The E-commerce model has forever changed the way businesses operate globally. In 2022, the Indian e-commerce market is predicted to increase by 21.5%, reaching US$ 74.8 Billion. While it is safe to say that the market is booming for online businesses, we cannot overlook the plethora of funding sources available for E-commerce businesses today that support these businesses in India. If you’ve been bitten by the E-commerce bug in today’s fast-growing market and are looking for ways to fund your business, one of the most common options available is business loans. This blog post discusses how one can avail of E-commerce business loans in India, with tips on choosing the best loan option. Read along!
What Are E-commerce Business Loans?
E-commerce business loans are loans availed by E-commerce companies from various banks and financial institutions. These loans are available at attractive rates in India today so as to encourage more and more businesses to grow online. These loans can be used for various purposes like expansion, purchasing new products, inventory management, hiring new employees, redesigning websites and the marketplace, covering marketing costs, meeting daily expenses, and maintaining a healthy cash flow.
Here are the features of an E-commerce loan:
- The loan value extended could range between INR 1 Lakh – INR 1 Crore
- The loan is available both with and without collateral
- The loan tenure can range between 90 – 270 days
- The interest paid starts from 1.5%
- Highly flexible repayment tenure
- The loan sanction is capped at ‘x’ times of monthly sales revenue (X differs from lender to lender depending on the requirement of the borrower)
How Do E-commerce Business Loans Work?
E-commerce loans ideally work like any other business loan. There is a set of eligibility criteria that the business must meet for one to be eligible for the loan. They can then approach the lending financial institution either online or by directly visiting their physical branches across the country. Based on the revenue the business generates, the entrepreneur’s credit history, and other factors, the lending institution can opt to approve or reject the loan application. Once approved, depending on the policies of the lender and the type of loan availed, the capital is given to the business. The business then has to start repaying the loan amount with the specified interest as monthly installments (online payments are available) for the said period of time.
How To Qualify For An E-commerce Business Loan In India?
To qualify for an E-commerce business loan in India, entrepreneurs/businesses must meet the following eligibility criteria:
- The business owner must be a citizen of India
- Self-employed individual between 26 – 66 years
- The business should have a specific per month revenue, and this varies from lender to lender
- The business must have a strong presence in at least one big e-commerce platform such as Alibaba, Paytm, Amazon, Flipkart, Shopify, Snapdeal, etc.
- Having a decent credit score can help.
What Documents Are Required To Apply For An E-Commerce Loan?
In India, the documents required for availing any type of business loan are similar. In the case of E-commerce business loans, here’s what you will need to submit:
- Duly filled loan application form.
- Passport size photos
- Proof of address (Can be Aadhar card, Ration card, Passport, or Driver’s license)
- Proof of identity (Aadhar card or Driver’s license)
- Last 6 months Current Account Bank Statement
- GST Registration Certificate
- Shops and Establishment Certificate
What Are The Different Types Of E-Commerce Business Loans?
To attain success as an e-seller, selecting the appropriate e-commerce loan is crucial. Numerous e-sellers have faced challenges in scaling their businesses due to insufficient funds and a lack of a strategic vision. Here are the six most commonly availed loans:
- Term loans: A term loan is a type of business financing where an organization gets a specific amount as a loan with a specified repayment schedule based on a fixed or floating interest rate. These loans are available from both traditional lenders and online financing companies.
- Working capital loans: A working capital loan is one that is taken to finance a company’s day-to-day operations. These loans are not used to buy long-term assets or investments. They are, instead, used to provide the working capital that covers a company’s short-term operational needs.
- Business credit cards: A business credit card is one of the most effective funding sources for an e-commerce business struggling with cash flow issues. The business credit card gives you access to ready cash up to the predetermined amount.
- Line of credit: A business line of credit is a pre-approved amount of financing, which your e-commerce business can draw on whenever you need cash. It’s ideal for working capital, emergencies, and ongoing expenses, and you only pay a fee for the amount you draw on the line of credit. A line of credit typically allows you to borrow a larger amount of capital with lower rates compared to business credit cards and other short-term options.
- Loan against property (Aka Mortgage Loan): A loan against property is a secured loan where the borrower can pledge their residential, commercial, or industrial property as security or collateral for the loan. It is a great way to leverage your existing assets to raise business finance. The loan amount is decided based on the market value of this property and your repayment capability.
- Merchant Cash Advance: A merchant cash advance is a cash advance based on credit card sales deposited in the borrower’s account. The loan amount is determined by the business’s credit card swipes or monthly volume. A merchant cash advance is a great loan option for e-commerce businesses with good credit card sales. Once approved and the advance is provided, the funder will receive its payments as an agreed-upon percentage of your future credit card sales.
How To Choose the Best E-commerce Business Loan?
For any business to succeed, it is imperative to choose the right source of funding that fits its requirements. These are some key considerations for choosing the right E-commerce loan.
- Ascertain how much loan amount you would require. This can be determined based on your monthly expenses and sales. Ensure you have a proper calculation in hand before requesting any amount from the lender.
- Research the different interest rates available in the market. Different lenders have different interest rates for E-Commerce business loans in India. Ensure you have thoroughly vetted the different lenders. Proper market research is key to choosing the right funding source.
- The loan application process is generally straightforward. However, due diligence is required when it comes to the terms and conditions. Do not overlook this factor while choosing the right E-commerce business loan.
E-Commerce business loan FAQs
Can one expect some additional benefits or subsidies while availing an E-commerce business loan?
Depending on your credit score and financial conditions, a few banks may agree to provide you with some extra benefits. The Indian government also offers many subsidies to support small e-commerce startups in India through multiple schemes.
Can one use the business loan for other purposes?
Generally, it is not advised to use business loans for other purposes. These loans can be used for business expansion, renovation, purchase of equipment, hiring new staff, or marketing.
Do you need to physically deposit every installment of the loan?
This completely depends on the lender’s policies. Many banks today offer an easy online payment option that automatically deducts the EMI from the borrower’s account.
What’s the loan approval process period for E-commerce loans?
The loan processing period is different for each lender. We recommend going through the policies of your lender before deciding on the right one.
Revenue-Based Financing: The Best Ecommerce Business Loans Available
If you think getting loans from banks is daunting, we can help. At Velocity, we recommend going for revenue-based financing if you want a flexible, highly scalable, 100% digital fundraising process. This founder-friendly approach lets founders raise funds without diluting equity or providing collateral, and the repayments happen as a percentage of monthly revenue. You can learn more about revenue-based financing in our ultimate guide to revenue-based financing.