E-COMMERCE FINANCING

Submitted by

NANDHINI S

M.Com 1st Year

Dr. RV Arts and Science College

 E-COMMERCE FINANCING
ABSTRACT

E-Commerce stands for electronic commerce and performing business online and
electronically. It has entirely transformed the conventional perception of business.
E-Commerce deals with the buying and selling of goods and services with the help of internet
and computer networks. The Indian E-Commerce market is experiencing rapid growth, with
estimates suggesting that it will surpass $62 billion in 2023. This growth is driven by the
increasing availability of internet access and smart phone penetration in India, as well as the
growing number of consumers and businesses turning to online platforms for their shopping
and sales needs. This research has focused on the study of E-Commerce financing by
understanding the features, benefits and process of E-Commerce loans in India. This research
has adopted the qualitative research approach and findings of this study has further indicated
that E-Commerce will see rapid and continuous growth in India with the support from
E-Commerce financing options.

OBJECTIVES

• To provide detailed understanding of the meaning, types and process of E-

Commerce Financing. To provide the overview of E-Commerce loans in India.

INTRODUCTION

E-Commerce, is a business model which enables any commercial entity to conduct

business on electronic platform namely, the internet. The internet space is highly competitive,
the dynamics of e-seller is different as compared to the conventional or traditional seller.
There is a need for the e-seller to consistently replenish inventory, effectively manage
logistics and supply chain management. There is a need for quick and flexible working
capital loans. Most banks cater to this need by extending E-Commerce loans. E-Commerce
financing is a funding solution that provides working capital for web-based businesses.
Companies use E-Commerce Financing to stabilize the cash flow and to cope with payments
obligations such as staff’s wages, tax and utility bills. E-Commerce financing is also used to
make investments like buying more stock or invest in structural transformation. The solutions
for your E-Commerce needs include: lines of credit, micro-loans, invoice factoring Invoice
discounting, Invoice Financing and Supply Chain Finance.
RESEARCH METHODOLOGY

This paper reviews the literature on the basis of secondary data collected from various
references which already exist in published form such as articles, books, newspapers,
national/international journals, magazine, annual reports, government and non-government
publication and company official websites.

RECENT REFERENCES:

1. The Indian E-Commerce industry is experiencing rapid growth, with estimates

suggesting that it will surpass $62 billion in 2023 and follow a minimum 14% year-
on-year growth rate until 2028. This presents significant opportunities for businesses
to tap into the online marketplace and grow their sales and revenue.
Source: Chitrangana.com.

2. The E-Commerce market in India is estimated to be worth $38.5 billion in 2021, and
is expected to grow to $84.0 billion by 2025, at a compound annual growth rate
(CAGR) of 18.4% (Source: Statista).

3. In 2020, the online retail market in India was worth $26.8 billion, and is expected to
grow to $73.7 billion by 2024, at a CAGR of 23.2% (Source: Mordor Intelligence).

4. The number of online shoppers in India is expected to reach 320 million by 2025, up
from 120 million in 2020 (Source: Statista).

5. The top three E-Commerce companies in India by revenue are Flipkart, Amazon, and
Paytm Mall (Source: Economic Times).

Participants in E-commerce Financing:

1. The Online Seller – the applicant requesting financing. This could be a trading firm, a
manufacturing company or a service provider.

2. The E-Commerce Marketplace Platform – a worldwide & well-known digital platform

selling goods. For eg., eBay, Amazon or Alibaba. They often have a warehouse to store
goods.
 3. The Financing Platform – a reputable financial lending institution providing liquidity
by advancing funds to the online seller.

Why do Online Sellers Need E-Commerce Financing?

E-Commerce businesses have long and irregular cash cycles and banks are usually
unwilling to lend to such firms. Marketplaces like Amazon usually pay the online sellers on a
14-day cycle. Many of these online sellers pay back their suppliers 30 or 60 days after
inventory purchase.

This puts pressure on cash flow, extending the cash cycle. Cash flow issues on the
balance sheet are why most eShops apply for E-Commerce financing. Creating a new digital
image of your shop can be time-consuming and costly. Key Opinion Leaders (KOL), a.k.a
influencers and content creators play an essential role in the E-Commerce ecosystem and
growth.
These marketing expenses take a heavy toll on your business growth.

With E-Commerce financing, sellers can unlock working capital to cover advertising
and affiliate programme expenses, and purchase additional inventory, close the gap between
the time the revenues are generated and the time payment is made by the marketplace and
speed up their cash flow cycle.

How Does E-Commerce Financing Work?

