30 Jun Ecommerce Financing 201: How to Make Your Finances Work for You (Not Against You)
This guest blog was provided by SellersFunding. SellersFunding relies on the idea that eCommerce is changing the landscape of retail globally as upcoming technologies change the way consumers behave. This continually-evolving ecosystem naturally creates new challenges that traditional institutions have trouble understanding.
From a young age, you’ve likely been told to steer clear of debt.
But this belief doesn’t tell the whole story—especially when it comes to growing an eCommerce business.
While using funding to buy depreciating assets probably isn’t the wisest thing to do, when you take on debt for things like working capital or long-term investments, debt can actually be your friend.
In fact, a Kauffman study found companies that receive funding achieve 30% more sales growth and a 50% increase in employees and almost 50% of businesses who apply but don’t secure funding say they experience challenges expanding into new markets.
In other words, access to the right kind of capital is everything.
With more and more eCommerce funding options now available, there’s no need to fear taking the leap (provided your business has its ducks in a row).
If you’re keen to kickstart a winning streak in your business, we’ll show you how to set yourself up for success with the helping hand of eCommerce financing.
Let’s dive in.
Want to become the next eCommerce success story? Learn more about your funding options.
Ecommerce Financing 201: What We’ll Cover
- Why Ecommerce Financing Is Essential to Level Up
- What Kind of Ecommerce Financing Is Out There?
- How Does Ecommerce Financing Work?
- Securing Ecommerce Financing: The Inside Scoop
- Win with Ecommerce Growth Capital
- Become an Ecommerce Financing Success Story
- Tips for Crushing It in the Ecommerce Business Game Post-funding
- Let Ecommerce Financing Do the Hard Work for You
Why Ecommerce Financing Is Essential to Level Up
At this stage in your eCommerce journey, you’re probably well versed in the high and lows of managing cash flow.
One minute you’re on top of the world with more cash than you can count, and the next, it feels like you can barely scrape enough coins together to restock your inventory.
When you were a newbie, you could find a way to make it work. But as your operations become more sophisticated, your obligations stack up too.
Ecommerce financing is essential to support you through those growth spurts and the teething issues that come with them.
What Kind of Ecommerce Financing Is Out There?
Before we get into how eCommerce financing can work for you (and not against you), let’s go through some of the funding options available to eCommerce sellers:
- Working capital: You’ll take on working capital funding from an online provider to cover daily business expenses like staff, supplies and shipping. It’s a great way to stabilize cash flow—but it gets even better: unlike working capital for brick-and-mortar stores, you can use this cash for large investments like inventory or advertising and marketing when launching a new territory. (Need a boost in working capital? Check out our eCommerce funding options).
- Cash advances: You agree to sell part of your upcoming revenue at a discount and pay a fixed interest sum in return for upfront capital—meaning cash advances aren’t loans. They’re more like revenue share between you and your funding provider. It’s as risk-free as it gets in the funding space. (Got a high sales volume but need some extra cash? Find out how our cash advances can work for you).
- Invoice factoring: Got an accounts receivable arm to your business? Sell your due invoices to a factoring company at a reduced rate plus fees and the factoring company then gives you the cash.
- Crowdfunding: If you’ve got a great business idea or excellent sales skills, this one might be for you. You launch your campaign on an online crowdfunding platform, then people can then decide to invest in your business. There are three types: debt, donation, and equity crowdfunding.
- Peer-to-peer lending: This funding option turns traditional funding on its head as you secure eCommerce financing from a person instead of a banking institution. Plus, it’s often completed quickly and easily online.
- Angel investing: If you want to dodge taking out a loan and don’t mind selling a stake in the business to a high-net-worth individual in return for capital, you could consider angel investing. Most investors are experienced business owners, so you may end up with a mentor too.
How Does Ecommerce Financing Work?
Ecommerce financing helps online sellers gain access to capital for a range of functions like:
- Establishing or steadying working capital
- Branching out into new territories
- Buying stock and supplies
- Purchasing property and equipment
How eCommerce funding works depends on the financial instrument you choose.
For example, with angel investing you could receive a lump sum and then share the profits as they come in, while working capital loans tend to follow a more conventional repayment pattern.
Most eCommerce financing options will automatically collect funds. For example, with cash advances the capital provider takes its share of the funded store’s card takings.
Securing Ecommerce Financing: The Inside Scoop 🔍
Before granting or rejecting your application, most funding providers will perform a risk assessment on your business (and sometimes even your personal) financial health.
