The Beginner’s Guide to Financing an E-commerce Startup

157
The Beginner's Guide to Financing an E-commerce Startup

If you’re reading this, chances are you’ve already got a killer e-commerce business idea you want to bring to life. But just like starting any other business, it all comes down to money – you can have the best idea in the world, but without funds, it’s merely an idea.

Global retail e-commerce sales reached a staggering value of $5.8 trillion in 2023, and this number is expected to grow by at least 39% in the coming years. It’s an excellent opportunity for you to jump in, but also a reminder that you must secure financing on time. 

Source

In this article, we’ll go over the financing options available to e-commerce startups and how you can decide on the approximate amount of funding you’ll need. So, let’s get into it!

If you are aspiring to develop an online e-commerce store for your business, you must check out our top shopify app development companies.

Preparing Your Business for Financing

Before we look at the different financing options, you must prepare your business. This isn’t a small investment we’re talking about, and you want it to yield fruit. So, to set your business up for success, you must first understand your business needs.

Assessing your financial needs

Do you have an idea of how big of an amount you’ll need to kickstart your e-commerce business? Setting up an online store is the least of your worries. You must factor in the costs of developing and maintaining an SEO-optimized and visually appealing website, purchasing the initial inventory, and investing in a marketing and fraud prevention strategy, among other things. 

Here are a few points to help you assess your financial needs:

  • Conduct market research. There’s no starting a business without conducting market research. It’s the best and, frankly, the only way to understand your target audience and competition. By doing so, you’ll get a clearer picture of how much funding you’ll need and where to allocate it for better results. 
  • Build a cap table. Potential investors want to know who owns what percentage of the business, so you might want to consider checking out Ledgy’s guide on how to build a cap table for your company to present this information. Not only that, but a cap table can also help you plan for future financial rounds. 
  • Understand operational costs. Now, operational costs include everything from website maintenance to costs for legal services. Business owners often attempt to reduce costs, especially when it comes to marketing and security. This right here is your advantage. You can calculate the expenses for everything beforehand, including unforeseen ones such as market fluctuation, and give your startup a competitive edge. 

Willing to start an e-commerce business in such a competitive market already indicates that you’re an ambitious person, so never settle for less. When looking to finance your startup, make sure that you’ll be able to budget for every aspect of your business, including unexpected costs. 

Sourcing inventory

Now, if your idea involves selling products or goods, your next step in preparing your startup for financing is to source inventory. This includes the matter of, for example, where to buy clothes to start a boutique or finding reliable suppliers for the products you plan to sell online. 

It’s important to note that the importance of sourcing inventory on time stays the same, regardless of whether you have your own product or will be reselling. 

The first and most obvious benefit of timely sourcing your inventory is that it defines your business. If self-funding isn’t in the picture, then showcasing to investors that you have secured inventory or found reliable suppliers is a smart move. It instills confidence in them. 

laptop-shopping-bags-online-shopping-concept

Exploring your financing options

Starting and expanding a business isn’t a simple matter. It’s not a cheap one either. However, if no financing options were available for supporting e-commerce startups, we would miss out on the potential of countless innovative ideas. Now, let’s explore the options thoroughly. 

Bootstrapping

Your first option is to finance your e-commerce startup by yourself. This means that you won’t rely on outside investments but will fund your business with personal savings (borrowing money from family or friends also counts) or the revenue generated by the business. 

Bootstrapping is undoubtedly challenging but can also benefit your business in many ways:

  • You’ll be the sole person responsible for making decisions in terms of how your business operates. 
  • If you have a clear idea you wish to execute, you can do it your own way, without external influence. 
  • It frees you from paying debts. 
  • You’ll be more limited but, at the same time, more efficient with your spending. 

However, if you do decide to go with bootstrapping, you’ll have to get used to the fact that you’ll be bound by limitations. You’ll have your financial freedom, but your startup will grow at a slower pace due to not being able to invest in marketing and advanced technology software.

You might like checking Budget Tips To Set Up Your E-commerce Business For Growth.

Small business loans

Loans are probably the most common option for e-commerce startups, or at least they were. It seems that e-commerce financing deals have slowed down from 2023 onward – from 879 in 2022 to 306 deals in total in 2023, to be precise. But this doesn’t mean you should discount small business loans, as there are still lenders willing to support your business.

  • SBA loans. The beauty of Small Business Administration (SBA) loans is that they offer you more favorable terms compared to traditional bank loans. They’re backed by the government and come in different forms, depending on your business’s specific needs. 
  • Bank loans. Bank loans, on the other hand, are known for their competitive interest rates. While this is a disadvantage, striking a deal with such an established financial institution will provide you with stability and credibility. 
  • Lines of credit. As for lines of credit, they give you the opportunity to borrow money when you need it rather than taking out a big loan all at once. Of course, you can do so only up to a certain amount. The interest rates associated with lines of credit are typically high, but these loans are still extremely helpful if you’re looking to move quickly. 

Some often associate a loan with financial stress, but it’s quite different when you’re using it to kickstart your business. This is a smart investment, after all. and with the right financing in place, you’ll be one step closer to succeeding in the competitive e-commerce market. 

Read our trending blog Unique Ways VR is Transforming eCommerce with examples.

Angel investors and venture capitalists

Now, angel investors and venture capitalists are a whole different story. They don’t provide you with funding so that you can eventually pay it back. They’re not interested in your money, but they want ownership equity or a stake in your business in exchange.

So, what’s the difference between the two then? Well, angel investors are wealthy individuals who use their own net worth to fund e-commerce businesses. Venture capitalists, on the other hand, are still private investors, but they use investment funds to do so. 

When deciding on whether you should go with angel investors or venture capitalists, ask yourself the following – are you willing to share ownership and come to terms with the fact that you won’t be the only person deciding on the direction your business should operate?

Crowdfunding

Crowdfunding is a bit more strategic way to go at financing your e-commerce startup. It involves presenting your business idea to a large number of people and offering them a chance to pre-purchase your product or other rewards – all with the hopes of them collaborating financially. 

You might wonder what’s so strategic about this. Well, not only can crowdfunding help you raise funds, but it can also help you put your business on the map and secure early customers. To an extent, it’s like a marketing strategy. You’re showcasing your product or service in front of a broad audience to seek funds and, let’s say unintentionally, attract customers’ attention. 

Source

Stepping up your financing game

At the end of the day, you have to come to terms with the fact that starting and expanding an e-commerce business involves making decisions constantly. Considering you’re a startup, choosing a financing option for your needs is one of the first business decisions you’ll make. 

Whether you choose to fund the business yourself or rely on external investments, it’s good to know you have options available. Sure, starting an e-commerce business in such a competitive market is no easy feat, nor is it cheap, but it’s how you’ll turn your idea into reality.

Alex Rode
WRITEN BY

Alex Rode

I am founder of Just Create App. I have extensive experience in writing about apps, softwares, IT companies. Done Master of Science in Computer Science from Yale University, I am a passionate tech enthusiast and dedicated writer. I delve into a diverse range of topics, from AI and software to app development, and keep a keen eye on tech firms and emerging trends. My expertise enables me to break down complex topics and present them in an engaging, accessible manner, making me a trusted source for insightful analysis in the realm of technology.

Leave a Reply

Your email address will not be published. Required fields are marked *

Business listing apps firms