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Financing Your Ecommerce Business

The proliferation of information on acquiring small business loans and grants is daunting. If you're just starting out and you've never approached a lender about small business financing, you'll likely need to update your thinking.

The following are seven topics that should help you understand just how much things have changed in the world of small business financing over the last decade or two.

"Conservative" and "Old-fashioned" aren't synonymous. The traditional concept of a business person approaching a bank to get a business startup loan is a notion of the past. Although merchant banks do have programs for small businesses, they typically expect you to establish your business and demonstrate a healthy cash flow before they'll consider granting a small business loan. Many startups now count on other sources of funding: credit unions, credit card companies, angels, customers and even family and friends to advance startup funds.

Funding for small businesses rarely comes from a single source.
Startup funding isn't an all-or-nothing proposition. If you can secure a business credit card with 4% rates but a $3,000 limit, you might be better off grabbing it and increasing the limit to $10,000 after six months. Your $20,000 severance package, equipment leases and other creative financing options can add up to the $125,000 you need to keep your business alive the first year until you can demonstrate a cash flow that's attractive to traditional lenders.

You're not asking for charity.
Prepare to negotiate and stick to your business plan. If the first offer of funding carries a heavy interest rate and the need to relinquish control of decisions like your growth rate or future funding acquisition, look elsewhere. You'd be surprised at how many investors are looking for your business.

The 4 C's have ridden off into the sunset.
If the last book you read on small business financing was written in the mid-eighties, you may have failed to notice that the four C's (character, credit history, cash flow and collateral) are no longer the criteria for securing funding.

Lenders are just too busy to investigate your finances for days on end just to lend you $100,000. Of the four C's, the only surviving C is credit history. With your credit rating in hand, lenders are prepared to make judgments about your ability to repay and stay out of financial trouble, fair substitutes for an investigation into your character.

Doing research on small business financing isn't panning for gold.
You don't have to travel far and wide to find the financing mother lode. It's right there on the internet. Within the past year, hundreds of books have been written on how to acquire startup funds or start a business with less than $1,000. Your research time will be swallowed up trying to sort out which of the many lenders trying to beat down your door are legitimate and appropriate for your needs.

Keep in mind that you won't just be comparing interest rates and repayment plans. Modern business lenders have entire packages of benefits that include support for small businesses, advice for startups and creative financing schemes.

The Small Business Administration (SBA) won't help you start your business.
The federal government has little interest in launching millions of small businesses. Their mission is to guarantee loans for small businesses that are on their way to success and to ensure that a fair proportion of government contracts are awarded to the little guys.

Generally, fast track lending of smaller amounts with longer repayment periods and lower rates are attractive deals for small business owners. However, you have to show a 3-year sales history to be eligible for these types of loans. The SBA doesn't fund startups, nor applicants with bad credit.

Small loans can be harder to find than big ones.
Big lenders are interested in big money and big business. Venture capitalists don't have time to fund tiny $500K loans when they have billions to invest. They'd have to spend too much time on due diligence and serving on advisory boards. Smaller lenders who take an interest in your business aren't just snooping: they're protecting their interests. In fact, many investors are far more interested in buying equity in your business than in advancing cash.

The Common Denominators
You've probably noticed a few trends in the seven topics listed above. First, if your small business is already up and running, thousands of lenders are standing ready to beat down your door to offer you financing. However, acquiring startup capital is another story.

While you can lay your personal equity or assets on the line by taking out a second mortgage on your home or using your kids' college fund as collateral, most new successful business owners advise against those personal risks when so many other small business funding opportunities exist.

Another trend that's clear is that you have to establish a good credit history. While a healthy personal credit rating is a good start, look into establishing a strong business credit rating.

Finally, you can't hope to get anywhere without a plan. Your business plan isn't just a financial plan. Timelines and benchmarks are critical. Any lender, as well as you yourself, should know exactly when and how repayment will occur. Your business plan is also an important statement of faith in your own ideas. How can anyone fund your business if you aren't showing enthusiasm in and knowledge about it yourself?

Creative Funding: Where to Find the Research
You can avoid wasting time by searching for startup funds rather than just small business funding. Your goal should be to match the financing to your company's unique needs rather than taking in all the funding schemes out on the internet. In fact, you may not need "small" business financing at all if your business plan shows that yours will be a mid-sized company within a year of successful operation.

Look for comprehensive information gathered at a single site. Inc.com's web site has a broad array of resources, including book titles and reviews, directories of angel networks, links to useful articles, success stories and advice on how to do your comparison shopping.

Use creative terms to find creative funding. Want to know about the guy who used credit cards, venture leasing and his bank account overdraft to fund his business for three months? Use good search terms and search engine functions to yield the most useful information.

Another approach to finding creative sources of funding is to look outside the internet. Talk to friends, neighbors and relatives to get the names of people they know who've launched successful businesses in the last ten years. One aspiring entrepreneur talked to his first big customer about funding, hoping to gain insights. His reward? His first customer also turned into his first angel investor.

Even if you're planning to approach friends and family about investing in your startup, take the time to do some research about the pitfalls and the risks. Numerous articles guide you into successfully doing business with your loved ones by sticking to a formal business arrangement that's bullet proof and well documented so that your finances are in good order when traditional investors come to call.

The bottom line? You're not just looking for funding. You're starting a relationship that can prove to be profitable for both you and your investor in the long run.

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