Funding For E-commerce Businesses
As e-commerce businesses and platforms continue to increase and develop, one of the main challenges these businesses face is securing financial backing. E-commerce platforms and websites such as Shopify have grown exponentially in the last decade, and this is in part due to the change in consumer behaviour with increasing amounts of money being spent on online shopping. As consumers have flocked online to purchase what they need, especially during the Covid-19 pandemic, the e-commerce market has grown quickly to meet the demand.
In addition to consumer demand, another reason for the growth in e-commerce ventures and transactions is the fact that e-commerce trading is accessible to all. Online businesses are democratised, enabling all entrepreneurs equal access to entry when it comes to selling products and services. However, like traditional businesses, e-commerce enterprises need funding in order to grow. Arguably, the financial world is still trying to catch up with the growth of e-commerce in terms of the funding options available. The finance world is continuing to evolve to ensure that it meets the needs of e-commerce retail businesses that operate via web pages and online sales.
Not having the capital funding and investment available is one of the main reasons that prohibit online ventures from succeeding. With consumers in the United Kingdom spending over £1 billion online every week, e-commerce funding has become a growing market. However, with less hard assets as traditional bricks-and-mortar businesses, e-commerce ventures may find it harder to find and secure the funding they need to expand and meet the needs of the economy.
When To Start Raising Funding
For any business venture, the best time to think about funding and finance is when the business idea is developed. Once you are clear about your business goals and aims, you should work out how much money you will need to achieve those goals. Securing funding not only enhances the chances of success, but also ensures you have the capital to build and execute your business strategy.
The type of funding you opt for depends on what type of business you have, your business needs, whether you want to ensure you keep full ownership, and what the funding is needed for.
Why E-Commerce Businesses Need Funding
You might be wondering whether a business venture that operates online requires funding? After all, many e-commerce businesses may not need the levels of inventory required by traditional businesses. Online ventures also do not have the extensive costs of property rental or asset management, but they do have the technology and software to function well on the internet and provide the best end user experience.
E-commerce funding is essential because it facilitates growth. Capital funding means the business can cover its expenses that can include marketing costs, operational expenses, and costs of operating via online platforms. E-commerce businesses have similar expenses and outlays to other businesses.
Many traditional funding options such as bank loans simply do not meet the needs of digital e-commerce business models and ventures. Online sales mean the logistics of e-commerce businesses are totally different from the needs of more traditional shopping and retail enterprises. E-commerce presents a different type of business opportunity that many people want to capitalise on using their sales skills and the newer forms of funding support e-commerce in a better way than bank loans.
The good news is that modern forms of e-commerce funding are becoming more prevalent. The most successful e-commerce ventures are those that appreciate what kind of funding they need, the financial rules and laws relating to their enterprise, and how best to leverage the funding to scale their business.
Below we will look at 6 of the most popular ways to fund e-commerce businesses.
Crowdfunding
The reason why crowdfunding is a great option for e-commerce businesses is that it follows a modern formula for financing a business. Crowdfunding works by essentially obtaining funding from a crowd. This entails raising awareness of the business, then seeking contributions from various funders (often individuals and members of the public). Crowdfunding platforms like Kickstarter and Gofundme facilitate the receipt and payment of the funding.
In essence, crowdfunding flips the conventional funding model over. Instead of starting with capital funding or a loan from a bank, and then taking the idea to the public. Crowdfunding starts with marketing the idea directly to the public and then raising the capital. For e-commerce enterprises this is especially useful as anyone with a good idea can gain traction on social media and acquire capital from investors.
Bootstrapping
Bootstrappers build their business with very little outside capital and investment. Instead, they self-fund their business idea and retain control of the business. Bootstrapping is a simple and flexible strategy but can lead to financial strains and high levels of stress. Normally, ventures that rely on bootstrapping will rely on personal funds and cash flow from the company to scale the business. A famous example of a successful bootstrapping business is Spanx. However, this funding option is not an option for all e-commerce businesses as it requires owners to have a large capital sum to invest in the business from the outset. Remember, not having enough working capital can be disastrous for sales and growth and can ultimately be detrimental to the health of the business.
