What are the funding options for ecommerce businesses?

As the UK ecommerce market continues to strengthen, it’s never been a more exciting time to sell online. However, if you’re serious about taking your ecommerce business to the next level, whether it be by stocking up on inventory or ramping up your marketing efforts, you’ll need to secure the right funding. 

With so many business finance options available, each offering a different set of benefits and drawbacks, securing funding is a fork in the road for many entrepreneurs. But if you’re feeling overwhelmed, we’re here to help. At Startups, we’ve been providing advice and support to entrepreneurs for 25 years, and we remain committed to making the funding process as straightforward as possible.

Using our industry expertise and in-depth understanding of the funding landscape, this guide examines seven popular funding options for UK ecommerce businesses. We break down their pros and cons, and explain what type of ecommerce business they’re best suited for, helping you choose the path that’s right for you.

1. Business loans

A business loan is a debt-based financing option that involves borrowing a lump sum of money, which is then repaid over an agreed-upon period, with interest. Due to their set repayment structure and predictable costs, loans are a popular form of business financing for ecommerce businesses. 

If you’re considering this form of finance, here are the main options to be aware of. 

• Traditional bank loans: these loans are provided directly by high-street banks, like NatWest or Lloyds, and are ideal for established ecommerce businesses with a solid credit history and track record. You’ll typically pay lower interest rates with bank loans, and be able to borrow more money than other alternatives, with loans commonly starting at £25,000.  
• Start-up loans: provided by the British Business Bank, this type of loan is designed to help new businesses begin trading, making it ideal for online sellers just starting out. With this form of financing, you’ll be able to borrow between £500 and £25,000, at a fixed interest rate of 6% per annum. This government-backed loan also provides free business support and mentoring to business owners for the first 12 months.
• Private loans: these loans are provided by private lenders, such as private investment firms or fintech companies, and are a good option for businesses that need fast funding or have been rejected by traditional banks. However, while private loans offer great flexibility, they tend to incur higher interest rates.

Is this the right funding option for my ecommerce business?

Business loans are predictable, accessible, and don’t require business owners to give up any ownership or control, making them a reliable option for a wide range of ecommerce businesses. Start-up loans, specifically, will be the best choice for sellers at the beginning of their ecommerce journey, while traditional bank loans are better suited to more long-standing ecommerce businesses with steady incomes. 

However, the debt-based nature of business loans makes them less favourable for online sellers with seasonal or unpredictable incomes. Certain types of loans, like bank loans, have strict eligibility criteria, making them a poor choice for businesses without a strong credit score.

Bank loans aren’t the be-all and end-all to business funding. Learn about 13 debt-free ways to fund your business here.

2. Business grants

A business grant is a debt-free form of funding, provided to businesses by government bodies, local authorities, or private organisations. Business grants don’t need to be repaid, making them an attractive option for ecommerce businesses that want to grow without taking on debt.

Being awarded a grant can also enhance a business’s reputation and improve its visibility, potentially opening up more doors than other forms of financing. 

However, the trade-off is that business grants are highly competitive and have strict eligibility criteria. To be eligible for a business grant, your ecommerce business will need to demonstrate a clear purpose that aligns with the funders’ goals. This could involve a focus on sustainability, regional development, or any innovation that serves a public good, for instance.

Learn more about opportunities that could be available to you in our guide to small business grants. 

Is this the right funding option for my ecommerce business?

Business grants aren’t a general-purpose funding solution for every ecommerce business. Their nature lends itself well to ecommerce businesses focused on innovation and research, sellers with a social or environmental mission, or businesses that actively contribute to regional or national development. 

Traditional online retailers without a unique angle, or those seeking funding to cover day-to-day expenses, will struggle to find a suitable business grant. These ecommerce businesses will be better off pursuing business loans or bank overdrafts instead. 

3. Lines of credit 

Operating similarly to a traditional loan, a line of credit is a flexible funding option that allows ecommerce businesses to withdraw funds up to a pre-approved limit. However, with a line of credit, you only pay interest on the money you use, not the entire amount available. This makes them ideal for ecommerce businesses regularly dealing with cash flow fluctuations. 

Despite their convenience, lines of credit tend to have variable interest rates and often incur an annual fee or other charges, even if you don’t use them. They also require strong business or personal credit to secure, making them less ideal for ecommerce businesses in their early days.

Is this the right funding option for my ecommerce business?

Due to their flexibility, a line of credit is a suitable option for online retailers that need to cover seasonal fluctuations in sales or respond quickly to market opportunities. 

However, a line of credit won’t be a good choice for you if you’re looking to take out a lump sum for a major investment, such as purchasing a new warehouse or funding a new line of products. Instead, a traditional business loan would be a better option. 

4. Bank overdraft

A bank overdraft is a short-term arrangement offered by banks, which allows personal customers and business owners to temporarily spend more money than is in their account, up to a predetermined limit. 

