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E-Commerce Loans – Online Retailer Financing

Financing For Online Retail Stores

As of 2014, over 80 percent of the online population had purchased an item online, and 50 percent of the online population had made an online purchase more than once. With consumers today being immersed and heavily reliant on the internet and technological advances, it is difficult to imagine that many people have yet to purchase a product or service online. Most consumers today do not even realize the in’s and out’s of e-commerce, but every business owner needs to know about this vital business practice, whether they are a brick and mortar storefront or an online business – e-commerce is revolutionizing every single industry today.
E-commerce, otherwise referred to as EC, e-business, or e-tail, is the purchase and/or sale of goods and/or services via electronic channels (the internet). These transactions are typically:

  • Business to business (B2B): This involves companies doing business with each other; the most common form of business to business transactions is manufacturers selling to distributors.
  • Business to consumer (B2C): This form of e-commerce is a business selling to a consumer, or the general public. This is the most common form of business, and in relation to e-commerce, the most well-known example would be Amazon.
  • Consumer to consumer (C2C): In C2C e-commerce, this involves an online classified ad, forum, or marketplace where one person can buy or sell goods and/or services to another person. Examples of C2C e-commerce include Craigslist and eBay.
  • Consumer to business (C2B): In this form of business, consumers will post a project or resume with a set price online, allowing business owners to review and select the bid. Elance is a well-known form of this type of e-commerce business.

Many consumers today do not realize that e-commerce actually started in the 1960s, when businesses started using Electronic Data Interchange (EDI) to share business documents with other businesses on value-added networks (VANs). With increased internet access and activity, the idea of e-commerce grew between the 1990’s and the early 2000’s; Amazon and eBay were the pioneers of this time, often being cited as the revolutionaries of the e-commerce industry.

Today, online shopping has surpassed the $1.5 trillion market in worldwide sales, and experts are expecting the e-commerce industry to surpass $2 trillion in the next few years. E-commerce is considered one of the fastest growing industries, and it is soon to be one of the most valuable business tools for online business owners and brick and mortar businesses alike. Over 78 percent of the United States population are online shoppers, with this number only growing with the increasing age of Millennials and Generation Z’ers who are known for growing up attached to technology and mobile devices. With that, studies are showing that mobile and social media e-commerce is exploding. In 2015, mobile e-commerce accounted for 30 percent of all United States e-commerce activities, and 5 percent of all online spending was via social media; Facebook, Pinterest, and Twitter producing the most referrals.

Overall, e-commerce has completely shifted the cost and profit idea for companies across the world. Increased e-commerce use has led to a reduction in transaction costs, improved supply chain management, and reduced costs for domestic and global sourcing; e-commerce has also increased productivity, profit margins, and competitiveness amongst businesses in every industry. E-commerce revenue today is around $165 billion compared to the $3.9 trillion of the total United States retail market – the e-commerce industry even continuously grew during the Great Recession, albeit slower than it is today.

Pros & Cons of Online Retailing

Over the years, ecommerce has definitely evolved, but Amazon and eBay are still major players that have consolidated much of the industry. Luckily, more and more technological advances are creating room for growth amongst startup’s and entrepreneur’s everywhere. The explosion of mobile devices and social media are two particular areas that are fueling the expansion and reliance of ecommerce amongst business owners in all industries today. The rapidly evolving ecommerce market is allowing businesses of all kinds to grow and flourish – assuming the business owner is capable of handling the unique set of difficult challenges that comes with ecommerce businesses.

 

Advantages:

 

  • Energy Consumption: With the ever growing trend of eco-friendly, green products, goods, and services, reducing energy consumption is a pretty exciting advantage of ecommerce business. Essentially, the more reliance put on ecommerce business transactions, the less consumers need to drive to stores, thus leading to less fuel use and less car pollution being emitted. Also, in relation to B2B transactions, this allows businesses to have less need for warehouse space, reducing less energy consumption and waste at warehouses.
  • Cost Reduction: This is the first benefit that many businesses see when it comes to ecommerce – cutting out middlemen to reduce costs when distributing goods, buying goods, and personnel expenses. Setting up an ecommerce website is also relatively inexpensive, compared to the typical costs associated with brick and mortar shops. This also allows ecommerce businesses to offer great deals and savings for consumers, thus drawing in more customers.
  • Social Media: Social media is the easiest way to market any business today, especially for ecommerce websites. Online shopping is fueled by social media sites like Facebook, Pinterest, Twitter, and Instagram. Social media and “social shopping” have allowed ecommerce businesses to develop a more personalized platform for brand awareness and consumer loyalty. Social media is evolving hand in hand with online shopping and ecommerce, as well as becoming the most effective, and affordable, forms of marketing.