Equity Finance
Equity financing is exactly what it says: finance in return for equity in the business. This is a very traditional form of financial investment and is utilised by many startup businesses. Equity financing can be difficult to secure as new businesses do not have the evidential documentation a successful business will have. For online businesses, they may often find that trade is variable and there are no fixed assets or real estate property to secure any financing against. For anyone considering equity finance it is important to evaluate the level of funding that you can raise, and the extent of equity you will be handing over.
Grants
Grants are a great way to fund an e-commerce business, as they are usually non-returnable and act as a great investment into the business without losing control. However, if you want to apply for grants successfully you need to make sure you meet all the relevant criteria for the grant. As expected, grants are fiercely competitive and depend on what kind of business you have. You might find there are more grants available for those types of businesses that support socio-political issues, such as sustainability, green initiatives and charity functions.
The main benefit of grant funding is that you do not need to pay it back, it is capital that is free from interest and costs. Applying for grants is a lengthy and complex process and there is no guarantee of success. It is always best to research fully any grant opportunities and fine tune your business model and documentation before any application. Bear in mind that some grant funding also requires match funding from the business.
Revenue Sharing
Revenue sharing is a fairly new funding model that is particularly popular with e-commerce businesses that operate via websites across different territories (ie United Kingdom, United States, China etc). The way revenue sharing works is that funding is provided, and in return the business offers the financier a share of future revenues. Repayments are tied to the level of revenue to be generated. So, if revenue increases so too the repayments increase, and if the revenue falls the repayments also come down. The reason many e-commerce businesses like the revenue sharing model is that there is no requirement to give shares or equity to the investors and the business owners can retain full control of the venture.
Bank Loans
Bank loans are the traditional form of funding businesses have always used. They facilitate raising capital funding via borrowing. Usually, the loan is repaid via regular repayments that include interest and other fees. The difficulty with this model of funding is that it is prohibitive to those who adhere to Islamic finance and do not want to incur interest charges, and also bank loans are not always accessible for new e-commerce businesses. This means that the terms on offer are not always competitive. For anyone considering a bank loan, you need to make sure you research what the terms and conditions of the loan are and think about what level of debt you are comfortable with.
Whatever funding option you decide to pursue, you need to make sure that the capital raised meets the needs of the e-commerce business and that you do not fully lose control.
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WHAT ARE INTEREST RATES?
Interest and inflation rates are linked and affect our daily lives from the cost of our weekly shop to how much money we can borrow. Interest rates are essentially the amount borrowers are charged for borrowing money. Most banks will show the interest rate as a percentage of the total loan amount. This means that the higher the percentage, the more interest you will pay back over the term of your loan.
If you are not a borrower and you are a saver, then the interest rate will inform you how much money you will accrue in your account. the higher the interest savings rate you have the more money you will be paid into your bank account.
Interest rates vary depending on who you are borrowing from, the amount of your borrowing, the level of risk involved, and the terms of your loan.
If a lender thinks lending you money is high-risk then it is likely they will charge you a higher interest rate. In this way, the economics of a country are impacted by the interest rates.
HOW CHANGES IN THE INTEREST RATE AFFECT US?
One of the most obvious impacts of a changing interest rate is that it affects the amount of interest we are paid (as savers) or pay (as borrowers).
Any time there are changes in interest rates you should examine your savings and lending to see if you will be affected.
For those looking to borrow money, whether that is to buy a house, invest in business, or even just for the purposes of education (such as a student loan), the cost of borrowing will increase when interest rates are raised.
Current economic uncertainty means that businesses, individuals, corporations, and almost everyone in society are impacted.
For homeowners, an increase in interest rates means an increase in repayments (unless the mortgage is based on a fixed rate). Ultimately, this will result in a squeeze on household income and budgets at a time when the UK is dealing with an energy bills crisis and an increase in fuel costs.
