The Role of Bridge Funding in Scaling Your E-Commerce Business

What is Bridge Funding?

In layman terms, the term ‘bridge funding’ refers to short-term loans that helps borrowers cover their immediate requirements, such as cashflow problems and operating expenses until their pending dues are cleared, investors transfer the funds, or a loan amount is secured.

The eCommerce market is intense, with no forgiveness for any small business. Reports even highlight that due to fierce competition, many eCommerce startups fail within 120 days of emergence. To grow online, eCommerce businesses require quick access to funds to improve their value proposition and for digital marketing. Unless their funds arrive, they can rely on bridge funding.

Bridge funding for startups does not necessarily mean that it is only for desperate and struggling business owners. In fact, many entrepreneurs can use it strategically to gain funds until they pull in an investor. By treating bridge funding as an important part of their business plan, eCommerce businesses can deliver results in time sensitive market. Be it restocking for peak seasons, launching various markdown campaigns, or simply fixing glitches in the technology, bridge funding can cover all cashflow gaps.

How to Use Bridge Funding?

As stated above, bridge funding can have numerous use cases. Even lenders recognize these cases and provide simpler repayment terms so that business owners can timely pay back.

1. Inventory Management: eCommerce funding through bridge loans can be used to restock depleted inventory levels and prepare for peak seasons.

2. Updating Software Technology: Entrepreneurs can update their eCommerce technology, fix glitches, and purchase essential software for managing their online business

3. Website Revamp: If the website requires a complete revamp because of new branding and other changes in the vision, bridge financing can again help.

4. Marketing: eCommerce businesses rely heavily on marketing. From organic SEO and paid campaigning to influencer marketing and offering lucrative discounts, all these can be managed with bridge funding.

5. New Product Launches: With immediate funds to buy reports and conduct research and development, eCommerce businesses can launch new products to drive sales.

6. Payroll: Talent required to run and manage an eCommerce business is expensive.Bridge funding can help manage payroll expenses as well.

7. Warehousing: In case rental warehousing or commercial real estate property is required, bridge loans can cover the rent for a few months until the business becomes stable or more funding arrives.

8. Shipping and Logistics: To ensure last mile delivery, eCommerce businesses require to establish a strong logistic network. Business financing can help them fulfill all such business needs.

9. Customer Support: Instead of manual sales operations, eCommerce websites have a direct checkout button. Only customer support is required to help customers and resolve their concerns. Business owners can use bridge funding to strengthen their customer support.

10. All Other Cash Flow Concerns: Along with all aforementioned uses, bridge funding can be used for various other cash flow problems as well.

Benefits of Bridge Funding

Bridge funding brings numerous benefits for eCommerce businesses:

1. Quick Decisions

The first and foremost is quick funding decisions. Does not matter where your cash is stuck, whether in due diligence, overdue invoice, or in long loan application process, bridge funding keeps everything covered. Unlike traditional loans that take weeks to disburse amount in your business bank accounts, bridge funding ensures access to quick funding decisions and so that eCommerce business can resume operations like cash flow were never a problem in the first place.

2. Scalability

Bridge loans are highly scalable. Providers usually state receivables, inventory, or other business assets in their collateral requirements, which secures the entire loan. Meaning, eCommerce businesses can access decent funds with bridge funding to fulfill various business requirements.

3. Easier Approval

Unlike other business loans that have a very broad eligibility criteria including credit score, credit history, income stability, etc. and strict evaluation for approval, business financing through bridge funding is simpler. Even new businesses with less years in operations may be able to secure funds through bridge financing.

4. Flexible Usages

Bridge funds are truly flexible. They cover a variety of business needs and can act as the backup option when no other type of funding is available. Businesses can use them to replenish depleted inventory levels, fund marketing campaigns, improve product or upgrade their software technology.

5. Shorter Commitment

Unlike traditional bank loans, bridge funding is a short-term financing solution. eCommerce business owners don’t have to worry about long-term payments. They can pay back these loans faster and expand their business without any repayment stress.

6. Non-Dilutive

In bridge financing, no business equity dilution is required. eCommerce businesses can save equity and search for important investors who bring in both knowledge and funds required for business growth. Meanwhile, bridge fundings takes care of their cash flow problems.

7. Improve Business Credit Score

Mixed credit utilization and timely repayment help entrepreneurs gradually improve their credit scores if the lender reports to credit bureaus. Instead of opting for long-term funding solutions like term loans and SBA loans, eCommerce businesses can rely on bridge funding instead.

What Lenders Look for When Providing Bridge Loans?

There are no definite fixed criteria. Each lender can evaluate your application from a different point of view. However, for a general idea, you can consider the following factors:

1. Credit Score

While personal credit score and business credit score are very essential to secure long-term business loan, they are only one of the requirements for bridge loans. Meaning, even eCommerce businesses with decent credit score can secure a bridge loan.

2. Receivables

As stated above, bridge funding only acts as a bridge until your funding arrives. Providers pay attention to your business receivables when providing bridge loans. They evaluate the receivables amount and the estimated date of receivable.

3. Business age

Business age acts as a source of trust worthiness. Nevertheless, this does not mean you need to have years of presence to get approved for loan bridge financial options. Even with 18 to 24 months of operations, eCommerce businesses can secure a business loan.

4. Debt to Income Ratio (DTI)

Debt to income ratio is an indicator of how much debt can a borrower handle. Lenders use Direct Service Coverage Ratio (DSCR) to measure debt to income ratio. This ratio can be improved by closing previous debt or opting for shorter loan amounts.

5. Income Stability

Businesses owners with strong financial documents to show personal or business income stability have higher chances of securing bridge funding.

6. Business Plan

eCommerce businesses with a soldi business plan, product, offerings and diversified revenue streams are preferred by lenders over other businesses. These are an indicator of your market resilience and can help secure funds.

Clearing Common Misconceptions About Bridge Funding

Just like other types of financing, bridge funding also has several misconceptions:

1. They affect business valuation: Bridge funding or any other type of loan does not affect the overall valuation of your business.

2. Bridge funding has higher interest rates: Like other loans, bridge funding is also secured. If business owners explore the market thoroughly, they can secure bridge funding at very competitive interest rates.

3. Only struggling business rely on bridge funding: Again, this is not true. Many eCommerce business owners use bridge funding strategically to manage cash flow. It is not for desperate or struggling business owners.

4. It requires immediate repayment: This is not how a bridge loan works. The repayment tenure can vary depending on the finalized terms and can range anywhere between from a few months to years.

5. They should only be a last resort: Using bridge loans as a last resort can adversely impact the profitability of your business. They are meant to act as a bridge until your frozen payment arrives, and you can capitalize on time sensitive opportunities. They are not a last resort business funding option.