Capital is the fuel that allows ecommerce businesses to thrive. It’s needed to survive as an entrepreneur, and without enough of it, you likely won’t. Adequate financing makes it possible for strategic decisions to be executed, inventory to be purchased at a pace that meets demand, and an overall trajectory of growth to be continued.
There are a range of funding opportunities that exist out there in the market. Which model is best for your business depends on your unique circumstances, the challenges you are encountering, and your set of particular needs. Like so many aspects of business, there is not a one-size-fits-all approach.
What is ecommerce funding? 🚀
Ecommerce funding invests cash into businesses to help with expenses and operational requirements. Start-ups and online businesses often benefit the most from this kind of capital injection, making it easier to gain traction and start experiencing success.
This financing can come from an array of different sources and using a variety of methodologies. Funds can be received from all kinds of lenders, such as banks, angel investors, VC firms, and even the public. The type of funding model you settle on determines the terms of your repayment and how much equity you maintain in your business.
What’re the different types of ecommerce funding options? 🤔
Bootstrapping
The first source you may very well turn to is your own bank account. If you have been setting aside money over the course of your career, your savings can be a great place to dip into as you go down the road of being an entrepreneur.
When you start your own ecommerce company, you don’t necessarily want to take on the burden of having to repay outside investors right off the bat. So if you can self-finance your venture using your own money, or partner with a co-founder who can chip in as well, you can launch your business while maintaining full and total control.
Friends & Family
Financing can often come from those who you are most familiar with. These are people who believe in you on a personal level and have faith in your ability to execute on big ideas. Generosity from friends and family can be used to your favor while trying to generate capital for your business.
Friends and family are often going to be flexible about the structure and terms of the deal you put before them. After all, these are people who care more about seeing you succeed than being a loan shark. If you are fortunate enough to have close relationships with people who are willing to bet on you, this is somewhere you shouldn’t be shy about looking to for help. If you hit it big with your business idea, these are likely the people you’re going to be paying back in a big way regardless.
Crowdfunding
Crowdfunding platforms like Kickstarter, StartEngine, and Indiegogo are a great place to share your vision with the world and receive investments from the general public. This is a solid way to share the story of your founding, and market your business and products to people who may never have heard about it otherwise.
You are essentially killing two birds with one stone: testing the market and receiving feedback, while also soliciting funds to give you the start-up capital needed to take your business to the next level. It’s also a nice feeling to know that your company is at least partially funded by the customers you are serving.
Angel Investors
Angel investors are typically people who have a wealth of knowledge when it comes to investing in start-ups. They often specialize in regularly investing their personal money, and may even be part of a network of other angel investors.
By tapping into professional investors like this, you not only get access to crucial funds but also the experience they have in helping businesses like yours thrive. Once you receive an investment from an angel investor, your financial interests are aligned, so they will want to see you prosper. When you succeed, they succeed as well, and they get to see a healthy return on their investment. As such, expect them to do due diligence on your business, and have to carefully consider your pitch before deciding to make an investment.
Venture Capital
Venture capital firms, or VC firms, are institutions of private investors, as opposed to individual investors. It’s common for software companies to seek out venture capital funding, but as a DTC ecommerce company, you should carefully consider the risks associated with this option.
VC firms are often on the lookout for companies that are going to be massive home run successes, to account for the 90% of companies they invested in that don’t pay off. As a result, if they do not view your company as having enough runway to win substantial market share in your niche, and exit for a large sum, it’s going to be a difficult hill to climb to receive a VC investment that makes sense. Unless you are inventing a whole new category, or completely disrupting an industry and have a clear path to hundreds of millions in sales, it’s likely best to focus your attention on other modes of funding.
Line of Credit
Lines of credit give you money you can access and draw down on when you need it. As such, they are popular with ecom businesses that have a vast number of expenses they’re being hit with at a dizzying speed.
Your fixed credit limit is based on your level of product turnover, and can range from $2,000 to $1,000,000. You can use this to take advantage of things like sales on inventory with your supplier, or any operational expenses you just don’t have cash in the bank for but could greatly benefit from. The great thing about lines of credit is you only pay interest on the credit you’re actually using, even if it’s only a fraction of the total amount you have at your disposal. It can also help you properly manage the cash flow of your business.
Credit Cards
Business credit cards for your ecommerce business are a lot like personal credit cards you’re probably familiar with already. One of the pros of using credit cards is that you have quick access to funds you need, and you can continue to borrow as long as you’re paying back what you’ve spent on a consistent and timely basis.
The biggest concern in using credit cards however is putting your personal credit on the line, but there are new services on the market like Divvy, Brex, and Mercury that provide higher credit lines than traditional business credit cards and don’t rely on personal credit. There is also greater flexibility here when it comes to repayment terms.
Revenue-based Financing
Revenue-based financing is a method of receiving capital where investors put up money in exchange for a percentage of ongoing revenues. Returns made to investors typically continue until the initial amount, plus any additional requirements such as fees, are repaid.
It is essentially an alternative to debt and equity-based funding. No upfront ownership in the business is taken, and no personal guarantees are involved. Financing is put forth in exchange for a portion of future earnings.
