Like brick-and-mortar businesses, e-commerce companies need capital for working capital and fixed asset purchases. To help meet their financing needs, they’ve historically turned to alternative online lenders. Nontraditional lenders may provide needed capital, but they also can saddle e-commerce companies with onerous terms and high interest rates.
As the online distribution channel has matured and become more mainstream, traditional lenders have become more open to lending to e-commerce companies. Before adding these types of companies to your loan portfolio, it’s important to recognize how their business model differs and consider adjusting your underwriting process accordingly.
Here are three ways you can vet loan applications from e-commerce companies.
1. Learn about customer acquisition
Online marketing expense consumes a significant portion of an e-commerce company’s budget. Ask for a detailed analysis of the company’s marketing efforts, including the total spent on each campaign and the effective acquisition cost of each customer in the previous 12 months.
Focus on conversion rates over time, such as the percentage of those targeted in a campaign that converted or the number of visitors to the company’s site that became customers. Note any decreases in the conversion rate and ask the prospective borrower to explain the underlying reasons for the drop.
2. Analyze sales activity
Ask for direct access to the company’s historical sales data. Focus your analysis on the number of orders, their average value and distribution throughout the year. How many customers come back to purchase again — and are repeat customers buying more, or higher-margin, products? Is the company offering convenient reorder options? How many bad credit cards is the business dealing with — and why? By doing so, you may uncover an opportunity to provide access to a merchant account to process credit card transactions faster.
3. Review cart abandonment rates
If the company sells products or services via its website, ask for current and historical shopping cart abandonment rates. Customers abandon their carts for several reasons, including high shipping costs, lack of trust when asked to provide credit card numbers and frustration regarding the checkout process.
Ask the company if it has a strategy in place to target customers that abandoned their carts. Regardless of the reason, abandoned carts translate to lost revenue.
E-commerce companies need access to lines of credit and term loans just like their traditional counterparts. Adjust your mindset to take advantage of this growing market niche.
Questions? Please contact David Lee at 404.874.6224 or fill out the contact form below.