Generally speaking, the Financing Company advances capital to the seller. The seller
pays back the lending company every 15 days using the revenues from the sales on the
E-Commerce platform. The credit team of the financing company assesses the feasibility of
the application. By doing so, the team can perform a thorough risk analysis. The team
analyses qualitative and quantitative variables when assessing the financing needs. For
Yearly turnover, Cash flow (for example the past 12 months), Stock analysis (flow of goods,
materials management), Sales performance. Thus, the E-Commerce Financing Platform
grants credit limits (credit allowance) to the seller.
Automation

The automation of E-Commerce financing relies on the constant communication of

the platforms. To guarantee a direct and continuous exchange of information, the API is
set-up. The financing company through API (Application Programming Interface) accesses
the E-Commerce marketplace platform. By doing so, the finance provider can monitor the
seller’s activities-real-time analysis of the stocks available at the warehouse and payment
records. In conclusion, automation reduces the risk of human error and minimizing the
interaction with the seller. Since the systems are linked up, the financing platform transfers an
Advanced Payment to the seller’s bank account. The advanced payment is based on the credit
allowance granted during the application. As we know, the E-Commerce Marketplace
platform handles the goods and revenues generated. Thus, monitoring the seller’s activity
such as stock analysis, sales and payments. E-Commerce marketplace platforms usually
repay the sellers on a bi-weekly basis. Therefore, the marketplace will transfer the funds
directly into the financing company’s bank account. Once the original Advanced Amount is
fully repaid, the financing company algorithm analyses the performance of the seller. Hence,
the funding process can start again. In conclusion, the dynamic renewal and transfer of
funding is an entirely automated process.

The Process of E-Commerce Financing – An Example

Think about any time you’ve bought a product online. You’ve either used an app, or
the website itself. For this example, we’ll say a customer buys a hat from ‘Hats-For-All’
through the Amazon mobile app. ‘Hats-For-All’ needs liquid capital to cover its
manufacturing costs for 600 new hats at a cost of $5,000. ‘Hats-For-All’ is looking to
increase sales through a marketing campaign that has tied up its liquid capital, so it cannot
afford to cover its manufacturing costs in the short term. ‘Lender Co.’ offers ‘Hats-For-All’
an advanced payment to cover these costs. Once a request for funding reaches ‘Lender Co.’,
an estimated advanced payment reaches the supplier’s (Hats-For-All) bank account. The
estimated payment is based on what the supplier needs ($5,000) and what the financing
platform is willing to provide (in this example, it is willing to fund the full amount
requested). The supplier then sells their goods to the customer, with the transaction recorded
on the E-Commerce platform as evidence of goods sold. In this case, the customer receives
their custom hat, and the transaction is recorded on Amazon’s database as evidence. The
revenue generated from the sale of goods is then collected by the E-Commerce marketplace
platform (Amazon) and transferred to the E-Commerce financing platform (Lender Co.).
Depending on the finance agreement, repayments may be made directly from each E-
Commerce transaction, or the E-Commerce business may repay a percentage of its monthly
or weekly revenue.

Types of E-Commerce Financing and Alternative Financing Services

Revenue-based Financing:

A funding option that allows a business to pay back a loan through a percentage of
sales revenue. ‘Variable collection’ agreements see businesses repay a flexible portion of
their revenue until the loan is repaid, plus an agreed fee. ‘Flat fee’ agreements see a business
pledge to pay a fixed amount of their turnover for a set period (for example, 2% for five
years) – which can be more attractive in the short-term but expensive long-term.

Merchant cash advance:

E-Commerce businesses borrow based on their turnover for a fixed period (e.g., six
months), with repayments made automatically each day from their payment receipts. There is
also a range of alternative financial services that are similar to E-Commerce financing in that
they offer businesses immediate access to liquid capital. However, these typically differ in
how the business qualifies for the service and in the repayment requirements. These include:
Invoice Financing – When a lender ‘buys’ a business’ unpaid invoices, giving them instant
access to the funds they’re owed by customers. The finance provider then owns the invoice at
its full value, receiving payment directly from the buyer at the expiry of the invoice.

Asset-Based Lending:

An agreement in which businesses borrow money against the value of their stock. If
repayments can’t be met, the lender seizes the collateral stock.

Business Loans:

A straight lump sum of money to help pay for a business’ day-to-day operating or
startup costs. This loan must be paid back over an agreed period with interest.
Venture capitalists:

It is a bit more complex than funding by banks and non-banking financial institutions.
The beneficiary undergoes serious due diligence to assess the viability of the online selling.
The funding is provided as dilution in equity.

Features of E-Commerce Loans in India:

Most banks have separate wing to evaluate and extend E-Commerce loans to individuals,
firms and companies.

