This post is by Radoslav Albrecht, the founder and CEO of Bitbond. Based in Berlin, Bitbond is a peer-to-peer lending platform that specializes in providing loans to online sellers and small businesses. The platform uses bitcoin as a payment network and is therefore available to everyone who has access to the internet. Previous to starting Bitbond, Radoslav was advising banks at Roland Berger Strategy Consultants and has worked for Deutsche Bank in London.
As a seller on eBay and Amazon you’ve doubtlessly thought about driving the growth of your online business. Whether its financing new inventory, hiring new staff, or keeping up with increasing demand, growing your business can be an expensive endeavor.
At Bitbond, we’ve helped finance 1,400 loans worth more than €740,000 to small businesses and online sellers. We operate globally, and often receive questions from international online sellers unsure whether a loan is the right choice for them. Our community is over 40,000 strong, but we recognize that many eBay and Amazon sellers still have doubts about growing their business with external financing.
Below, I have given detailed answers to the most commonly asked questions. We will cover all important aspects of financing for online sellers located in the US and abroad. With the information in this post, you will be able to decide if external financing is right for you, and what your next step should be.
What sources of financing are available for online sellers?
There is no one-size-fits-all answer here, so let me go into a little bit of detail.
Traditionally, online sellers and small business owners would go to their local bank to ask for a loan. Bank loans have the benefit of charging relatively low interest rates, but often have shorter payment horizons. Additionally, they are notoriously hard to get, as banks approve only around 20% of the loan requests they receive. This figure is even lower for online sellers, because banks find it almost impossible to accurately assess the creditworthiness of marketplace sellers.
In the US, there are SBA loans, with the Microloan program being the most promising for online sellers. These are up to $50,000 and dispensed by the US government through nonprofit organizations. The average Microloan is around $13,000 with a maximum loan term of 6 years. Getting financing as a marketplace seller is tough though, with approval ratings below the 18% mark, and available to US sellers only. Government-backed programs exist in other countries, such as Start Up Loans in the UK.
Finally, we have alternative lenders. These are far less restrictive than SBA’s and bank loans, while having a much fast application and approval process. Most marketplace lending platforms will rate and approve an application within 24 hours – a fraction of the time involved with the two other options mentioned here. Interest rates tend to be higher on these platforms however, as working capital is provided by lenders who are compensated for the risk they take on board.
So although alternative lenders tend to be more expensive, the easy online application, fast approval, and higher acceptance levels make it an attractive option for many online sellers. Not all marketplace lenders are created equal of course, and your best choice will depend on your location, loan size and business size.
Below you can see a table of the best alternative financing options for online sellers.
||40%-100% pa||15%-30% pa||1.75%-5% per month||2%-6% per month||1%-4% per month|
|Fees||1% – 13.5% for the first 2 months and 1% for the next 4 months||Based on PayPal sales history, loan amount, and repayment deduction.||One time origination fee, and late repayment fees||None||Origination fee 0.5%-3%|
||2k-100k||1.5k-85k||500-120k||1k-50k||From 0.1BTC to max 300EUR debt capacity per month|
|Terms||1-6 months||No fixed maturity date||Up to 12 months||Up to 6 months||6 weeks to 5 years|
|Repayment types||Pay 1/6 of the total loan amount plus the monthly fee each month||Pay at least 10% of loan amount + the fee every 90 days.||Monthly||Monthly, can repay early||Amortizing|
|Data used for credit check||Business checking, eBay, PayPal, Amazon, Etsy, Yahoo, Xero, QuickBooks, Stripe, Sage, Authorize.net, Square||PayPal||Paypal, Bank, Alibaba, shop||eBay, Magento, Linnworks, Shopify, Alibaba, FreeAgent, Britghtpearl, Amazon, PayPal etc.||eBay, LinkedIn, PayPal, Twitter, Facebook.|
|Time from application until approval / payout
||Same day||Same day||Same day||Same day||14 days|
|Countries available||US, UK||US, UK, AU||UK||UK, DE, ES, PL||Global|
How can financing help me grow my business?