To summarize the main effects of rising interest rates:
- increase in mortgage repayments
- increase in the cost of borrowing
- reduced consumer and business confidence
- increased incentive to save more to take advantage of the improved interest rates (but this depends on the rate being offered by banks on savings accounts)
- slower economic growth
- possible rise in unemployment
WHAT IS A BANK RATE?
A bank rate is set by the Bank of England. Arguably, it is the most crucial interest rate and is also sometimes known as the base rate.
The base rate is controlled by the Bank of England and is the rate paid by the Bank of England to businesses and banks that borrow from it.
The Bank of England is known as the central bank of the United Kingdom. They not only set the bank rate, which is currently 1.25%, but they also undertake the regulation of the banking industry, and financial business services, and they oversee the country's monetary policy. This then goes on to affect the economy including employment, wages, spending, and borrowing.
When banks set an interest rate they consider many factors in addition to the bank rate.
However, if the Bank of England changes the bank rate, then banks will also change their interest rate for both borrowers and savers in the market.
WHAT IS INFLATION?
The word inflation describes rising prices. If prices of goods and services are rising quickly then this is referred to as the rate of inflation.
Currently, in the United Kingdom the rate of inflation is 9.4%.
The rate of inflation is worked out by comparing the cost of products today and comparing the price against what the same products cost a year ago. The Office for National Statistics is the organization that is responsible for checking the price of goods and services.
If the price of production, imports, and raw materials increases then it is very likely that the rate of inflation will also increase. In addition, any increase in demand from consumers also causes the inflation rate to increase.
This is what is currently happening in the UK with the cost of living crisis.
WHAT CAUSES INFLATION?
As mentioned above, inflation is caused by various factors. The main drivers of inflation rates going up are the increased cost of production, and increases in raw materials and wages.
If inflation rates begin to increase it means that the cost of basic necessities including food and household items also rises. This can adversely affect society as many people will struggle to afford the basics and fall into debt. Inflation rates could also affect employment rates as employers also face cuts to their budgets and increased costs of operating.
Inflation does not only affect the basic necessities such as food. As we have seen recently in the UK, inflation also affects utilities, fuel costs, clothing, luxury goods, and cars.
Some of the main factors causing the rising prices in the UK, and thereby affecting the rate of inflation, include the following:
- increase in energy bills
- high fuel prices
- the war in Ukraine
- the rising cost of car prices (according to the Office for National Statistics)
- increased costs of household goods and furniture
- increased costs of food
- higher interest rates impacting homeowners
Whilst the cost of goods is rising, the wage increases are not rising in line with the cost of living.
HOW ARE INTEREST RATES AND INFLATION CONNECTED?
Theoretically, interest rates and inflation rates have what is considered to be an inverse relationship. This means that when interest rates are low, inflation is expected to rise, and when interest rates are high inflation rates should go down.
When interest rates are lower, the borrowing power of consumers is increased.
If consumers are spending but the prices of goods are going up faster than wages are increasing, then inflation rates increase. In order to encourage borrowers to borrow less and encourage them to save more the Bank of England increased the interest rate.
The aim is to slow the economy down enough to decrease inflation.
WHY HAVE INTEREST RATES GONE UP?
The Bank of England has increased interest rates so that it can reduce the rate of inflation. If the rate of inflation continues to go up in the UK then this can have many negative effects on UK residents. Currently, the inflation rate in the UK is at a 40 year high.
For example, people will have to pay more and more for goods and services. Property could lose some of its value, and fuel prices could continue to rise.
If inflation rises too high then this is called hyperinflation. This can result in a full economic collapse and devalue the currency.
WHY DID THE BANK OF ENGLAND RAISE INTEREST RATES?
The general view is that if the Bank of England raises interest rates they want people to spend less money.
When interest rates increase the Bank of England hopes that people begin to spend less and save more.
The Role Of The Bank Of England In The Economy
The Bank of England was established in 1694 as a private bank that lent the UK government money.
In 1997, the Bank of England was granted independence so that it could set the interest rates without any form of political affiliation.
The Bank of England is not connected to the Chancellor of the Exchequer as it it is important for it to base its interest rates on economic factors rather than political ones.
