Checklist of essential steps for e-commerce financing

More and more companies have embraced the concept of e-commerce. And entrepreneurs aren’t the only ones who see it as an opportunity and seize it. Consumers are also welcoming e-commerce with open arms. Proof of this is the more than $5.7 trillion in e-commerce retail sales worldwide in 2022. For entrepreneurs, reducing costs is what makes e-commerce attractive. For consumers, however, it’s all about convenience.

However, the rapid growth of the e-commerce landscape means increased competition. To keep up with changing market dynamics, companies need to expand operations. What fuels growth? Funding, of course! So, to stay ahead of the race, e-commerce brands need to raise capital.

Finding investors and securing external funding to fund your e-commerce business seems like a tough nut to crack, right? But the truth is that it is possible to do it, as long as you know the essential steps to take. Stay tuned for a capital raising checklist that every e-commerce entrepreneur looking to promote their brand should know.

Understand your financing needs

Before looking for investors or even checking out Amazon financing options for e-commerce businesses, make sure you understand your financing needs first. This way, creating a clear and convincing presentation for potential investors becomes easier.

Now, how do you evaluate financing needs? First, evaluate your current financial situation. Look at revenue streams, business costs and profit margins in relation to cash flow. Next, identify your specific financing requirements. Are you planning to expand your product line or invest in marketing? Perhaps you are hiring additional staff?

Answering the above questions can help you estimate the capital needed. Here’s a bonus tip: Make a realistic, conservative approximation. And don’t forget to consider potential risks and unexpected expenses along the way.

The preparation phase

Preparation is key in everything we do. And this also applies to raising financing for e-commerce. With your capital needs already crystal clear, it’s time to:

• Build a strong business plan: Here you can outline your business model. A business plan is also where you identify your target market and clarify what your competitive advantage is and how you will use it for your growth strategy.
• Collect the necessary documentation: When raising capital, potential investors may request financial statements and legal documents such as contracts. Make sure you have them ready.
• Identify potential investors and partners: already at this stage you can start identifying potential investors in line with your business objectives. Venture capital firms and angel investors are just some of your options. Since their market is expected to increase by around $200 billion in 2025, you may also want to consider crowdfunding platforms.

Here is a table showing the main differences between the potential investors and partners mentioned above to help you decide:

Table 1: E-commerce financing options for startups: a comparison

Characteristic	Venture capital firm	Angel investors	Crowdfunding platforms
Type of investor	Professional companies that manage mutual funds	Rich individuals	General public
Investment size	USD $1 million – USD $100 million +	USD$25,000 – USD$2 million	USD$10 – USD$1 million+ (depending on platform)
Investment phase	Next stage, high growth potential	Promising and early-stage ideas	Any phase, various types of project
Shareholding	Meaningful board involvement	Moderate and potential consultative role	Varies, rewards based options available
Expectation of return	High profits on successful exits	High returns due to stock appreciation	Various, donations, prizes or equity
Selection process	Rigorous, competitive, data-driven	Informal, based on individual criteria	Open to most, campaign driven
Advantages for startups	Access to large capital, industry expertise, network connections	Mentoring, orientation, flexible terms	Brand awareness, community support, early validation
Disadvantages for startups	Loss of control, pressure to grow quickly, complex terms	Limited funding, high expectations, potential interference	Lower average investments, regulatory limitations, success depends on public commitment

Financial analysis and projections

Once you’ve identified several potential investors, it’s time to shift your focus to how to instill trust in them. Do this by creating realistic financial projections to demonstrate the future growth and profitability of your e-commerce business. Include in your forecast your business’s potential revenue, expenses, and cash flow over a specific timeline.

Of course, don’t forget to clearly demonstrate to your potential investors the potential return on investment (ROI) for investing in your e-commerce business.

Evaluation and fairness

Why is an evaluation necessary? Well, that’s because it plays a crucial role in negotiating investment terms. It also helps you determine the most appropriate equity share that investors will receive.

The valuation can be done through a market-based, income-based or asset-based approach or a combination of these methods. The goal is a realistic and fair number for both parties. Then, decide on the capital distribution and ownership structure. How much ownership and control do you think is right for the specific funding you received? To give you an idea, in 2021 alone, approximately 73% of businesses in the United States operated as sole proprietorships. If you’re unsure what’s right for you, turn to legal and financial advisors for expert guidance.

Presentation and closing of the deal

Having said all of the above, you can finally present your proposal to your potential investors and partners. And once an agreement is reached, you can finalize the terms of the investment. Before closing the deal, carefully review everything. Ensure that the agreement protects the interests of both parties.

If you have done all the steps in this checklist correctly, you can expect a successful partnership with an investor that paves the way for the expansion of your e-commerce business.