Starting an online business can be a daunting process. While you may have come up with a well-thought-out business plan, there are still many obstacles to overcome. One of the most important aspects is finding a source of finance for your company.
Fortunately, today’s world has opened up many opportunities to obtain money for your online organization. Banks aren’t the only option, which can be a true lifesaver if you have a poor credit score.
There are many other providers, and you’re about to learn how to finance your online business using various sources.
Ways to Get Funding for Your Online Marketplace Business
Bootstrapping
Bootstrapping, also known as self-funding, is a method of investing your money and your startup’s operating revenue. Many well-known businesses launched through bootstrapping, such as Mailchimp, Braintree, Basecamp, and BigCommerce.
For business owners needing professional financial advice, a Dayton Ohio Financial Planner, like Gudorf Financial Group, can offer expert guidance on managing startup finances and long-term growth strategies.
One of the most significant benefits of this approach is that it saves time. There’s no need to set up a detailed pitch deck, practice your elevator pitch, or persuade investors to provide you with funds.
Another great thing about bootstrapping is the lack of debt after going under. Even if you have an enormous debt after a failed startup, you get to keep your organization’s name in the clear.
Plus, you don’t have to hand over the control to the investors. They can influence some managerial aspects, but the reins are still in your hands with bootstrapping.
The biggest downside to this method is that it requires a large amount of money. The first fundraising stage can set you back anywhere between $100,000 and $500,000.
Pros
- Time-saving
- Your company incurs no debt
- Keeping complete control of your organization
Cons
An expensive method
Venture Capital
Venture capital financing has to do with venture capital firms providing startups with private equity. Venture capital organizations are limited liability or limited partnership organizations investing in a startup business due to its potential for high ROI. In return, the investors can influence your company’s development.
The main benefit of venture capital financing is the lack of fees. You don’t have to pay a dime to meet up with investors.
Venture capitalists are also not very restricted in terms of the budget. They can invest a considerable amount of money if they’re confident in your online business success.
Furthermore, there are enormous opportunities to expand your company. Other methods, such as bank loans, aren’t that flexible. Apart from the requirement to repay your loan, you’d also need to ensure collateral. By contrast, venture capital firms take on the risk themselves since they believe in your organization’s long-term success.
The most significant disadvantage of this method is the obligation to waive some equity in the company. Be prepared to provide your investors with a share if you’re collaborating with venture capitalists.
Pros
- No fees
- Less risky than bank loans
- Opportunity to grow your company
Cons
Giving up equity
Angel Investing
Angel funding consists of well-to-do individuals investing in startup companies, usually in return for some equity in the organization. In general, angel investors look for various opportunities within their line of business. Therefore, it’s a good idea to look for persons from your niche.
One of the most significant advantages of angel investing is the tremendous support your online business receives. These individuals give up their money and want your company to succeed. Considering that they are part of the same line of business, they are well-versed in how the industry works and are willing to share the information.
Additionally, you can acquire a large number of influential acquaintances. Not only can you obtain valuable information, but you can also meet renowned players from your industry with the help of angel investors.
Also, cooperation with angel investors boasts the same benefit as venture capital, which is the lack of risk. There’s no need to repay the funding you receive from your investor since they receive a share for their services.
That said, meeting with angel investors, let alone persuading them to share their funds, is incredibly challenging. On average, typical angel investors agree on between one and three deals every year.
Pros
- Support and knowledge
- Meeting new people from your niche
- No risk involved
Cons
Closing deals with angel investors is complicated.
Vendor Financing
Yet another method you have at your disposal to finance your online business is to engage in vendor financing. Now, for those of you who do not know what vendor financing is, in its most basic form, it means that the seller leaves funds in the business for a set period (usually 6 to12 months) to allow the seller to buy the business with less funds than the asking price. The buyer then pays this back over the period from the business's profits.
This type of financing is a good method to consider for those who are having trouble finding other sources for financing, because it generally offers a high level of flexibility when attempting to secure funds.
It also comes with the advantage that depending on the vendor in question, the interest rates could be quite low, with some not even charging any interest at all (since you are using the money to purchase goods or services from them).
On the other hand, besides the fact that some vendors may charge ridiculous interest rates, there are of course other risks to consider as well, such as if you are not happy with the vendor for whatever reason, and are then stuck in a financing deal.
Pros
- An affordable monthly payment provides the new owner with some breathing room
- The interest rate paid isn't much different than the interest that would have been paid to a bank
Cons
Of course, there is always a drawback. For the buyer, the drawback is taking on the risk of running the business plus the risk of making a monthly repayment
Best Funding Platforms
The approaches we’ve covered so far can be an excellent match for your company. Still, there’s one more option primarily directed at financing online startups – funding platforms. Here are the best solutions for your organization.
Gust
Gust is a global platform for launching and investing in high-growth companies. The platform features numerous tools that can help online businesses with cash flow management and many other aspects.
With over 85,000 investors on the platform, you can connect to a robust startup ecosystem. As a result, there are vast opportunities for financing your online business.
In addition, you get a tailored feedback engine to provide you with details about your funding potential. This way, you can set realistic expectations and obtain more information about your abilities.
Moreover, Gust is very well-designed and comes with a wide range of tools to facilitate many operations.
- Cap table management
- Document storage
- Deal management
- Financial modeling
- Participant portal
- Options management
- Portfolio management
There aren’t many downsides to using Gust, but one of the biggest nuisances is the prolonged application process. Once you file your request, it will be reviewed, voted on, and commented on. Afterward, you’ll need to provide extra information to attract investors.