Now you know where your external funding can come from, we should look at how a loan can help you grow.
There are three ways financing can help you grow your business.
1. Keep up with demand
When you are approaching a month which has been great for sales historically, external financing can help you take full advantage of the seasonal increase in demand. As well as supporting the growth your store is already experiencing, you can expand your inventory or bring out a new product for the holiday season. Should your growth merit it, you can even hire a new staff member to help process your orders.
For marketplace sellers, it is vital to fulfill the orders as they are placed. Waiting for funds to be paid out by the marketplace or payment provider (e.g. Amazon or PayPal) can take too long and kill your growth stone-dead.
In this situation, external financing can be the oil that keeps your business running smoothly. Getting a loan at affordable rates can help you meet this rise in demand head-on – maximizing your revenue and keeping your customers happy. This approach has worked for many online sellers, including novelty bow seller Schleifenparadies.
It’s worth noting as well, that as your store becomes more successful, you will most likely also experience a significant surge in demand. To keep up with this demand, you will need to buy more inventory and increase the amount of stock you produce or purchase.
2. Survive bad months
As an online seller, you will no doubt have experienced seasonal fluctuations in demand. Whether it’s a spike before Christmas, or a lull during summer, very few products are immune to the seasons.
During low-demand months, online sellers have a limited number of options to keep cash flowing into the business. A common approach is to run a sale. This entails selling full-value products at discounted prices, sometimes resulting in an overall loss per unit sold. Not only are you potentially selling below your own cost price, but you are also foregoing the profit you could have made, had you sold during a better time of the year.
Another option is to get external financing. Interest rates from marketplace lenders begin at around 1% per month, making a loan significantly cheaper than the average flash sale. Additionally, online sellers regain control over their finances during periods of low demand. This makes a more calculated approach to inventory management possible and keeps your business in safe waters.
3. Finance bulk purchases
Most wholesale suppliers require bulk purchases, or provide much better pricing for them. Chinese manufacturers, for example, will stipulate a minimum weight or order quantity for each purchase. Although the cost per unit might be low, the minimum order quantity can be in the thousands, and online sellers may struggle to meet it.
In such a situation, external financing can bridge the gap. The loan provides the capital to make bulk purchases and take full advantage of volume discounts.
For more detailed illustrations of these scenarios see my article Ecommerce Loans: The Online Sellers’ Guide to Financing.
What should I look for in a loan?
Most importantly, your loan should meet your needs perfectly. It is vital not to settle for second best when considering financing – the wrong loan could be very bad for your business.
As a marketplace seller, there are now a large number of options available to you. You can afford to shop around and get a loan which exactly fits your specifications.
The key points to consider are:
- How much do you need?
- When do you need the money?
- When do you want to repay?
- How much can you afford to pay for the loan?
- Which lenders are available in your country?
Answering these five questions should clarify which provider would be best for your business. Take a look at the table provided above, to help identify the right platform for your financing.
When should I consider getting financing, and when should I not?
For small business loans to be effective, your business needs to be running well. Specifically, you should be selling good products with a high profit-margin and a reliable supplier. Ideally, your store is starting to make a name for itself, and customers are asking for a wider selection of products.
A loan can be harmful when it used to paper over the cracks of a failing business. This is the case when your products have low demand, low profit margin or poor quality. In such a case, it is very important to fix these problems and make your online store healthy again, before taking on external financing.
Is a loan a good choice for someone resuming selling after a break?
If you previously ran a successful online store, getting a loan may be a good choice. Depending on the length of your break however, you may want to reacquaint yourself with your niche first.
This is particularly true for Amazon sellers, as competition is fierce, and strong new competitors may have appeared to fill the gap. This could make re-entering your old niche difficult.
Should you have up-to-date information on your preferred vertical, however, a loan can help you purchase stock, launch your store, and hire the staff needed to kickstart your business.
What kind of sellers have used external financing?
As this market matures, more and more stories about external financing appear. It’s hard to believe, but peer-to-peer lending platforms alone lent out more than 300 million dollars in August. Online sellers will have received a sizeable chunk of that.
