Become an Onyx IQ Insider. Subscribe to our Newsletter Today

Subscribe to our Newsletter Today

E-Commerce and Merchant Cash Advances: An Overview for Lenders

A street sign with the name “e-commerce.”

The rapid rise of e-commerce has undoubtedly transformed the business landscape, creating new opportunities for entrepreneurs worldwide.

However, with large retailers dominating the online marketplace, small enterprises (SMEs) must continuously adapt to remain competitive—an ongoing challenge that requires financing.

And as SMEs struggle to secure traditional loans, merchant cash advances (MCAs) can provide a crucial lifeline. Indeed, with fast access to funds and flexible terms, e-commerce SMEs are empowered to flourish.

In this article, we’ll dig into the new possibilities that e-commerce brings to alternative lending, and MCA providers specifically. 

The Rise of E-Commerce

E-commerce is far from being a buzzword. It’s more of a business revolution—if businesses aren’t selling online, they’re missing out on huge revenue opportunities.

The facts are clear: the global and domestic e-commerce markets show no evidence of slowing down. Recent data shows: 

  • Global e-commerce sales will grow by 10.4% in 2023, with almost 21% of retail purchases occurring online. 
  • 16.4% of retail purchases in the U.S. will take place online in 2023.
  • The national e-commerce market will reach over $1.1 trillion in sales.
  • As consumers crave convenience, e-commerce sales are set to soar, reaching 31% of all sales in the US by 2026.

But what’s behind this phenomenon?

SMEs have a lot to gain when it comes to adopting  e-commerce: 

  • Transcend geographical boundaries: SMEs can tap into the global market through online platforms, marketplaces, and digital storefronts. This allows them to expand their customer base with just a few clicks.
  • Reduce overhead costs: by eliminating the need for physical storefronts, SMEs cut down the associated costs, such as rent, utilities, and maintenance. E-commerce’s flexibility also helps streamline inventory management, and lower the risk of unsold stock.
  • Enhance the customer experience: consumers tend to prefer shopping online due to the convenient and accessible nature of e-commerce. Merchants who prioritize quick and transparent ordering, payment, and communication processes will gain customer loyalty.

These advantages point toward potentially higher profit margins, making e-commerce an ever-increasingly appealing industry for enterprises, small and large. 

Yes, E-Commerce Businesses Need Funding Too

Although costs for e-commerce SMEs are definitely lower than brick and mortar enterprises, they still require funding to finance operations, including:

  • Website development.
  • Inventory and logistics management.
  • Order fulfillment.
  • Marketing efforts.

Then there costs that are more specific to e-commerce, such as cybersecurity and multi-language content.

The Problem With Traditional Lending

When looking for funding, SMEs typically consider traditional banks and credit unions first. 

However, their risk evaluation methods may not be suitable for all SMEs, especially those with e-commerce models that are fundamentally different from traditional retail businesses.

Moreover, traditional lenders base their decisions on criteria such as credit history, credit score and revenue, while e-commerce enterprises have unique success indicators.

And when it comes to new SMEs, or those that have taken hits, it’s common for them to be denied financing altogether.

This is where alternative lending solutions such as merchant cash advances play a crucial role. 

The Opportunity of MCA in E-Commerce

With MCAs, e-commerce SMEs can access capital quickly and conveniently, enabling them to purchase technology and invest in inventory, marketing campaigns, or any other growth initiatives. 

By bridging the financing gap for small businesses, merchant cash advances empower e-commerce SMEs to compete on a level playing field—and unlock new opportunities for success.

One notable player making a significant impact in the SME lending space is Shopify Capital. Launched in 2016, Shopify Capital offers MCAs specifically tailored to e-commerce enterprises, with a simple application process and flexible repayment structures.

Shopify Capital has since experienced remarkable year-over-year growth. In the fourth quarter of 2022 alone, the company provided $393.2 million in capital to merchants across the U.S., Australia, and the U.K.

The success of Shopify Capital shows that the SME e-commerce lending market is rich soil for merchant cash advance providers.

Strategies for MCA Funders in the E-Commerce Lending Market

MCA funders can take advantage of the booming e-commerce market by tapping into a large pool of SMEs seeking alternative lending options.

However, winning clients demands a strategic approach, as you must tackle online SMEs’ distinct challenges—not to mention the growing competition of SME lending players.

Here are five strategies you can follow to position yourself in the e-commerce lending market.

1. Develop Underwriting Expertise

Evaluating the creditworthiness of e-commerce merchants requires expertise and knowledge of industry specific metrics and KPIs.

Distinguish market leaders from stragglers by relying on the appropriate data and understanding how to analyze it.

To succeed, merchant cash advance providers must gain specialized knowledge of customer acquisition costs, order fulfillment metrics, chargeback rates, and other critical factors specific to e-commerce enterprises. 

This may involve analyzing your own corporate historical data (assuming you have the tech to do so), and engaging with data consortiums to better finetune your processes and KPIs for working with e-commerce SMEs.

2. Understand the Market

E-commerce SMEs encounter different risks than those of traditional enterprises—from intense competition to supply chain management.

To properly service this market, you must deeply understand these dynamics and nuances.

Conducting thorough market research is critical to stay up-to-date on the latest trends and upcoming advancements. Get started by visiting major e-commerce platforms such as Amazon, Walmart, Alibaba, and Rakuten. 

To go the extra mile, make sure you also explore specific niches within the e-commerce market, as well as varying models (e.g., B2B, B2C, B2B2C, etc.). 

3. Offer Specialized Products

Armed with the knowledge of the unique financing needs and market gaps affecting e-commerce SMEs,  you can create and promote tailored MCA solutions that align with their variable revenue streams and operational necessities.

By offering flexible repayment structures, customized terms, and competitive rates, you can quickly gain a place in the market.

4. Establish Partnerships

Strategic partnerships can also be a valuable avenue to become a trusted e-commerce lending provider.

By joining forces with complementary service providers like digital marketing agencies, e-commerce consultants, or fulfillment centers, you  can cultivate mutually beneficial relationships.

Via these arrangements, you can then offer funding to your partners’ clients. This fosters a symbiotic ecosystem that caters to the comprehensive needs of e-commerce SMEs.

5. Implement Agile SME Lending Technology

To stand out in the increasingly crowded e-commerce lending marketplace, you must make it effortless for merchants to access funding.

A sure way is by adopting agile loan management software, so you can cater to the time-sensitive pressures of e-commerce SMEs by expediting MCA approvals and delivering funds rapidly—all while providing a seamless user experience.

Supercharge Your E-Commerce SME Lending With Onyx IQ

As the e-commerce landscape continues to grow, the alternative lending industry’s focus on merchant cash advances will play a crucial role in supporting the success and expansion of e-commerce SMEs.

With a strategic approach and the right technology, MCA funders can increase their portfolio and create long-lasting relationships with e-commerce SMEs seeking reliable and flexible funding solutions. 

If you’re an MCA funder looking to expand your services to e-commerce SMEs, consider supercharging your business with Onyx IQ.

Our all-in-one digital lending platform is designed to automate your lending tasks and workflows, allowing you to fund more deals with confidence.

Click here to schedule your free demo of Onyx IQ today.

Share article:

Become an Onyx IQ Insider!

Stay current with monthly recaps of today’s alternative lending news from our industry experts.