, you may struggle to get accepted for the most competitive interest rates. A business credit card also won’t be the best option if you need to borrow a larger sum of money as you won’t be able to borrow as much as you could with a business loan, for example.
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Use our business loan calculator to find out your monthly cost and total repayable amount.
See how to get a business loan as a limited company in the UK, and how much you can borrow.
Find out how to get a loan if you work for yourself, including which lenders offer business loans for sole traders.
Learn about government support and alternative options for businesses needing finance to help deal with the impact of coronavirus.
Find out if a business loan is considered income and what you can claim as a tax deduction when taking out a loan.
Businesses all over the UK face financial instability daily, which often requires outside funding. We have looked into how the state of borrowing for these businesses differs between the industry, over the years, and for the size of the business.
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