To boost your odds of a successful application with favorable terms, you need these things ready before applying:
- 12 months of selling history
- High sales volume
- Good cash flow
- Reasonable stock turnover
- Good liquidity
- Collateral and savings (personal and business)
If you meet these requirements (or most of them) not only can you get funded, but you can use the capital to grow your business.🌱
It can be intimidating to take this significant step forward. Like most business owners, your store has become like your baby: you’ve watched it grow from nothing, nurtured it, and now it’s time to help it stand on its own two feet—and that’s a scary prospect.
To help you make a choice you can feel great about, let’s explore how funding can transform your eCommerce business for the better.
How Ecommerce Growth Capital Can Help You Win
- Compete with the big dogs
Have a product you’re keen to launch? Or maybe you’ve uncovered another business vertical you’re confident you can crush?
It’s exciting—but there’s one thing cutting your celebrations short: you don’t have the capital to execute your ideas, so you have to sit and watch the bigger brands swoop in and take your spot. Double ouch!
With eCommerce financing, this frustrating situation doesn’t have to be your story.
The advantage of being a small business is that you’re nimble and can go from concept to product in weeks instead of months or years, unlike your larger competitors.
In fact, an Accenture study found that businesses with around 200 staff have agility rates 11-19% lower than their smaller counterparts.
With eCommerce financing on your side, you could be months deep into selling your new product (and looking for your next one) by the time the big brands have got through the mounds of red tape and politics. 🚀
2. Enough room to breathe and create
Don’t underestimate the effects of recurring money issues on your mindset, not to mention the strain on your finances and dampened creativity due to stress.
For example, you may have a great business but—thanks to issues out of your control, like inconsistent and unpredictable payments from your merchant platform (we’re looking at you, Amazon 👀)—you still struggle with cash flow each month.
This situation isn’t ideal because you need creativity and innovation to set your business apart in the sea of eCommerce sellers out there.
Ecommerce financing releases you from the constant scramble of trying to stay afloat, even if it’s only for a short time until you figure out a more permanent fix. Hello boosted productivity and morale. 📈
3. Make more money 💰
When you use eCommerce financing correctly, you can make a return larger than the amount you borrowed—making it a great vehicle for scaling your company. But always aim to make back your money and some in each project you pursue.
Remember, it isn’t a good idea to borrow money for depreciating assets (save for them), instead funnel your cash into revenue-producing activities to accelerate your growth.
- Marketing and sales initiatives: Think: launch parties, email marketing, PR, influencer marketing, and hiring sales reps to close more wholesale accounts.
- Branding: Invest in great photos, videos, copy, and logo.
- Product optimization: Add or remove features to your products based on customer feedback.
- Site personalization: Invest in AI software to customize the shopping experience to each visitor.
Become an Ecommerce Financing Success Story
Watch your debt
You made it through the vetting process and secured those all-important benjamins. Congratulations! 🎉
Not everyone achieves this, so props to you.
But here’s a word of caution: Don’t get carried away by the excitement of new possibilities and allow your debt to get out of control by taking on even more financing.
We live in a society that lives off instant gratification, yet this can be troublesome (just look up the horror stories surrounding services like buy now, pay later credit companies for consumers 😲).
No funding is free, each comes with obligations and you shouldn’t underestimate the level of commitment required. For example, even if you’re not carrying debt per se, i.e., you took a cash advance, you’ll still need to carve off a portion of your sales each month to your funding provider.
Without sufficient cash flow, stacking external funding can get messy quickly.
It becomes even harder to repay your first funding provider and existing business obligations. So, you may find yourself without enough cash to go around.
To avoid money-induced headaches you’ll need to be proactive and commit to following the financially prudent methods that got you accepted in the first place. This includes carefully assessing the validity of each expense (be it a project or product) and tracking your cash so you don’t overspend.
Get familiar with your financial figures
Love it or loathe it, there’s one thing you can’t dodge if you want your eCommerce business to be successful: knowing your numbers.
There are few financial statements you’ll need to get familiar with for a well-rounded view of your eCommerce business’ financial health.
Let’s break them down:
- Income statement
The income statement (a.k.a. profit and loss statement or statement of operations) is your business equivalent of a bluntly honest friend who tells you when and where you messed up so you can course correct. It also lets you see in black and white when you’ve done something right money-wise, so you can double down on it. 👍
For example, if you have profitable products flying off the shelves, your income statement will let you know.
Let’s dive into some of the other benefits of an income statement:
- Lets you know how much profit or loss you’ve made over a specific period: You can create an income statement to assess a month, quarter, or year in your eCommerce business.