Not only does the Bank of England set the base rate, but they also:
- forecast the inflation rates
- issue coins and bank notes
- act as a lender of last resort for UK banks
The Current State Of The Uk Economy
According to PWC, the UK economy was recovering well from the global pandemic.
Unemployment rates were low and the labour market and service industry was recovering well.
However, the war in Ukraine was a shock to the UK economy (and economics globally), impacting it in many different ways including:
- disrupting supplies and services for all industries including retail and construction,
- leading to higher commodity prices and less revenue for businesses
- lower trade levels
- less investment flow
News agencies and websites are reporting that the UK growth outlook for the next 12 months does not look promising.
KPMG has agreed with this analysis stating that the GDP growth this year will halve and slow further in 2023 (UK Economic Outlook Report, KPMG, 2022).
According to KPMG, they predict further interest rate increases from the Bank of England. This is based on data from economic forecasts, consumer spending, interest rates, and the unemployment rates.
WHAT IS HAPPENING IN OTHER COUNTRIES?
Many other countries around the world are dealing with similar problems that the UK economy is dealing with.
According to the Office for National Statistics, the European Union is facing similar rates of inflation as the UK.
The United States is reporting inflation levels of 9.1%.
DO INTEREST RATE AND INFLATION RISES AFFECT INVESTOR BEHAVIOR?
The basic answer to this question is yes. Interest rates and inflation rates affect investor behavior. In fact, changes in inflation and interest rates affect everyone.
What it means in real terms is that any money you have saved could be worth less today than it was yesterday. High inflation rates impact the purchasing power and confidence of consumers and their spending.
Inflation rates and interest rates affect investment portfolios. If investors are finding it more expensive to borrow funds to invest then it is very likely that investments overall will reduce.
Investor Risk
Investors aim to increase their wealth and minimize their risk and tax liabilities. In an economy where interest rates and inflation are rising, there is normally an impact on portfolios and investments.
Rising inflation not only affects stocks and bonds it also affects property prices. Of course, all investment comes with a risk of losses.
Any investor with inflation-indexed assets or liabilities needs to be particularly aware of the changes in their portfolio.
Also, as interest rates rise this affects borrowing. As borrowing becomes more expensive, this leads to investors having less money available to invest.
Rises in interest rates also affect the stock market and the impact of the rise is usually felt quicker than in the general economy.
Normally, when interest rates fluctuate investors should expect the market rate of their bonds to also fluctuate. However, not all bonds are equally affected. Bonds that have short maturities may not be as impacted as bonds with longer maturities.
For investors who have a long-term outlook and planning when it comes to their portfolio, short-term changes to the interest rate should not significantly impact them.
For an investor who is looking at the long-term goal and who has a mix of assets, the long-term outlook of their portfolio should be fine.
To summarize, when interest rates increase the impact on investments includes the following:
- a rise in mortgage rates
- affect on the price of commodities
- Fall in bond prices
- Potential losses in the stock market
- fluctuations in real estate values
- increases competition between banks
Interest Rates And Islamic Finance Customers
For many borrowers, any increase in interest rates will affect how much they pay back to the bank they have borrowed from. The exception to this is those with fixed rate loans or mortgages. As the interest rate on these loans has effectively been 'fixed' for a specific period, then interest hikes or drops will not affect the repayments. Make sure to check when your fixed rate period comes to an end so you can plan accordingly.
In theory, for customers of banks who want Islamic Finance and Sharia compliant services, changes in the interest rate should not adversely affect borrowers or savers. This is because banking services based on Islamic Finance principles do not rely on interest or include any form of interest payment.
Conceptually, Islamic banking customers are not motivated by profits or gains. Therefore, changes to the interest rate should not affect them.
However, on a wider scale, any changes to the interest rates and inflation will affect all lending institutions in some way. Many Islamic Finance lenders use the base rate of the country to benchmark their repayment calculations. This means any increase to the base rate could affect the repayments for customers of Islamic finance products.