Pros
- Extensive network of investors
- Robust feedback
- A variety of helpful tools
Cons
Extended application process
AngelList
AngelList is an investment platform that can connect online business owners to various types of investors. It’s a highly polished and user-friendly system.
First, setting up your account and reaching potential investors is relatively straightforward. The entire process is mainly automated, eliminating room for error.
Second, there’s also a terrific investor pool. The individuals on AngelList are highly knowledgeable and experienced with online startups.
Also, users accepted to the network gain access to recommended investors based on the market, location, and stage.
But sometimes, you may reach a dead end with the candidate pool. Consequently, you’ll need to wait for quite a while before new recommendations are added.
Pros
- Streamlined activation process
- Broad investor pool
- Recommendations and filters
Cons
Waiting for new recommended investors takes a lot of time.
OnDeck
OnDeck is another terrific funding platform. The organization serves more than 700 industries, making it incredibly versatile.
One of the best things about OnDeck is the transparency and quick turnaround. Upon filling out your application, you can receive your funds as soon as the same day.
There are also several loan types. Additionally, you can negotiate to have the amounts and repayment period organized to your preferences.
Furthermore, you also get a committed loan adviser available six days per week. They offer highly valuable information on how to finance your online business so that you can make the most of your application.
However, many customers have reported subpar assistance during the COVID pandemic. While OnDeck lowered payments, the company didn’t postpone them.
Pros
- Great transparency and turnaround
- Good loan conditions
- Convenient loan adviser
Cons
Inadequate COVID response
Commercial Loan Direct
Commercial Loan Direct is a mortgage and correspondent banking institution. The platform has partnered with numerous investors, life insurance companies, and real estate investment trusts to offer a wide array of financing vehicles.
Most people praise the company for its excellent rates. Many customers had trouble obtaining a bank loan but had no difficulty acquiring funding for their online business from Commercial Loan Direct.
The staff is friendly and eager to help. Their customer support exhibits excellent knowledge and can walk you through the company’s offers.
In addition, the platform doesn’t compromise your safety. You only need to provide basic information to get connected to your pool of investors.
That said, the company could do a better job in personalizing their offer. It would be great if you could filter your investors on Commercial Loan Direct so that you can reach individuals who better suit your niche.
Pros
- Decent rates
- Helpful staff
- No safety concerns
Cons
Lack of personalization
Go Kapital
Go Kapital offers online business owners multiple capital solutions through their various funding options. Their loan partners include merchant cash advances, unsecured loans, revenue-based loans, equipment leasing, and many more.
A great thing about Go Kapital is that it makes it easier to get a business loan than a bank. Lending options are much more accessible, making refusal less likely due to a high minimum credit score.
The funding platform also believes anyone should be able to own an online business. That’s why they offer quick working capital to organizations run by women, veterans, and Latinos.
On top of that, the application process is easy and doesn’t take a lot of time.
The biggest problem Go Kapital customers face is poor support. In many cases, people reached out to the company for help but were taken aback by a support team reluctant to solve their problems.
Pros
- Convenient loan conditions
- More accessible to minorities
- Simple application process
Cons
Lackluster customer support
FAQ
Should I Get a Working Capital Loan?
Working capital refers to the difference between current assets and liabilities. Current assets consist of short-term assets, like cash or any other means of funding, that will turn into cash before the fiscal year ends. Some of the most common examples include accounts receivable and inventory.
Conversely, current liabilities boil down to debts your online business owes that you need to pay within the next twelve months. These include accounts payable and short-term loans.
A working capital loan can be an excellent way to stabilize your cash flow. They are also valuable for online companies that can’t tell how much money they need to take out or businesses looking for a cash cushion. Plus, these loans ensure your organization can quickly access funds without applying for another loan.
What Is a Good Credit Score?
A good credit score is generally considered to be in the range between 670 and 739. A fair score is reserved for the 580 to 669 range, whereas ratings between 740 and 799 are very good. Anything over 800 is considered excellent.
How Do You Get a First-Time Business Loan?
To get a first-time business loan, you’ll need to meet several requirements:
- Excellent personal credit score
- Stable business financials or a great business plan
- Ample collateral
- Solid revenue and experience (helpful, not obligatory)
Types of Business Financing
Online businesses can get nearly any type of financing for their company:
- Invoice financing
- Online loans
- Equipment financing
- SBA loans
- Business line of credit
- Real estate loans
- Microloans
- Cash advance
Recommendations – Our Top 3 Choices
Gust
Gust may be the best funding platform due to the sheer size and high-quality services. You get access to nearly 90,000 investors, making it very likely to find the ideal connection. Plus, the personalized feedback provides all the information you need to maximize your financing potential. This way, you get a clear goal in mind and excellent resources to accomplish it.
AngelList
AngelList is also a great option for several reasons. You can set up your account in no time due to the automated application system. There’s also a large number of seasoned investors eager to help your online business. Additionally, you can filter the recommended investors according to various factors.
Go Kapital
The main reason why Go Kapital is on our list is that it incentivizes minority groups to connect with investors. There are favorable conditions for Latinos, women, and veterans. What is more, lending conditions aren’t as strict as with conventional banks.
Knowing How to Finance Your Online Business Is Crucial
Now that you’ve learned how to finance your online business, it’s time to get your entrepreneurial journey underway. The funding platforms we reviewed can be a great choice, depending on your needs. Just make a choice, and you’ll lay a solid foundation for your online business to thrive.