One example is eBay and Amazon seller Bargains Arizona who wanted to expand his profit-margin and source new products from China. In order to do this, he got an ecommerce loan of $6,345 which is repaid via equal installments over 36 months.
Another example is this Thailand-based Amazon seller, who needed more capital to launch his brand of organic superfoods on Amazon. He received his Amazon loan within a matter of days, and will now pay 24% annual interest on his $4,000 loan.
Those are just two examples of marketplace sellers benefiting from external financing – many more exist.
What happens if my business collapses and I can’t make repayments?
This depends on the source of external financing you receive, and the size of your business. Most online sellers are the sole proprietor of their business meaning their business is not a separate entity. This means that you and your online business are considered the same and you are personally responsible for its debts.
Should you be unable to service your debt, US-based sellers will most likely have to file for Chapter 7 bankruptcy. This will result in your qualifying business and personal debts being wiped out, without the need to make further payments over time. The downside is that most of your assets (both business and personal) become part of the bankruptcy estate, meaning that creditors may receive them as a form of payment. Similar bankruptcy procedures exist in other countries.
Alternative financing platforms tend to be more flexible than banks with regards to repayments. Should your business go under, in some cases you might be able negotiate a new repayment plan which better suits your circumstances. However, keep in mind that this could also mean you get excluded from getting another loan.
Therefore the best thing to do is to plan ahead and pay 100% of your payments on time. This will improve your credit with the lender and reduce your financing costs in the future.
What if my stock doesn’t sell as quickly as I planned?
In general, you should reach out to your loan provider and inform them of the situation. Should you fail to make a repayment on time, you will fall into a grace period. The length of which varies by platform, but the standard is 90-120 days.
Prior to that, the lending platform will reach out to you, and remind you of your obligation to pay. You would then explain the situation and ask for a rescheduled payment plan, which gives you more time to sell your stock.
Most of the time these loans are unsecured, and as a borrower you therefore do not need to offer collateral. Nevertheless, financing platforms might add fees, and increase interest rates. Finally, the defaulted loan would be turned over to a collection agency which will work to secure loan repayments.
In many cases, online sellers can work with the loan provider to work out a repayment plan which suits both parties, but keep in mind that this might mean you cannot get another loan in the future, as mentioned above.
Are the new online seller loan companies regulated and legitimate?
The peer-to-peer lending sector has matured since 2005, when Zopa first burst onto the scene. Since then, financial regulatory bodies around the world have worked hard to ensure that all the platforms are legitimate and above board.
In the UK, the Financial Conduct Authority is keeping check, while BaFin is tasked with regulation in Germany. In the US, the Securities and Exchange Commission has worked with major financing platforms to ensure the protection of both borrowers and lenders. Check that any lender you are considering is properly licensed by the relevant authority.
Nevertheless, all online sellers should do their research before taking out a loan. Check out reviews on independent websites like Trustpilot and Web Retailer, and read through the platforms rates and fees. If you have further doubts, visit some online seller forums. These usually offer great advice and honest experiences of financing platforms.
For bitcoin loans, what happens when the exchange rate changes? Could I suddenly owe more or less?
No. At Bitbond, online sellers globally can receive a loan denominated in US dollars. This means that the value of your repayments remains pegged to the US dollar, regardless of what happens to the price of bitcoin. This ensures that borrowers always repay only what they owe.
To illustrate this point we can take a look at this Amazon seller’s repayment schedule. He was funded $9,000 over 6 months to meet his growth goals.
From the screenshot above, you can see that the borrower received the equivalent of $8,910 on June 29th ($9,000 less a 1% origination fee). The repayment amount is clearly stated and remains stable. The seller will pay $529.86 in interest, regardless of the price of bitcoin.
I hope you have found this useful, and wish you a lot of success in your online selling business!
To find out more about Bitbond visit Bitbond.com.
Bitbond is the highest-rated alternative lender in the Web Retailer directory: Bitbond reviews.