Why Banks Want eCommerce to Fail

Many eCommerce businesses find themselves seeking the same financing options that traditional businesses do, but this may prove difficult because banks are not rooting for eCommerce. Online businesses are still a relatively new phenomenon, and banks have been around for a very long time. 

Banks have decades of experience lending to and financing traditional brick-and-mortar businesses, but they don’t have the same kind of experience and data to work with regarding online companies. Anything they don’t have the data on simply doesn’t work in their eyes, especially in the long term. 

Even though eCommerce and online businesses have innovated business operations such as customer loyalty, inventory management systems, and advertising, banks are still refusing to help finance eCommerce businesses and hope they fail. Here’s how we know:

Low Approval Rates 

Banks that look at a business typically ask for a copy of a cash flow statement, net income, or income statement as a part of their evaluation process. Even if all of your statements look good, the odds are not in your favor. Banks are used to lending to and financing businesses with physical locations, excluding an online business. 

Approval rates are also low with online businesses because most eCommerce brands are small or medium in terms of scale. Many small and medium-sized companies do not have the credentials that many banks evaluate in the lending process. Because of this, banks must resort to a manual review process in which a specific person must look over a business’s website. This means banks have to spend more time looking into the validity and risk of funding a business than they‘d like. 

Long Application Process

If you’re looking for funding for your eCommerce business, chances are you need it quickly to purchase raw materials, inventory, supplies for your business’s product or service, or to cover overhead costs. Unfortunately, banks have very long application processes. This makes it difficult to acquire and utilize bank financing for the immediate needs of an eCommerce business. 

Let’s say you check your inventory levels and see that they’re low, which means you need to purchase finished goods to ensure your supply chains continue to run smoothly. You’re short on cash, so you decide to take out a bank loan to finance the cost of finished goods for your inventory. You start the application process, but there’s an extensive amount of paperwork you have to fill out, and then the paperwork needs to be reviewed. After completing the paperwork and having it reviewed, some banks require representatives to visit the requesting business in person. Meanwhile, you’re unable to purchase the inventory you need to keep an adequate safety stock

Long, tedious application processes prevent eCommerce businesses from accessing the funds they need to keep up with the fast pace of the eCommerce market. That can mean running out of inventory when sales spike, losing out on time-sensitive discounts from suppliers, and lost profit. 

Unwilling to Adapt

Banks haven’t put much effort into accommodating financing options for online businesses. In the age of the internet, you’d think banks would jump at the chance to offer services to a larger market, but banks have a few bones to pick with eCommerce. It seems that eCommerce threatens the business model banks currently use. 

Large businesses needing $1 million to $20 million in loans with brick-and-mortar establishments are the kinds of businesses that banks tend to target. An increase in smaller online businesses may pressure banks to adjust their underwriting models, which doesn’t seem like something they’re willing to do. Because banks see online businesses as a temporary fad and a demographic that doesn’t meet traditional business models, banks aren’t really interested in the rise of eCommerce. 

Straying from the Traditional Business Model

Amazon is an eCommerce powerhouse, but banks are unlikely to finance you even if you’re making substantial revenue via Amazon. That’s because they don’t take FBA inventory very seriously as a business asset. Remember, inventory techniques have recently changed due to the increased presence of online businesses. 

Inventory management software is also a relatively new tool that online companies greatly benefit from using. However, if your inventory is not in a physical location owned by you or your business (goods housed and sold in a retail store) banks don’t view your inventory as an asset valuable enough to make your business eligible for funding.

Banks are also largely unfamiliar with new business metrics. Even if your social media engagement, reach, reviews, brand awareness, and sales rates are impeccable, these metrics mean nothing to banks. Banks heavily rely on business and personal credit during the application process. Even if your business is taking off, a bank will be highly unlikely to fund you if your personal credit and business credit are less than optimal. 

Temporary Fad

It’s no secret that marketing techniques go in and out of style, but that’s unlikely for online businesses. Still, banks are not jumping on the eCommerce bandwagon. The COVID-19 lockdowns brought about a larger influx of online sales, and it’s not likely to slow too much even after restrictions are fully lifted. 

According to Digital Commerce 360, eCommerce made up 21.3% of total retail in the United States in 2020, while retail stores experienced an unprecedented number of bankruptcies. Even before 2020, eCommerce had been steadily growing. In 2010, eCommerce made up 7.2% of U.S. retail sales in the United States, steadily rising to 14.3% by the end of 2018. 

Wouldn’t this data suggest that eCommerce is a viable way of conducting business, and therefore worthy of bank financing? It would seem so, but banks are still lagging behind the growth and innovation that’s taken place in the eCommerce marketplace. 

Some of this innovation can be credited to social media. Social media platforms have given eCommerce businesses a considerable edge in the retail marketplace. Social media marketing has also made marketing easier and more efficient for online retailers. 

A Better Alternative

Payability offers eCommerce businesses a way to access funding options without the hassle of dealing with banks. Payability’s Instant Advance allows you to get cash advances based on your future eCommerce sales while Instant Access gets marketplace sellers paid on delayed terms by the marketplace paid the next day, every day for their sales. Plus, you do happen to also qualify for bank financing, you still use Payability alongside it. 

Payability’s application process requires absolutely no credit checks and takes less time than traditional bank applications to suit the needs of busy eCommerce business owners. You can get approved as soon as the next business day. Payability is designed to help eCommerce businesses grow and thrive by building products around their unique needs. Apply today and get the capital you need to grow your eCommerce business. 

Victoria Sullivan
Victoria Sullivan is a Marketing Manager at Payability. She has over eight years of social media, copywriting and marketing experience. Prior to joining the Payability team, Victoria developed social media content and strategies for top technology brands such as Skype and Samsung. She holds a degree in Advertising from Syracuse University’s S.I. Newhouse School of Public Communications. She can often be found in a yoga class or working on her fashion blog.

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