- Shows earnings, where you spent your capital, what your expenses look like: This includes cash made on credit (accounts receivables). You can even add in lines to the income portion to deduct any returns or discounts you gave.
- Highlights any financial risks in your business: For example, losses over a few months, which can be crucial warning signals.
Want to learn more about the power of income statements. Check out this in-depth guide by Investopedia.
2. Balance sheet
The balance sheet helps you get real about your business assets, liabilities, and equity. It shows you the state of your eCommerce business’ health by assessing:
- The amount of liquidity you have: This refers to your business’s ability to pay its short-term obligations and sell assets to raise capital.
- How solvent your eCommerce business is: Solvency concerns your business ability to take care of its long-term obligations for an undetermined amount of time.
If you’re struggling, the balance sheet won’t hold back. Likewise, if you’re doing good, it’ll be sure to tell you.
This is just the kind of honesty you need when assessing your eCommerce finances. With your balance sheet in hand, you can make informed purchase and investment decisions.
Want to understand how balance sheets can help you keep the lights on? Check out this awesome breakdown.
3. Cash flow statement
The cash flow statement keeps you informed about your incoming and outgoing capital and is critical to forecast your future business capital (a.k.a. create cash flow projections), so you know how much liquidity you’ll have ahead of time.
Here’s what your cash flow statement will show you:
- How you’re performing money-wise: For example, whether you’re producing enough cash to cover your debts and operating expenses.
- How you spend your business’ capital compared to what you have available: For example, your outgoings compared against the capital you’re keeping in the business.
- Any shifts in your assets, liabilities, and equity: Think: property acquisition or decreases in debt.
The cash flow statement distinguishes itself from the income statement by excluding projected capital coming in and exiting your business, i.e., cash from customers who have bought on credit but are yet to pay.
If you’re keen to dig into the details of cash flow statements, check out this insightful Investopedia post.
Tips for Crushing It in the Ecommerce Business Game Post-funding
- Ensure your marketing gets results
Some businesses fall into the trap of spending money on marketing for the sake of it, rather than ensuring it drives returns.
Every campaign should have a specific purpose, whether it’s securing email sign-ups or getting sales.
Here’s how to rock your next marketing campaign:
- When you get your influencer marketing initiatives down, you can make some serious dough. An Influencer Marketing Hub survey found companies returned $5.78 in media value per $1 spent on influencer marketing and that 90% of respondents felt influencer marketing is effective.
- Don’t be afraid to team up with businesses serving similar audiences (for example, if you own a makeup brand, you could work with a hair care company) to help expand your reach, grow your audience, and secure more sales.
- Aim to optimize your marketing campaigns over time, so they garner more conversions for less.
2. One store, two stores, three stores, four…
Now you’ve got the cash, it’s time to diversify your channels.
These days customers expect to have options in where they shop as well as what they buy.
Here’s why it’s worth investing in multi-channel stores:
- A Harvard Business School study found that customers who use online multichannel shopping bring a business 10% more customers than single-channel shoppers.
- Building multiple streams of income that thrive independently will help you meet that goal of making more than what you borrowed. But remember to find platforms and marketplaces that fit your brand’s mission, ethos, and makeup. For example, if you own a handmade sock business, Etsy may be a better choice than Amazon or eBay to begin with.
- Multiple channels increase eCommerce business’ stability, liquidity, and solvency, reducing the risk of your business encountering cash crises.
- You’ll get more peace of mind as you won’t be subject to the whims of a single platform’s pay-out processes.
3. Optimize your eCommerce business across the board
With growth capital in hand, there are countless things you can do to give your eCommerce business some extra oomph to get heads turning.
Start with the easiest tasks and work your way up to the more complicated and cash intensive.
- Solidify your supply chain by seeking out backup suppliers for stock, freight, and logistics.
- Negotiate suppliers to reduce costs and secure better payment terms.
- Look for ways to make your freight more efficient, i.e. flying in 30% and sending 70% by sea.
- Improve customer service by setting up chatbots and a social media powered helpdesk. And remember: the optimal time to respond to a query is within 12 hours.
Let Ecommerce Financing Do the Hard Work for You
Securing eCommerce financing isn’t always easy.
To ensure your eCommerce finance journey is profitable, it’s crucial you stick with the script and are wise with your growth capital—because how well you invest will determine your success.
To ensure you don’t bite off more than you can chew and undo all your hard work, mind your debt and don’t be shy to ask questions about your finances. After all, it’s your money. 😉
Finally, be willing to learn and improve in all aspects of your eCommerce business, even if this means investing in the right training, tools or financial systems that help you know your numbers.