Dropshipping can be a very low-cost way to start an e-commerce business. You can think of it as using a virtual warehouse for products that a third-party ships directly to your customer after they place an order on your website. No need to store inventory in a dedicated warehouse or in your garage and very little upfront capital is required – so where do the costs come in and what are the different sources of funding for dropshipping? 

What are the costs in setting up a dropshipping business?

While it’s true that a dropshipping business can be set up with minimal cost, it really depends on how quickly you want to grow and what your goals are for the business. Some social media influencers have touted dropshipping as a ‘get rich quick’ scheme, set up an online store for free and make a million in your first month. If it really was that easy in reality, everyone would be doing it and for the very few that have managed this, they will have had substantial capital outlay to achieve it. 

The main expense you’ll need to consider is an online storefront. This can cost nothing or as little as a few hundred dollars to set up using a website building service such as Shopify or Wix plus you’ll need to subscribe to monthly plans ranging from $9 (basic store) to $2,000 (big store with advanced features) depending on the size of the store and how much revenue you’re generating.

Up to the point of launching your store, you can invest very little, however, expenses can start creeping up if you decide you want to hold your own inventory and it won’t be a case of ‘build it and they will come’ – once the website is launched, you’ll need to invest in marketing to drive interest and visitors to your store. It’s fair to say a certain level of knowledge with online marketing funnels, influencer marketing, content creation and social media platforms will be necessary to take your store to the next level and it might be that you need to hire someone experienced to help with this; otherwise it could be a steep learning curve which delays ability to grow in the early stages. 

A viable business with realistic expectations

Lots of dropshipping startups start out small with a nominal amount of expenditure and build very successful online businesses over time. With good products and marketing and the agility to adapt to current trends, it’s more than feasible to make a good full-time income from your business. 

The volume nature of the business model means balancing costs and profits can be a little more complicated however because;

• Margins are lower than inventory-holding e-commerce businesses because you’re not benefiting from any bulk supplier discounts and you may have to pay fees to suppliers for providing the dropshipping service;
• If you’re using a selling platform such as Amazon or Ebay, rather than selling through your own site, you’ll need to factor in their sales and listing fees.
• The low capital requirements to enter the market results in more competition and prices therefore have to be kept low to compete.
• Marketing costs for Google ads, SEO and affiliate marketing may be more costly in a highly competitive market.     

What are the funding options open to e-commerce businesses? 

Although it can be a lucrative business opportunity, launching a dropshipping business is viewed as slightly more risky than other ventures. When you approach a traditional lender for a conventional bank loan, they’ll need full visibility of your business plan and projections and be confident that you’ve done your research into market viability. Anyone can get into the industry without prior experience but this can be a hindrance to obtaining finance.

Bearing in mind that any new business has around a 30% chance of failing within the first couple of years and the main reason for that is a lack of product-market fit, you can understand why lenders are reluctant to fund new business owners with no prior industry experience and a lack of trade history. 

What are the options if you can’t get bank funding for dropshipping?

Credit Cards – It may be easier to qualify for a credit card and you might even get an introductory deal with 0% APR, but following this the interest rate compared to other finance can be on the high side. Sometimes a credit card won’t be suitable for paying some expenses but it may be a short-term solution if of course you know you can repay it. 

Business Line of Credit – A business line of credit is a pre-approved amount of funding that can be drawn upon as and when needed and you only pay interest on the portion that is utilized. This is a good resolution for dropshipping businesses looking to pay expenses in an ad-hoc way, however, new businesses can find it hard to qualify. 

Inventory Financing or Purchase Order Finance – If you want to be able to benefit from wholesale prices by buying in bulk, inventory or purchase order financing can offer the adaptability you need to secure volume discounts on in-demand or seasonal products so that you can maximize your margins and protect your supply chain. 

Grants – There are grants available to startups in all kinds of industries and groups. A grant is essentially free money, it doesn’t have to be repaid but on the flip side, the process to qualify for one is generally laborious and lengthy and the competition is high. US-based online bookkeeping company Bench provides a great overview of the grant options available to business owners and OpenDigits summarizes what’s on offer for Canadian businesses and startups by province. 

Non-traditional finance for dropshipping entrepreneurs

Big banks approved just 13.5% of small business applications in May 2021 year-on-year whereas alternative lenders approval rates increased to 24.3%. The main reasons for rejection (63%) were because the business didn’t have enough collateral to show or they were too fresh in business for their credit history to be assessed. Banks are becoming more risk averse as we emerge cautiously from the pandemic situation and enter into a period of unknown for small businesses that have relied on federal support for the 18 months prior. The most viable e-commerce business is therefore more likely to be turned down for conventional bank finance than it is to be approved. 

Alternative finance providers such as Sallyport Commercial Finance are growing every year and  increasingly funding businesses that would otherwise not have the opportunity to get off the ground. Our progressive application processes take a more holistic view of your business and whether it has the potential to succeed – contact us today to find out how we could help you turn your dreams of becoming an e-commerce entrepreneur into a reality.