However, for economies where the interest and inflation rates and subject to fluctuation, this could lead to more people being interested in the interest-free products offered by financial institutions that offer Sharia compliant services. A research study in Malaysia found that any increase in base rates increased consumer interest in Islamic mortgages.
Ultimately, how you are affected by increased interest rates and inflation rates depends entirely on your financial circumstances and the management of your investment portfolio.
The success of your business depends on you maintaining a healthy cashflow. You want to have money available in order to pay your bills and your staff on a weekly or monthly basis, along with having capacity for growth.
It doesn't matter how great your product or your marketing might be. The foundation of success for businesses, and the reason why some don't make it, is cashflow. The moment you don't have the money in the bank to pay your staff, suppliers or tax bills, you could be in big trouble. Cashflow planning helps you to see this coming, giving you time to take action.
Cashflow planning is essential
It's much more comfortable when you have consistent, positive cashflow. There are no moments of panic when you fret over how you'll pay a particular commitment. You have more time to plan ahead, to have an eye on the future rather than worrying about today.
Consistent, positive cashflow doesn't just happen. Being profitable doesn't guarantee that your business will always have the cash to meet your commitments. Income from sales doesn't always flow in fast enough to cover payments you need to make. Achieving a steady cashflow requires planning. It starts by making a cashflow forecast.
Prepare a cashflow forecast
A cashflow forecast is a plan of the money your business expects to receive and to pay out in the near future. It helps you to predict how much money will be in your bank account at any point in time. A cashflow forecast is usually broken down into months or weeks to make it easier to plan.
To construct your cashflow forecast you'll want to use a spreadsheet or a cashflow planning tool. Your accounting system can provide useful information about your past cashflow but it's not so helpful for predicting the future, because it's based on transactions that have already occurred.The benefits of preparing and maintaining a cashflow forecast include:
- You have better control over your business finances.
- It helps you to make realistic decisions about spending.
- You can plan for the future more easily.
Your cashflow forecast is just that - a forecast. The reality will turn out differently, although a well-prepared forecast won't be that far off what actually happens.
Use a forecast to make better business growth decisions
Growing a successful business requires you to make choices. If your business model is sound it's likely your business will expand naturally, at least in its early days. However, it won't be too long before the rate of growth levels off, as you've satisfied the initial levels of demand. Maintaining growth, or restarting it, requires decisions and actions that will bring in more customers and extend your opportunities to earn more revenue.
Your cashflow forecast will help you to assess the impact of these decisions. It allows you to model what's likely to happen in the future, as you incur more costs with the objective of growing sales.The forecast will help you determine the costs and benefits of actions such as:
- Launching a new marketing campaign.
- Taking on a new member of staff.
- Selling a new product.
- Purchasing new equipment.
- Expanding into a new geographical area.
- Raising additional working capital.
Forecasting requires making some estimates about likely future income based on your choices.
How to build a cashflow forecast
Whatever tool you use to build your forecast, it will have three basic sections. These are:
- Incoming cash
- Outgoing cash
- The net balance
Step 1 - Incoming cash
This section is a list of your different sources of income. Depending on how you sell, you may want to break this down into different categories based on the type of income, such as cash sales, credit sales, credit card settlement and the like.
Not all incoming cash is from sales. You may also receive cash from loans, equity investments, tax refunds and other sources.
Once you've completed this section, you should have a clear idea of how much money you expect to receive on a weekly or monthly basis, over the period of the forecast. Typically, a cashflow forecast will look six months to a year ahead, and longer for bigger projects.
Step 2- Outgoing cash
In the same way, list all the payments made from your business. Be sure to include every form of payment, and take care to include irregular or annual payments. To help you check that you've not missed something, take a look at your accounts for the previous year to see what payments were made.
Payments you're likely to have in this section include:
- Stock purchases
- Payroll
- Tax payments
- Loan repayments
- Asset purchases
- Expense reimbursements
Once you've completed this section you should have a total for the cash outgoings on a weekly or monthly basis.
Step 3 - Net balance
The net balance is the difference between the total incoming cash and the total outgoing cash. If you add your opening bank balance, the cashflow forecast will now give you an estimate of how much money you will have in your bank account on any particular day.
