If you are wondering about how to finance the purchase, launch, or expansion of an online business, you should be aware of the different options available.
As seen in the recent post, E-Commerce 101: How to Start an Online Business, there are different considerations for an e-business and a brick-and-mortar operation.
Knowing how to fund online business growth can give your operation an advantage when you are choosing among different financing options.
For Ruth Frantz, founder of the online champagne retailer Henri’s Reserve, the choice was clear. She chose to partner with Benetrends to leverage existing retirement fund assets to start the business, which offers unique, small-bath and family reserve champagnes to individuals, corporate clients, and high-end restaurants.
Frantz had worked in the wine industry and saw the success of online selling and wine clubs. She also noticed a growing trend away from mass-produced champagne and toward specialized offerings.
“I had seen a model that worked and knew the numbers on it,” she said.
It was not until she learned about Benetrends’ funding strategy, which uses 401(k) or IRA funds to fuel business start-ups and growth, that she knew she could launch the online business. She notes:
“I don’t think I would have ever started the business if I hadn’t known about Benetrends. I wouldn’t have had the instant access to capital.”
Here is a closer look at some of the funding options available.
Many entrepreneurs seek funding from a bank or credit union. This is a tried-and-true method for businesses to gain capital to start or expand a business.
However, in the decade since the Great Recession, banks have tightened their requirements for small business financing, giving greater scrutiny to credit scores and business plans before releasing funds.
When you use traditional financing, you are going to be on the hook for monthly payments that include both principal and interest payments. Additionally, in recent months, the Fed has raised interest rates, meaning lending is getting more costly.
Venture capital funding is a good option for businesses that have an innovative, compelling, and market-researched idea. With venture capital, investors provide funds at different stages of your business growth.
Gaining VC funding can be challenging, requiring extensive market analysis, development of a board of advisors, and stressful presentations to investors. Those investors are going to take a percentage of your revenue in perpetuity. Much like with bank loans, you need to pay the financers first. Many VC companies also want management oversight, including advisory services that can be helpful but allow you to take advice from outside parties.
If you have the savings to finance your online business, you are in great shape. Most folks who self-fund their businesses, however, rely instead on personal or business credit cards or second mortgages. Credit card debt can add up quickly and usually carries high interest rates that can saddle your business with large debt loads that take a long time to pay off.
In some cases, you can arrange for seller financing, where the site seller acts as a bridge as you take over the business. Of course, this approach only works when buying an existing business.
Seller financing can be in the form of a direct loan or an arrangement where you pay the seller a portion of revenue or profits for a pre-arranged length of time.
Benetrends offers a unique option for entrepreneurs. With Rollover for Business Startups (ROBS) funding, business owners structure their business as a C corporation and use existing 401(k), IRA or other retirement funds to fuel their business purchases or expansion.
With ROBS funding, you gain access to your funds quickly with the flexibility to use them in whatever way you deem necessary. Even better, the funds do not need to be paid back and come with no tax penalties or interest payments.
Frantz described partnering with Benetrends as “very, very simple and seamless.”
“It’s a smart way to go,” she said.
To learn more about how Benetrends can help with your online business, download Innovative Funding Strategies For Entrepreneurs today!