If provided with capital in this manner, it is assumed that your company will set aside a percentage of revenue in order to repay the advance. This typically occurs on a set frequency, such as on a monthly basis.
Should certain months yield more revenue for your business, this results in a greater monthly payment and a shorter overall repayment period. The inverse is also true. A drop in revenue on certain months means a smaller monthly payment and lengthening of the repayment cycle.
Services like Clearco, Wayflyer, Uncapped, and Outfund are great resources to receive revenue-based financing for your business. Signing up with a provider like this is as simple as connecting your business's financial and marketplace accounts to determine eligibility. You then select an offer that is based on projected earnings, and begin repaying your advance according to the revenue your business is bringing in.
Purchase Order and Inventory Financing
Purchase order and inventory financing means you pay back funds as you sell products. Services like Settle, Kickfurther, Float, and 8fig all offer to fund inventory for DTC brands, and allow you to create customizable repayment schedules based on your cash flow. This is fast, flexible funding for ecommerce sellers that doesn’t require you to give up any equity. As demand changes, your remittance plan can as well, so you’re able to get capital only when sales dictate it.
Find more ecommerce loans and funding providers here.
Merchant Cash Advance
A merchant cash advance (MCA) allows businesses borrowing funds to pay back advances with a percentage of their sales. It’s a great option if you need capital quickly. Typically, an MCA provider gives you a set amount of funds, and you agree to pay it back, plus more, by giving a percentage of your gross sales on a daily basis until you hit the amount you owe. The downside is that you usually have to pay back all or most of the advance amount before you can get more funding. However, there are a lot of MCA providers in the space, so you will be able to look around for the best deals.
Invoice Factoring
If you’re a seller on a third-party marketplace like Amazon, you know that your proceeds can often be locked up for weeks at a time before they are deposited to your bank account. This limits your ability to order more inventory, pay your employees, or invest in your business while your funds are not liquid.
As such, invoice factoring can be a useful way to generate cash flow. How it works is you send an invoice to your factorer when you send an invoice to a third-party marketplace. They will release up to 90% of the invoice value and it will be placed in your bank account, often the next day. When the platform does distribute your proceeds, you get the remaining 10% minus a small fee. This is a nice way to free up your funds from limbo and put your capital to work without wasting any more time.
Asset-based Lending
Asset-based lending borrows against the value of the inventory you have on hand or in a warehouse. Your inventory is given a liquidation value where the lender makes an assessment about the amount of money they would get if they had to take possession of your inventory and liquidate it.
ABL can be difficult to navigate for ecom brands because access to inventory can be more complex due to third-party logistics (3PL) providers. Liquidation values are hard to be certain of for many DTC stores and liquidation processes are not always easy to carry out. Services like Assembled Brands and Dwight Funding make the process intuitive and straightforward by allowing you to leverage the value of your inventory and receive funding you can use to fuel your business growth.
Mezzanine Debt
Mezzanine debt occupies a middle ground between senior debt and equity. With this structure, senior debt holders get first claim on all money until they are fully paid back, if there is a problem with the business. Leftover capital goes to mezzanine debt holders, until they are paid back. Mezzanine debt is unsecured, and it carries much higher interest rates than senior debt. There is also usually an intense due diligence process associated with mezzanine debt.
Bank Term Loans
Banks can be a way to secure funding, but because of strict regulations, the terms of the loan may not be as favorable as you’d like. There is often a set repayment schedule that does not vary even if you have a decline in sales, unlike with revenue-based financing. There may also be a high interest rate, unless you have large underwritable assets as a borrower, such as if you own the facility where you are warehousing your goods. The healthier your track record in business–meaning the longer history you have of being profitable–the easier it will be to value your assets and get a loan to help fuel growth. But be aware, there are a lot of reporting requirements involved with bank term loans.
Supplier Terms
You can lean on your supplier to help you out as you purchase inventory, especially if you have a strong relationship. Terms with your supplier are almost always negotiable, and getting a plan in place that is more favorable can impact your cash flow in a real way.
Let’s say you are able to extend your payment terms from 30 days to 60 days. This gives you an extra month to generate revenue and profit that can be used to pay your supplier while also investing in your business. This can influence your cash conversion cycle in a good way, and out of all the funding options outlined so far, this one probably has the least amount of heavy lifting. Don’t be afraid to leverage the goodwill you have built up with your supplier over your time in business.
Grants
If you are in a field that is innovating for the public good, there are likely government and research grants at your disposal. This is sort of like an investment from society that you don’t have to pay back, and can instead plow right into your business to bring your business goals to fruition.
Grants available vary depending on country and industry, and can be difficult to find for many ecom businesses that don’t fit specific criteria. There can also be a lot of paperwork involved, but if your business directly contributes to the greater good through things like waste reduction, it’s worth seeing if you may be eligible for receiving grant money.
Private Credit Funds
Private credit funds make use of actively managed capital that invest in loans to private companies. These often have a longer duration and come with large figures, while requiring 12-20% rates. Services like Montage, Decathlon, and Espresso Capital can provide private credit to ecommerce businesses and DTC brands. This can allow you to meet the needs of your business in a structured way with term sheets that are clear and straightforward. In sum, it can help finance your growth while minimizing dilution.
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