In a strong, healthy business the net balance should be positive. If it's not, the forecast will help you to identify the reason. It may be that you're investing in business growth, which will bring in more future sales income but involves advance costs. The forecast will help you identify whether you need to source short or medium-term funding from elsewhere, and the scale of that funding.
Common problems with cashflow forecasts
Errors occur in cashflow forecasts because the process involves making estimates and it often relies on data that's input into a spreadsheet manually, rather than taken directly from your accounting system.
Problems to look out for in your cashflow forecast include:
- Overlooking VAT on sales, purchases and tax payments.
- Inaccurate information about future receipts and payments.
- Big differences between actual and estimated sales.
It takes time to build and refine an accurate cashflow forecast. Don't be surprised that you need to alter yours often, adding in unexpected receipts and payments.
Keep your forecast up to date
Because your cashflow forecast is based on estimates and assumptions, it will very quickly differ from what actually happens. This means you should update it regularly and often. A well-run business will maintain their cashflow forecast several times a week, perhaps even daily, to keep it as accurate as possible.
Cashflow planning is a vital business activity that you can't afford to overlook or put off. If you're planning to grow your business successfully, the time you put into cashflow forecasting is a wise investment.
Ethical business funding from Qardus
We support growing businesses by providing growth finance of between £50k to £200k on terms of between 6 and 36 months. This finance is helping UK-based small and medium-sized companies to expand their operations and their market share.
We fund businesses that have demonstrated their capability with a proven product and management team. Our clients are drawn from many different industries, but our ethical position means we cannot work with companies involved with products considered detrimental to the welfare of society, such as gambling, alcohol and tobacco. This is because we operate based on Islamic community principles. Our funding process is certified as Sharia-compliant.
We work with businesses and their owners both inside and outside the Muslim community. Any business that operates in line with our ethical values is welcome to apply for funding.
If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.
The investment term for this offer has been successfully concluded
As the investment term for this facility has been successfully concluded we wanted to present some highlights of this offer to investors:
The problem: Dara 77 Ltd, a dental practice, was seeking funds for working capital, to purchase dentistry equipment, and refinance an expensive mycashloan of c.£30,500 at c.50% APR.
The solution: In order to refinance the expensive loan at the earliest possible time and meet their working capital requirements, the company needed a timely injection of business finance. Dara 77 Ltd hence sought to raise a total of up to £60,000 of Sharia-compliant finance on the Qardus platform.
The outcome: The company had a two-year unsecured amortizing finance facility with Qardus, giving it the capital required to support their next phase and pay-off the expensive loan. The funds were drawn down on January 28, 2021.
Final settlement: Dara 77 Ltd made a voluntary early prepayment for the full outstanding balance of the financing facility on May 12, 2022. The Director used the extra cash proceeds from the sale of her home to pay off all her debts.
Payments to investors:Over the term of the facility, investors received their scheduled profit and principal payments each month.
Returns to investors: Investors made a return of 16.2% per year over the term of the facility. An investment in this offer made a return on investment (ROI) of 20.88%andXIRR of 25.31%upon successful conclusion of the investment term. The XIRR function calculates the Internal Rate of Return (IRR) by assigning specific dates to each individual cash flow.
“Excellent service from start to finish, comprehensive and friendly staff that make the full process feel easy. I was seeking growth finance and contacted Qardus and within 5 business days, I had an offer and funds in the bank. Highly recommend, thank you again Qardus”Director, Dental Practice
“This business is a prime example of a UK SME which has strong social impact credentials and that our investors are keen to support. This was also the first female owned business on our platform that got funded in 6 hours! In addition to providing working capital headroom, the funding will also be used by the business to refinance an expensive loan at c.50% APR. With this financing facility, we look forward to watching this business grow”Hassan Daher, CEO & Founder, Qardus Limited
Please remember that when investing in the offers available on the Qardus platform your capital is at risk and returns are not guaranteed. Past performance is not indicative of future results.
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