How Lenders Determine The Loan Limit For An Online Seller

E-commerce in India is growing at a rapid pace. It’s a highly competitive space as it gives opportunities to thousands of small sellers as well as big brands. However, to compete with the larger players, several sellers face the challenge of sufficient capital.

Be it in day-to-day operations, meeting sudden demand rise or to build a brand value, capital is all that you need to keep your venture growing. Loans are one of the most convenient financing options available for most online sellers. This is to expand their business and to manage gaps in cash flow. Be it a big brand or a small seller, financial backing is much needed to grow on e-commerce platforms.

Leading e-commerce companies have tie-ups with many financial institutions such as banks and NBFCs. These partnerships help encourage sellers on e-commerce platforms by providing them finance, mainly in the form of working capital.

Many financial institutions are working in collaboration with e-commerce companies. They have rolled out financing schemes for their online merchants and sellers. Lenders collect the database of sellers from the partnered e-commerce company. They then determine the quantum of loan and the interest rate for the potential borrower. Usually, loan amount varies from Rs 1 lakh to 100 lakhs.

Some lenders offer higher loan amounts depending on the pattern of the business. These e-commerce loans are offered to online sellers at a competitive rate with flexible repayment tenures.

Interest rate offered varies from 11% to 15 %, depending on the various factors and business record of the seller. It involves a quick and easy application process and minimum documentation.

E-commerce loans can be applied online through a simple process of form filling. Approvals are instant in most of the cases. Seller should be registered with the respective e-commerce company to avail the financing scheme. Usually, e-commerce loans are unsecured loans, i.e. loans without any collateral.

Lenders focus on many records related to the seller. Here are some of the Influencing factors based on which lenders determine the quantum of e-commerce loan:

1) Cash Flow Management: 

When you are selling products online, it’s important to ensure healthy cash flows. Online sales are quite difficult to predict, especially during the festive season and on big sale days. Failure in your marketing strategy can leave you with a lot of inventory that you could not sell. Seasonalities are common in the online selling business. You may end up facing cash flow problems, which ultimately lead to a financial crunch. Effective management of cash flows is a vital element. Lenders take your cash flow forecast statements into consideration while determining the loan limit.

2) Past Record:

Lenders take into consideration the entire business record of the seller since inception of the enterprise. Some of the documents taken into consideration are:

  • Business license,
  • Incorporation or registration details
  • Timely payment of sales tax etc.

The lender will then check your business plan and the performance since inception. They do this to understand the pattern and size of your business. So, be mindful of maintaining a good business record right from the onset.

It’s important for online business owners to keep their records updated. With good records, you may get a preferential rate on credit.

3) Operational History: 

Numbers of years in business counts more in getting the e-commerce loan approved. Generally, most of the financial institutions provide e-commerce loan to online sellers with more than a year of operation. The biggest fear for lenders when providing loans to online sellers is the possibility of default. Hence, stability of business is taken into consideration. Your entrepreneurial experience plays a major role in getting a credit facility for your online business.

4) Return on Sales: 

The efficiency of your business is measured basis the return on sales. Lenders consider the ratio of profit and sales to determine the credit limit that they can offer. The loan amount is determined by lenders based on your sales records of the last six months.

5) Type of Business: 

A lender decides the percentage of finance that they can offer to an online seller. It depends on the type of business. If your business is fast moving and the frequency of buying such products is more, you are likely to get higher loan.

6) Customer Satisfaction and Review: 

Earning customer loyalty and trust is key to being successful in online selling. The first impression of a seller needs to be good for customers to consider purchasing from the seller. Positive customer feedback will ultimately lead to more business. This creates more demand in the online marketplace. Customer review and rating defines your service quality. This helps you in building brand loyalty on the e-commerce platform. High customer satisfaction will ultimately boost your sales. This creates competitive advantage for you in the online marketplace. Lenders consider these elements to evaluate the level of your service quality.

CONCLUSION

With many e-commerce companies collaborating with financiers, availing credit for online businesses is no longer a challenging task. As lenders partner with e-commerce companies to offer customized finance solutions to e-sellers, more opportunities are available for new entrepreneurs to explore the online selling business.

Raising working capital for an online business is now convenient. It has become easy with the financial assistance from e-commerce companies.

With the help of details like:

  • Cash flow forecast,
  • Number of years of business experience,
  • Profitability,
  • Sales volume
  • Customer satisfaction report, etc.

Financial institutions are able to underwrite e-commerce loans for online sellers.