13 best financing options for e-commerce brands

There are many posts on the Internet discussing different financing options for startups, but we think too few look at the options from a holistic point of view (debt AND equity). In addition, we think many posts approach the discussion from the wrong starting point, simply listing different financing options. We want to start from first principles, asking  – what do you need the financing for?

This may sound simple but it makes a huge difference in where you should be spending time and energy exploring your financing options / providers. Each financing provider is looking for their capital to be used in different ways. 

Below we are going to dive into the different types of financing that are available for each problem you are trying to solve. 

Jump to the bottom to see a matrix of the financing options and what to use them for.

What do you need the cash for?

FINANCING OPTIONS FOR RESEARCH AND DEVELOPMENT

At this early point in the journey your company doesn’t have any assets to put up as collateral or historical data to prove that the product can be sold. So any financial partner is essentially taking a bet on you–the founder–rather than the business.

So, who would be willing to take this bet?

• Debt (generally no ownership in the company given up, but you have to pay the money back with extra fees)
  • Personal loan: A loan directly to you from an online lender, bank, credit card, etc. This will leverage your FICO score to get the loan.
• Equity (when you give up a stake in your company for capital)
  • Angels: Wealthy individual investors 
  • Seed funds: Small institutional funds
  • Friends and Family: As the name suggests. They are more likely than anybody to take a bet on you, if they have the capital.

 GETTING THE PRODUCT TO MARKET

At this point you have done the fundamental R&D on how the product would work, how it will be manufactured and, hopefully, if there is a market for it. Now the business has some assets to leverage (potentially IP, market knowledge / story, product expertise, etc). 

Even though these assets don’t seem like much, they can make a huge difference since now investors have something other than just faith in you to back up their financing decision. 

• Debt
  • Personal loan
  • Venture debt: If you have raised equity capital from a reputable VC firm some banks will provide debt lines that are secured by the VC firm and / or warrants in the business. 
  • Crowdfunding platforms (e.g Kickstarter or Indiegogo): You don’t have to pay back the money like a normal loan but you do have a debt to pay, in that you owe a product to your backers.
•  Equity
  • Angels
  • Seed funds
  • Friends and Family
  • Crowdsourced equity: Made possible by the JOBS Act, services like AngelList and Wefunder (there are others) give you access to early stage Angel investors outside your personal network. 
  • VC firms: Firms will generally be hard to get funding from this early but it’s not unheard of if your business has high growth potential (i.e not a lifestyle business). 

TO INCREASE INVENTORY

It’s key to never have an out of stock situation. Running out of inventory not only creates a lost revenue opportunity, but also a poor customer experience. 

A point to note here: most equity investors, especially larger funds don’t like supplying financing for working capital, since it is not where they want their money to be spent. They prefer to see their capital spent on areas that will 10x the business (i.e team building, growth, etc).

• Debt
  • Venture debt
  • Alt lenders (like Kickpay): Use your historic sales data and / or current inventory as collateral to provide extra capital that can be used to purchase more inventory or expand key business areas like marketing budgets.
  • Bank loan: For companies with a large enough revenue stream (>$2M / year) and are profitable, bank financing can provide cheap capital.
  • PO financing: Will not be applicable if you are 100% direct-to-consumer, but if you have some retail deals from big box stores, once they issue you a PO, some firms will finance the PO for you.
  • Invoice financing: Again, not applicable if you are 100% direct-to-consumer, but once you issue invoices to your B2B clients (if you give them terms), invoice factors will pay you immediately (instead of waiting 30+ days to be paid). This will give at least some liquidity to help with future inventory purchases.
• Equity
  • Friends and family

TO INCREASE SALES 

Increasing sales can take many forms, such as expanding your marketing budget to growing your sales team to boosting PR, and everything in between.

Whatever form increasing sales takes for your company, if you are raising money you need to have shown you have the sales process locked down. For example, you can show that if you put $1 into your sales process you can get $1 + $x back in sales.

• Debt 
  • Venture Debt
  • Bank loan
  • Alt lenders
• Equity
  • VC firms
  • Angels
  • Seed funds
  • Crowdsourced equity

LARGE SCALE GROWTH

This may seem like a rather ambiguous title, but if you are at the size that you have created all your internal processes and you really just need to throw fuel on the fire to to capture the market, the rules change somewhat.

If you are doing $20M+ in revenue, your financing options become less varied and more specialized. 

• Debt
  • Bank loans
  • Venture debt
• Equity
  • VC firms
  • PE firms: Firms that generally play above VCs in the size of deals. They will be more operationally focused than VC firms. 

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