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Updated: December 15th, 2020
Now that social distancing has become the new norm, the small business community has adapted by bringing their businesses online in some capacity. Small businesses that made the switch to e-commerce in the wake of the COVID-19 pandemic are reportedly benefiting from that decision.
Even with all the planning and a top-notch technology platform to sell online, business owners can still run into cash flow problems that can prevent success, such as not having the funds to market and sell products online. Working capital small business loans could help in a pinch and be the key to helping your business build an e-commerce presence.
Having enough business working capital for your small business is needed to run a successful company. It can be calculated as the difference between current assets — such as cash and inventory — and current liabilities — such as accounts payable and short-term debts that are due within a year. A positive business working capital suggests that you have enough cash flow to pay your debts, while a negative result could mean that you are a good candidate for working capital financing.
Even if you have net positive working capital, you may still want to keep an open mind if you focus on business adaptability, such as accessing working capital financing to invest in a strategy that will help you sell more with business capital loans online. Once you know where you stand with working capital, you can determine if you’re on the road to success or if you could use a working capital loan to help you get there.
Business Working capital loans for e-commerce are short-term in nature with between six and 18 month terms, depending on the lender. They are intended to help with short-term financing needs, such as filling the shelves with inventory, when you are in a pinch. Working capital loans may or may not require collateral, once again depending on the provider. Funding Circle’s partners do not require collateral for this type of financing. Working capital loans are provided on a lump-sum basis and could be repaid by daily or weekly fixed payments.
Now that your business has gone online, you can access a larger market than your local area with a brick-and-mortar shop. Chances are you are going to need more inventory to satisfy the demand from an online audience compared to the foot traffic that comes into your store. Overstocking can also be a risk, because the last thing you want is to be left with excess inventory that you need to offload at fire-sale prices to get rid of it.
In this case, a working capital line of credit could be a good solution. This type of financing is more similar to a business credit card than it is a loan, as it allows you to draw from an approved amount of capital as you need it. So for example, if you are doing renovations and you need to purchase more material to complete your project before the busy season starts, you can draw on the capital for that period.
Once sales starts coming in, you can use the revenue to repay the line of credit. The line of credit will have an interest rate attached, for example it might be 14%, and the repayment period, which doesn’t begin until you draw on the funds, might be for 12 months.
Now that you have the potential to reach more customers by selling products online, you’ll need to establish an online marketing presence to get in front of potential customers’ eyes. That’s where marketing and advertising come in, and these are business initiatives that a working capital loan can help with. If you pursue a working capital loan for marketing and advertising, you’re in good company, as it’s one of the most popular reasons for business owners to pursue financing.
You’ll have to choose from a variety of options and find the approach that works best for you. For instance, working capital loans for e-commerce can be used toward experimenting with different forms of marketing, such as using social media channels, sponsoring events or sports teams, for example.
You might need to hire additional talent for new strategies like social media. Social media experts should know how to be sure that your message reaches the right demographics for your products at the right time that will inspire them to “click.” Another option is to outsource analyst or hire one in-house to examine your marketing and advertising strategy and make sure you’re making the most of your working-capital loan.
Ultimately, the idea is to sell more with a business capital loan or lines of credit, and the more specific you are about the way that you intend to direct the funds, the more likely you are to find a lender that is willing to work with you.