Starting an e-commerce startup, as with any other startups, can be a tricky process. From the idea to the name, to the product and to the market research. There are a lot of different aspects of the business structure to be considered and a lot of mistakes can occur in the beginning. One thing that puts a lot of people off from starting their own businesses, is the financial aspect of it.
Financing an e-commerce startup or any other startup isn’t risk free. There is a lot to be considered. Even if the entrepreneur(s) manages to gain the capital needed to set their plans in motion, things don’t necessarily always go according to plan. The company could end up in a standstill or worse, leave the entrepreneur(s) with a lot of debt to cover.
Of course, that is one thing to be considered, supposing that the entrepreneur(s) do manage to gain the capital needed to fund their ideas. However, there are a lot of reasons that could prevent entrepreneurs from getting the needed capital to finalize their ideas. Banking institutions are notorious for putting up big demands on borrowers before they can receive their loans.
Luckily, there are a myriad of ways to fund a company in 2018. Despite your background or current financial situation, there are multiple solutions that may be suitable for you and your company.
Receiving funding through a bank loan is the traditional way of receiving capital for a business idea. It’s also one of the first things that the average borrower/entrepreneur thinks of, when considering getting a business loan. While there are several perks of choosing an institution such as a bank for funding, there are several points to take into consideration with a decision like this.
Pros of bank loans
Depending on the bank that the borrower is considering to use for a loan, the interest rates may vary, this could potentially save a lot of money for the borrower, if they decide to go with a bank that offers low interest rates. Some banks also offer fixed interest rate for loans. This gives the entrepreneur the ability to predict future payments to pay off the loan, rather than having to deal with different payments that are associated with variable rate loans.
Finally, banks also provide the borrower the flexibility of choosing the duration of the loan, which gives the borrower the amount of time they need to pay off their loan.
When a business gets a loan from a bank, they build up business credit. Having a good business credit score is vital for creditors and other investors to determine whether or not the business is capable of paying its bills on time. It’s also important in case the borrower needs another loan to finalize their goals.
Cons of bank loans
There are quite a few barriers, that are associated with banks and other financial institutions, that could prevent the borrower from gaining a loan. For instance, as a pre-measurement for avoiding the potential loss of money, in case the business idea does not work out, some institutions require the borrower to provide the necessary collateral in order to prove that they can pay off their loan. This can be an issue if the borrower does not have the necessary means to provide collateral funding.
Just as collateral can be a requirement before the banks give out loans, some banks also look at the credit score of the borrower, to see whether or not they are able to pay their creditors on time. Getting a loan is very hard without having the sufficient amount of personal or business credit.
While crowdfunding may seem like a modern term, especially considering how many platforms there are on the internet that belong under this category. E.g. Kickstarter, Indigogo, GoFundMe and CrowdCube. You would think that it’s something that appeared within the last 5 years, however, crowdfunding does have roots dating all the way back to at least the 1800s.
The idea behind crowdfunding is simple. You present your product/idea on a crowdfunding platform where potential investors see what you have presented. Depending on whether or not they like your idea pitch, they’ll invest in your idea, and already from there, you’ve earned capital for your startup. While it is the simple explanation to it, there is a lot more to crowdfunding than you would think.
Pros of crowdfunding
There are a lot of pros when considering crowdfunding as a source of investment.
To begin with, crowdfunding eliminates the barrier that is associated with dealing with banks and other institutions, since the investments come from everyday people. Some crowdfunding platforms, such as Kickstarter, follow an all-or-nothing model, which is following the premises of entrepreneurs not getting the funding from backers/investors, if they don’t reach their goal. Thus, they are more inclined to invest into a project, because they know they have a security net. Most crowdfunding donations are also usually small in size, so investors have little-to-nothing to lose.
Crowdfunding is also an excellent marketing tool, as it brings awareness to investors about a potential business idea and/or product. Investors also have the option to share the project on other social media platforms, helping to increase the publicity of the company. This in turn saves the company a lot of money on paid advertising, market research, PR and other costly actions that are associated with marketing.
Crowdfunding also provides the luxury of market validation. Entrepreneurs can reach out to the investors, asking for ideas/suggestions for improvements of their product, which otherwise would have been hard to do so through traditional means. It’s a win-win situation allowing for easier communication to investors that are willing to invest and buy the product(s).
Cons of crowdfunding
As previously stated, crowdfunding is a great alternative to gain capital. However there are drawbacks associated with crowdfunding as well. Firstly, crowdfunding is not the solution for all projects, depending on how much investment the entrepreneur(s) needs, it may take weeks or months to reach a significant number in investments.
Secondly, while most crowdfunding platforms provide a huge list of projects for investors to potentially invest in, it can be problematic, as other people can steal your business idea. Therefor, if the entrepreneur(s) decides to use crowdfunding as capital, they should consider getting their idea patented.
Depending on how large and vast your network is, you may be able to gain the necessary capital from a business angel (BA). A BA is an individual (typically a person of wealth) who invests their own money into a business.
Pros of BA’s
BA’s are usually wealthy individuals. Usually investments range from $250,000 to $500,000 The investment will come from a person rather than a financial institution or crowdfunding platform. This means that the money is usually invested in a short period of time, and the overall amount can be much larger than from crowdfunding or a bank loan. Because BA’s are usually wealthier individuals, and because the investments come from a person, rather through a financial institution. The money is usually invested much quicker.
The BA’s usually have a lot of experience in the field(s) that they are investing their money. Having a more experienced opinion can be truly beneficial for the entrepreneur and the company if they are relatively new on the market.
Cons of BA’s
Unlike a bank loan that usually follows some sort of collateral security net or the all-or-nothing model that is associated with crowdfunding, there is a huge risk for BA’s who invest in an early-stage business.
Unless the business can convince the BA that there is potential in their product/idea, getting investment can be hard. Likewise, should the business fail, repaying the BA is also going to be an issue for the entrepreneur.
When a BA invests their capital into a business, they typically assume an important role in the business. They usually becoming involved in decision making, as it is their capital that is being used by the business. It’s debatable how big of a con this is. If the BA’s views differ from the entrepreneur’s, then it could potentially be a big internal problem, as there are strings attached with this kind of partnership.
As stated earlier in the blog post, there are a myriad ways of funding ecommerce startups among other businesses in 2018. Each funding method has its own set of pros and cons. Thus every entrepreneur should take into consideration which one is the most appropriate for the type of business they’re planning and what their short-term and long-term goals are.
Adel-Alexander Aldilemi is a content writer at Valuer.Ai. He considers himself an avid traveler, as he has lived across two continents and is currently studying humanities at Copenhagen University.