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Rise of Business Loans for Online Merchant Retailers


Since the early 1990’s Online shopping or e-commerce has evolved across the spectrum - from B2B and B2C commerce (Amazon.com) to furniture, grocery retailers (Bigbasket.com), to music (iTunes) and online auction platforms(eBay). The growing e-commerce platforms have pushed modern businesses into a race to ensure that their customers receive the best premium services as these businesses find the effectual balance between globalization and localization.

E-commerce Retailers

E-commerce retailers, striving endlessly to get a sizable chunk of the market, are challenged by shrinking lead times, inventory management during peak and lean seasons, pricing decisions and customer expectations. Responding to these business challenges also means addressing the retailer’s own financial stability. The most common financial challenge by both start-ups and established e-commerce businesses at different points of their business is to have substantial working capital and control cash flow.

Importance of Working Capital

Working capital constitutes the bloodline of any business, and studies show that any business is required to have at least 3-months working capital for ready expenses in order to be able to acquire new customers as well as to diversify into different products. Working capital covers account payables, wages, and investments for an enterprise and stand testimony to the financial health and efficiency of an enterprise, particularly in the short-term perspective. While cutting costs and stacking those savings may help to certain extent, the need for financial aids is persistently going up due to the increased demands of businesses to be ahead of their competitors.

However, the right financing at the right time can mean a significant competitive advantage for e-commerce retailers. Availability of funds can be the factor that helps e-commerce retailers significantly improve their sales and new customer addition.

Untapped lending segment

In the whole gamut of financial products available, loans and credit lines are often untried territories for online retailers. They don’t have collateral or a long history of financial statements to give confidence to a lender. Majority of retailers still depend upon the unorganized sectors for the loans. While some financial institutions have been adapting to the growing demands of online retailers, other traditional institutions are yet to reform their traditional lengthy underwriting models.

To help battle these constant financial challenges faced by e-commerce retailers, financial institutions have been rolling out tailored products to ensure that online businesses can stay afloat of these problems.

Some of the most common working capital loan products are

Line of Credit: Revolving loan which allows Merchants to make multiple draws within their credit limit depending upon their requirements

Account Receivable Loans: Loans availed based on confirmed sales order value of e-commerce retailers.

Merchant Cash Advance: Similar to Account receivable loans, loans are based on historic and future credit card receipts

Lenders who specialize in e-commerce retail consider the particular needs of their borrowers and jump in to fill the gap that traditional institutions left in this segment. Introduction of tailored products, upgrading their underwriting models ensures a better return for lenders in the long run. In the bargain, the borrower gets an eased process through ready availability if the eligibility criteria are met. The processing is not only quick, but the flexible repayment terms, zero collateral and immediate assistance ensure that any financial chaos can be certainly averted.

Partnership with E-commerce players

Leading e-commerce companies have tie-ups with many financial institutions such as banks and NBFCs. This collaboration can help reduce customer acquisition costs and funding costs for lenders and also generate short-term micro-borrowers for effective lending.

Financial Institutions have also changed their underwriting models that can structure their lending by basing it on the database of retailers collected from the partnered e-commerce company.

Here are some of the Influencing factors based on which lenders determine the quantum of e-commerce loan:

Cash flow Management: Setting up cash flow forecast to analyze borrower’s liquidity and ability to repay.

Business record: Lenders analyze business plan, performance, compliance (taxes, license) of online retailer business.

Selling history: Stability of business, seasonal sales and number of years in operation are considered in determining the credit limit.

Return on Sales: Efficiency of business is a measured basis on a return of online retailer sales. The loan amount is determined by lenders based on sales records of the last six months.

Customer Feedback: Customer review and rating determines retailer’s service quality. This, in turn, determines brand loyalty and higher sales.

Fintech lenders also partner with e-commerce platforms to crunch data on the trading history of small vendors, the goods return ratio and customer ratings to profile promising retailers. This channeling can effectuate the streamlining of the lender's investments and duly safeguard them from defaults. By monitoring and controlling the investments through the lender’s own digital accounts, retention and growth of customers are a guarantee.

The modernization of financial aids can help build an eco-system for e-commerce businesses to generate capital in the course of expansion of their business, and also enable financial Institutions to increase their customer base and target segments


  • January 18, 2018
Rajesh Kumar Lakshmanan
Rajesh is Product Manager with Lendfoundry and he is responsible for Product Roadmap, strategy and implementation. He has over 8 years of Financial industry experience, working majorly on cards & payments, Retail and Wholesale Banking. Rajesh holds PGDM from IIM-Indore and Bachelors in Engineering from Anna University. He can be reached at Rajeshkumar.L@Sigmainfo.net

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