6 Startup, VC Ecommerce Finance Alternatives



Options for Retaining Your Equity: 6 Alternatives from Startup Finance and Ecommerce to Venture Capital. photo by Nathan Dumlao at Unsplash

Raising outside capital to develop a start-up or e-commerce business has often been a reality for only a racial group with 90 percent Silicon Valley venture capital funds going to companies run by white men.

Venture and private equity firms raise capital pools from accredited investors known as limited partners to invest in private companies. Their goals are to increase the value of the companies they invest in and then sell them – or their equity stake – at a profit. For the founders, securing venture capital means giving up equity and a chance they lose control of their businesses.

Covid-19 has reshaped the financial landscape as offline commerce continues to move online, says FinTechMagazine.

Subscription models for offline businesses often don’t translate into e-commerce businesses.

The growing demand for products on online platforms has created opportunities for businesses. “These companies need financing solutions to meet this demand or risk stockouts and a poor customer experience,” said Keith Smith, CEO and co-founder of Payability.

Going into debt on a business might seem scary, but it can be a wise reinvestment in your e-commerce business, said Michael Ugino, co-founder and chief marketing officer of the market management platform. Sellbrite.

As the US economy reopens, consumer-oriented Main Street small and medium businesses are expect to see if the first lines and cash flow will come back.

There are options for keeping your equity. Here are six start-up and e-commerce finance alternatives to venture capital.

Brex

Brex created a corporate payment card for start-ups that rejects traditional subscription methods. Instead of credit scores, it focuses on financing the business itself, Nerd wallet reported.

There is no personal guarantee and you do not need to provide a Social Security number or pay interest, but you must pay the balance in full each billing cycle. The map connects to your corporate bank account which is automatically debited from the balance, so you must have some money there.

Brex says it can issue cards faster and with higher limits (10 to 20 times higher) than the other options. The card works on the Mastercard network, there are no annual fees or overseas transaction fees, and cardholders can earn rewards. It offers perks and rewards for small business owners working from home to earn bonus points on services like Slack, Zoom, and food delivery.

Brex might be a good choice for startups that have a minimum of $ 100,000 in the bank, are comfortable giving Brex access to the bank account and other funding information, and might need to access a high line of credit.

PayPal Working Capital

PayPal Working Capital is a business loan only available to PayPal sellers based on their PayPal account history, with no credit check required and no interest. As the name suggests, the funds can be used for day-to-day functions of the e-commerce business, such as paying rent and payroll.

There is a fixed fee for the loan. You pay a percentage of 10-30% of daily sales and you choose the payback percentage. The higher your sales, the faster you repay. On days without a sale, you pay nothing, but you have to repay a minimum of 10% every 90 days to keep the loan in good standing.

You can expect to repay $ 0.01 to $ 0.58 in fees for every dollar borrowed (according to PayPal’s calculator example), Maverick merchant reported. Borrowers cannot save money by prepaying the loan.

Lighter capital

Seattle-based “Alternative VC” firm Lighter capital helps entrepreneurs raise funds without traditional venture capital. Since its launch 10 years ago, it has invested $ 200 million in 350 U.S. companies using an innovative process known as revenue-based financing.

Revenue Based Funding (RBF) enables early stage startups to raise funds without giving up equity or board seats Geekwire reported. It’s a relatively new form of financing for tech companies that have recurring monthly income. The funding model “mixes some aspects of debt and equity. Most RBFs are technically structured as a loan. However, the returns of RBF investors are directly linked to the performance of the startup, which is more akin to equity, ”according to Lighter Capital.

“RBFs are basically dressed up debt towers,” Techcrunch reported. The difference is, “Investors have a greater incentive to help companies they invest in because they receive a certain portion of that company’s monthly income, typically 1-9%. Finally, as explained in detail in Lighter Capital’s RBF report, monthly payments end, typically 1.3 to 2.5 times the amount of the original funding – a multiple called the “cap”. Three to five years later, any unpaid amount of the said limit is due to the investor. Ultimately, ideally, the startup grew with the support of capital and did not lose equity.

Lighter Capital Says It Provides Access To Up To $ 3 Million In Capital

Shopify Capital

Shopify Capital is a Shopify merchant loan program with funding in two forms: merchant loans and cash advances. With loans, you get a lump sum and repay it over 12 months with automatic withdrawals from your account, Sellbrite reported.

The money can be used to buy more inventory, boost an ad campaign, or fund a new business such as an expansion.

With cash advances, repayment is more closely tied to sales. Shopify lends you money in exchange for a percentage of your future daily sales.

In Q4 2019, Shopify Capital made $ 115.9 million in cash advances and loans to merchants, up 61% from Q4 2018.

To qualify for Shopify Capital, you must sell on Shopify, be considered low risk, use Shopify Payments or a third-party provider, and process a minimum amount of sales, although Shopify does not disclose exactly what this benchmark is.

It’s easy, repayment is straightforward, and you don’t need to have good credit. However, Shopify’s repayment plans and interest rates can be expensive compared to other financing options, especially if your business is growing quickly, according to Sellbrite. You are also losing future income. The expected sales may look good, but you will have to hand over some of your profits until the loan is paid off.

Payability

Only available for online sellers, Payability fund sellers on Amazon and other online marketplaces. No credit score is needed, rates tend to be cheap, there are no additional charges, and there are prepayment discounts, according to a MerchantMaverick see again.

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There are two products. One works like invoice factoring by providing you with daily payments for your market sales. This means that you don’t have to wait weeks to make money from your sales. The other loan product is similar to a merchant cash advance. Payability buys future sales and gives you a lump sum payment.

Payability claims to have provided more than $ 3 billion in financing to thousands of online sellers.

Fund of funds

A typical small business has enough cash to pay 27 days of regular bills, research by JPMorgan Chase. Many take out loans to cover these payments – if they can get credit, Wired reported. In times of economic downturn, payments are slowing down and the “net terms” economy hurts small and medium-sized enterprises.

The San Francisco start-up Fundbox offers a combination of a credit card and a payment system like PayPal for small businesses. Fundbox pulls data directly from a company’s banking and accounting software, using machine learning algorithms to predict whether a company will pay.

Fundbox can be a good option if your business needs cash quickly – the next business day – and you don’t qualify for further funding. But that requires a minimum annual income of $ 50,000 and at least three months of billing history with supported accounting software or business checking account.

The credit score requirement has a low minimum – 550 – but the rates are high compared to traditional banks, according to a Nerdwallet see again. No personal collateral is required for business lines of credit less than $ 50,000, which means you are not personally responsible for repayment if your business does not repay a loan.

In addition, Fundbox borrowers do not have to provide collateral such as real estate for the repayment of a loan.



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