 

Disadvantages:

 

  • Privacy: Privacy among consumers is a top concern, especially since the internet has become more savvy. Many ecommerce businesses today can collect plenty of information on consumers that purchase their products through electronic trackers known as cookies. Cookies track the surfing patters of consumers, allowing merchants to create individual profiles of the consumer. While many businesses are using these profiles to target specific advertisements and deals towards consumers, and many consumers do enjoy this, there are still plenty of critics out there who worry this is an invasion of privacy.
  • Security: There are a variety of regulations that are associated with the ecommerce industry, making this system relatively complicated to utilize properly. Security is also an area that consumers are incredibly conscious and worried about. Reviewing the different regulations put in place by Federal Trade Commission and PCI Security Standards Council relating to ecommerce are key in compromising consumer confidence in a business.
  • Mistaking Ecommerce as a Simpler Alternative to Brick and Mortar: Ecommerce is a growing platform for every business, whether the business is 100 percent online or has a brick and mortar storefront. Unfortunately, too many entrepreneurs mistakenly believe that by choosing to run an ecommerce business, they can avoid many of the hassles associated with running a brick and mortar business. Well, they’re wrong – running a business is still running a business, hassles and all! Most ecommerce businesses fail due to common business mistakes – not enough investment since ecommerce startup is relatively cheap; financial mismanagement by not bringing in a qualified professional accountant or other professional help; lack of traffic because they do not understand the complexities of content marketing and social media marketing; implementing an overly ambitious business strategy that is not sustainable.

All in all, ecommerce is unavoidable in today’s business world, but many businesses launching into the ecommerce industry do not fully understand all of the intricacies involved. Ecommerce is essential for any business today, but sometimes this transition can be difficult, especially for well-established businesses looking to add this beneficial advancement into their company with little to no knowledge of how it truly works. Making sure to consult professional help, or to do thorough research to fully understand the complexities of the ecommerce industry are vital to making sure that this necessary technology is implemented effectively.

E-Commerce Business Loans

Types Rates Terms Funding
Bank 6-10% 3-7 years 14-30 days
Line of Credit 5-15% 1 – 3 years 7-30 days
Alternative 6-25% 1-5 years 5-7 days
 Cash Advance 1.16-1.55 3-24 months 1-3 days

Alternative E-Commerce Loans

Alternative loans, particularly fintech institutional financing, is the choice of retailers who are unable to obtain financing from more traditional sources (like banks, credit unions and SBA financing). Alternative lending is easier to obtain than bank-rate financing facilities, because these lenders have much lower credit and profitability requirements than conventional lenders. Funding is very fast, and can take place in a matter of weeks, if not days, and the paperwork and documentation required is much less than banks require.

  • Rates: 9-25%
  • Terms: 1-5 years

E-Commerce Cash Advance

Retailer cash advances are a way for e-commerce businesses to obtain working capital and inventory financing in a matter of days, if not the very same day. Cash advances aren’t loans in any way, but they’re instead the sale of the ecommerce business’s future bank deposits in return for upfront funding. The lender will deposit funds directly into the retailer’s bank account, and then collect a fixed repayment amount each business day until the funding is paid back.

  • Factor Rates: 1.16-1.50%
  • Terms: 4 months – 2 years

E-Commerce Merchant Advances

Merchant cash advances for online retailers are almost identical to a business cash advance. The only real difference between a MCA and ACH loan is the way the loan is repaid, with a typical business cash advance being repaid each day by collecting funds from the retailer’s bank account via ACH, and a merchant cash advance lender collects repayment by taking a percentage of each day’s credit card processing sales as repayment.

  • Factor Rates: 1.16-1.45%
  • Terms: 4-21 months

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