3 E-Commerce Business Financing Options
Find Investors and Funding to Expand an Online Business
Jun 15, 2009
Traditional banks are not the best choice for e-commerce business funding. Their lending criteria are often unattainable for newer businesses. Banks may also demand that homes, vehicles, or other personal assets are held as collateral. When a bank will agree to lend to a small or online entrepreneur, their rates are often so high that it isn't worth the risk to the business owner.
Small online businesses have several other options when it is time to find funding for expansion and growth. Here are three of the more popular choices:
Soliciting Small Business Seed Capital from Family and Friends
Approaching family and friends to ask for a loan makes some people uncomfortable. However, when presented as a business opportunity, people are more likely to contribute.
Entrepreneurs must have a business plan to show interested investors, even if the person in question happens to be their mother or other close relation. See How to Write an Online Business Plan for the seven critical components of an e-commerce business plan.
Seed capital helps fund new growth, as well as operations in the period of growth. Potential investors will expect to see projections and a plan for making that growth happen within a given amount of time. Seed capital generally isn't a large amount of money, but those with financially strapped family and friends may find it necessary to offer several phases of funding. Show potential investors how each round of funding will help sustain the business and create value before the next round of funding is required.
Seeking seed capital from family and friends can be a good idea for entrepreneurs requiring a smaller amount of money, ie.: $10,000 - $50,000.
Connecting with Business Angels
Business angels are individuals who seek out new businesses and offer funding to help them launch and grow. These seasoned investors do not throw money at every opportunity. They want to see a workable idea, a solid plan, and some like to work with businesses that have already been in operation for a year or two. This shows a level of commitment on behalf of the entrepreneur.
New business owners in the market for up to $100,000 in funding should consider seeking out a business angel. Many services act as agencies in bringing angels and entrepreneurs together. However, it is crucial for a borrower to do their homework and check out angel investors before getting involved.
It may take several meetings and presentations to find the right fit. When an angel investor becomes interested, ask questions about their financing, other businesses they have invested in, what type of agreement will be used, and more to get an understanding of the type of arrangement they are looking for. Do not proceed with funding until all expectations on terms and repayment are clear.
Incorporate and Sell Private Placements
A small business incorporates for many reasons. Many incorporate to protect the owner from personally liability. Some seek tax breaks and benefits. Others still choose to incorporate to help raise additional business funding.
A private placement is also known as a non-public offering. This allows smaller businesses to choose which investors to bring on board. The entrepreneur can also negotiate different terms with their shareholders. For example, a potential investor may have a substantial amount of money to invest, but they expect a seat on the company's board. The entrepreneur can decide if they are comfortable with that type of arrangement.
Private placements allow e-commerce businesses to raise more money quickly. When shares are sold to a number of investors, the risk to any one person is less than if one investor provided the entire loan. Ten investors could invest $15,000 each, rather than one with $150,000.
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