Financing an online retail start-up is cheaper than doing it on the high street. Business rates, sky high rent and slowing high street activity have killed many a great ‘brick and mortar’ business over the years. Plus, with Nasdaq predicting 18% of all UK retail purchases will be online this year, it makes sense to be trading in the digital world. It’s a growing market with no bubble to burst just yet.
The good news is those of you on a budget can get started on the cheap. Domain names cost just a few quid and web hosting costs little more each month. You can use an online website builder to build a website that works. That’s the bare bones of your business up and running for less than you spend on monthly groceries.
However, what you can’t do on the cheap is acquire the stock you need to fulfil orders and the warehouse storage you need to keep it safe. Assuming you’re not running a drop shipping business, your main overheads will be in the processing and fulfilment of orders and every single one of these eats into your margin. To raise the funds you need you’ve two options. Which is best, depends on your
Use Kickstarter or Indiegogo to raise funds for your business. People love a story they can get behind so if you have a motivational story behind you, you can use emotion to fuel the funding of your campaign.
The downside to crowd funding is uncertainty. Crowdfunding campaigns do have a high risk of failure and some don’t even get off the ground. You could end up wasting your time. But, you could also end up with what you need.
Start-up business finance
A more realistic finance option is start-up finance. This is simply a new business loan approved by a specialist lender based on your business plan and personal finances. If your credit rating is good and your business plan sound, B2B lenders will be happy to lend to you over one to five years. It’s a flexible term.
There isn’t really a downside to borrowing money to finance your online business, except the loan will obviously cost you money. How much? This is determined by the interest rate on the loan. A 5% fixed interest rate (which is typical with specialist lenders – high-street banks tend to be higher) means borrowing £15,000 over 4-years would cost £1,545.75. Your monthly repayments would be £344.69 per month. This part of the loan is all interest, so it is tax deductible on your balance sheet.
The bottom line is money easily gets stretched thin and so using existing revenue or assets to fund your business is a recipe for disaster unless your profit margins are huge. If you divert too much of your profits into the running of your business it will starve, and your great idea will die and wither away. It has happened to the best entrepreneurs and it will happen to you unless you have sufficient ongoing funds to operate.
For most entrepreneurs, borrowing is the most realistic funding option. However, you should only borrow if you are financially capable of keeping up with repayments. If you’re not comfortable with borrowing to get started, you can use personal finances to get going but this brings its own risk. Whatever you choose to do, good luck.