• Type of unsecured loan, no collateral requirement

• Loan value extended could range between Rs. 1 Lakh – Rs. 1 Crore
• Loan tenure can range between 90 – 270 days
• Interest payment 1.5% onwards
• Flexible repayment mode – monthly, bi-monthly repayment schedule available
• Loan sanction is capped at ‘x’ times of sales revenue per month

Benefits of E-Commerce Loans:

Among the many benefits that one can cite, these business loans involve lower
documentation and are extended with minimal processing. Thus, the loans can be availed in a
quick manner. The aspect of documentation is critical especially for any business man, since
establishment of stability of income becomes a challenge. There is also the benefit of flexible
repayment, fortnightly repayment facility is also available. These loans are typically used for
working capital and inventory management. These loans cater to established players and to
start-ups as well. The loans are also extended for shorter period, thereby making this
convenient rolling credit arrangement.

Lenders of E-Commerce Loans

While most banks extend these types of loans under their personal loan product, SBI
have a separate product called the e-Smart SME E-Commerce Loan. The loan is specifically
structured to benefits the Small and Medium Enterprises (SME). This product was launched
in collaboration with Snapdeal, one of India’s largest retail E-Commerce dealer. Following
the launch of E-Commerce loans by SBI, there are other banks such as Canara Bank,
Syndicate Bank, Bank of Baroda and Punjab National Bank which have launched their own
E-Commerce loans. Some of the NBFCs that offer E-Commerce loans under their product
line are Tata Capital, Reliance Capital Limited, Bajaj Finserv, DHFL, Indiabulls, Fullerton,
Cholamandalam Finance etc. There are other institutions which specialize in extending
E-Commerce loans such as Capital Float, BankFin, Gromor Finance etc. Apart from banks,
there are many financial institutions and venture capitalists who prefer to fund the
E-Commerce segment. They see tremendous value and growth in this space. Venture
capitalists are on the look-out for E-Commerce companies which have not matured in the
market. They look at funding opportunities which are in nascent stages. By providing them
funding at this stage, venture capitalists help them increase the depth of their operations. The
investment in such businesses has become apparent, there are known venture capitalists
whose name being associated with any E-Commerce company could potentially increase the
brand value of the company. This could potentially result in increased revenue. The ideology
of investing in E-Commerce companies at nascent stages is to enable them to increase their
market share substantially and gain profits. Several banks have also invested their funds in E-
Commerce companies in the hope for higher returns on such investment. These investments
reflect in the Balance Sheet of the bank on the assets side.

How to select the right E-Commerce loan?

1. Calculate all costs associated with sale on internet platforms

Selling a product online needs proper market research to assess the competitors
pricing of similar products. While pricing the own products, one must keep in mind all the
costs involved in moving to the online platform like registration costs and ancillary charges.
All these costs must be considered, and an assessment must be made to ascertain the loan that
needs to be borrowed.

2. Low interest rate and flexible repayment schedule

Like all other loans, E-Commerce loans also have the interest rate. This is one key
component that needs to be considered. A comparison must be made across various lenders
and the one with the most conducive terms should be chosen. Typically, these loans are taken
for short term.
3. Fast and easy disbursement of loan

These loans are designed with minimal processing requirement. They require
minimum documentation and are processed with low charges compared to other loans.
Typically, the loan value would be ‘x’ times the monthly revenue of the business. There is a
need to establish stability of income while borrowing funds, especially if the loan is extended
as an unsecured loan (without collateral). In other cases, the inventory is provided as
collateral against the E-Commerce loan.

4. Underlying pledge for E-Commerce loans

If the loan is extended as an unsecured loan by a bank or NBFC, or any other

financial institutions, the borrower is required to pay it back along with interest rate. In other
cases, when the funding comes from venture capitalists, there may be equity dilution. The
borrower must forego a part of ownership in the business.

Eligibility criteria for availing E-Commerce Loans from financial institution

• The e-seller should have registered the business and should have been in operation for at
least 6 months Business should have an established presence in atleast one of the popular E-
Commerce platforms – Amazon, Flipkart, Snapdeal, Shopclues, Alibaba, Paytm etc.,
• A stipulated volume and revenue per month should be achieved, this would vary from
one lender to another
• A decent credit score which will enable the borrower to negotiate favorable terms for the
E-Commerce loan

CONCLUSION:

According to industry experts, 2023 will continue to witness innovation in marketing

and customer experience by the small financing of banks and other institutions. Overall,
ecommerce businesses will look to adopt sustainable growth strategies instead of growth at
all costs. They believe that the next ecommerce wave is set to come from the smaller cities
and towns of India. Further, experts anticipate the localization of ecommerce in 2023, as
more and more local brands and stores will join the government’s ambitious digital
commerce project. Overall, the next few years will be about realizing the maximum potential
of ecommerce, expanding into smaller towns and rural areas of the country and building for
the upcoming wave of ecommerce users.