Starting an e-commerce business can be a daunting task. There are so many things to think about – from setting up your website and choosing the right payment processor to market your business and dealing with customer service issues.
One of the most important decisions you’ll need to know is How to fund an e-commerce business.
Here are some of the most common ways to fund an e-commerce business:
Bootstrapping is when you use your savings to finance your business. This is often the best option for e-commerce businesses as it doesn’t require giving up any equity in your company. However, it can be risky as you’re gambling your finances on the success of your business.
However, if you have researched your target market well, as you should, you will have reduced the risk that is involved in risking all of your own money on the success of your new venture.
Bank loans are another option for funding your e-commerce business. The main advantage of this type of financing is that you don’t have to give up any equity in your company. However, bank loans can be difficult to obtain, especially for small businesses.
It is important to have a good business plan to present to the bank that demonstrates your business is a good prospect as opposed to a high-risk proposal.
A business plan should include a:
- Executive Summary
- Business Description
- Industry Analysis
- Target Market Segmentation
- Competitive Analysis
- Marketing Plan
- Sales Forecast
- Operational Plan
- Management Team
- Financial Plan
Know inside out the direction your business will take from what you have worked out and how you plan to achieve that. Have projected figures for several years to cover the duration of the loan. You need to show how you would pay the loan back and why it is needed. What you will spend your loan money on will be of particular interest to ensure the money is being put to good use. It may be a case of cash flow or seasonal fluctuations as well as the initial funding of capital items that will be required.
Venture capital is another option for e-commerce businesses. This type of financing is provided by investors who are willing to take a risk on your business in exchange for an equity stake of between 25 and 50% in your company. However, it can be difficult to find investors who are willing to invest in your e-commerce business.
Like with a bank, you will need to convince those risking their money that your business is heading for success.
Angel investors are individuals who will invest in your e-commerce business for an equity stake of between 20 and 30%, so potentially lower than what venture capitalists will want.
Again, it is down to your ability to attract these kinds of investors to get involved with your start-up or fledgling business.
Crowdfunding is when you raise money for your e-commerce business from a large group of people. The advantage of this type of financing is that it’s relatively easy to find people who are willing to invest in your e-commerce business on that basis. However, the downside is that you will have to give up a portion of the equity in your company.
There is no doubt that it is easier to ask more people for smaller amounts than a few individuals to risk more of their money in a business venture that can never be guaranteed to succeed. The rewards are high, though, which is why there is interest in helping businesses of all kinds.
No matter which method you choose to finance your e-commerce business, be sure to do your research and understand all of the risks and rewards before making a decision.