This type of business financing acts as a short-term cash flow buffer, making it ideal for online sellers who require funding for unexpected small expenses or to bridge cash flow gaps. However, compared to other funding options, like business loans and lines of credit, it’s one of the more expensive forms of borrowing, with high interest rates and daily fees. 

Is this the right funding option for my ecommerce business?

A bank overdraft is an ideal solution for established ecommerce businesses that need a safety net for covering unexpected expenses, such as a sudden increase in shipping costs or customer returns. 

Overdrafts shouldn’t be the go-to for every business owner, however. Early-stage ecommerce businesses without a strong credit score may struggle to secure one, especially in comparison to more accessible options like private loans. 

Its short-term nature and the risk of it being recalled at any time also make it a poor form of financing for businesses making long-term investments, such as a website redesign or purchasing a large volume of stock.

5. Merchant Cash Advance

A Merchant Cash Advance (MCA) is a flexible form of funding which gives businesses a lump sum of capital in exchange for a percentage of their future card sales, plus fees. Instead of fixed monthly payments, repayments vary with sales volume, making MCAs a great financing option for ecommerce businesses with fluctuating seasonal demands. 

With MCAs, funds are typically available within a couple of days, and the eligibility criteria tend to be less strict than with traditional bank loans and overdrafts. This flexibility comes at a cost, however. MCAs incur higher borrowing fees, making it one of the most expensive forms of business financing.  

Is this the right funding option for my ecommerce business?

If you run an ecommerce business that processes a high volume of credit and debit card transactions and need capital quickly, a merchant cash advance will be a great option for you. MCA lenders tend to focus on sales history rather than credit scores, making it an accessible option for ecommerce businesses that have been turned down by other lenders. 

However, if your business has low sales volumes, the cost of borrowing may quickly become unmanageable. MCA funding also won’t be suitable for retailers that rely heavily on third-party Buy Now Pay Later (BNPL) services, like Klarna or Clearpay, as the lender doesn’t have visibility or access to other payment streams.

6. Invoice financing

Invoice financing is a type of funding that allows ecommerce businesses to borrow money against their outstanding invoices. Instead of waiting up to 90 days for customers to make a payment, this financing method allows businesses to get paid instantly by selling their invoices to a third-party lender. 

This lender will advance an agreed-upon percentage of the invoice’s value, typically around 80-95%, and then collect the full amount when the payment is due. 

The biggest selling point of invoice financing is that it provides businesses with quick access to cash. It’s also able to seamlessly adjust to a business’s needs without a tedious re-application process. Yet, compared to other funding options, like traditional bank loans, the costs of invoice financing add up quickly, making it one of the more expensive forms of borrowing. 

Frustrated by late payments? Learn how to regain control in our guide to the Fair Payment Code.

Is this the right funding option for my ecommerce business?

Invoice financing is useful for business-to-business (B2B) ecommerce retailers selling to other companies on credit terms. However, since business-to-consumer (B2C) online stores rely on instant payments from customers instead of invoices, invoice financing won’t be suitable for the vast majority of ecommerce businesses. 

7. Crowdfunding 

If you’re looking to avoid taking on debts or risking collateral, you could also consider crowdfunding. Crowdfunding is an alternative type of business financing that allows businesses to raise money from a large number of people, typically via online platforms like Kickstarter or Crowdcube. 

There are two main types of crowdfunding options to consider:

• Reward-based crowdfunding: with this option, you offer a tangible reward to people who pledge money to your campaign. The reward can be a product itself, a discounted price, or exclusive merchandise. This type of fundraising works in a similar way to taking pre-orders, making it ideal for fresh ecommerce businesses developing a new product.
• Equity crowdfunding: with this form of crowdfunding, you offer a small stake in your company to a large number of investors, who contribute money in exchange. This gives you access to a significant amount of cash quickly, but it does require you to give up some control of your ecommerce business. 

Is this the right funding option for my ecommerce business?

The success of crowdfunding will depend entirely on your stage of growth and the type of product you sell. For instance, if you’re still in the product development stage and are interested in building a community around your business, reward-based crowdfunding can be a creative way to secure startup funding while generating awareness for your brand. 

High-growth online stores looking to secure large amounts of capital, on the other hand, would be better suited for equity crowdfunding. This option also allows you to remain debt-free while exchanging a piece of company ownership. 

It’s important to bear in mind that crowdfunding is an all-or-nothing game. If you fail to meet your funding goal, you get none of the money. This makes the funding option significantly less reliable than more common cash flow solutions, such as bank loans or invoice financing. 

Finding the right funding for your future

From covering cash flow gaps to financing new product lines, the perfect solution is out there; it’s just a matter of knowing where to look.  

But before you even consider which path to take, gaining a clear understanding of your business’s financial needs and goals is imperative. What exactly is the funding for? When will you be able to repay it? Are you willing to give up equity? These are all questions you should ask yourself before approaching any lender or investor. 

With this knowledge, you can confidently select the option that will propel your business to new heights.