A founder’s guide to eCommerce funding: What are your financing options?

Nearly 90% of eCommerce companies fail within their first 120 days of business, and when they do, running out of cash is a top-five reason for failure. Founders who can secure the right type of funding for their journey will be in a much better position to keep cash in the bank and products on their way to customers.

Learn the best type of financing for where you’re at in your brand’s journey and what you plan on putting the cash towards. You’ll get the most value out of your funding and successfully grow your business.

Here are seven ways you can fund your eCommerce business: 

1. Revenue-based finance

Revenue-based financing offers founders a flexible, fast way to access working capital and efficiently pay for inventory and marketing.

How it works: You apply for funding from a provider and get approved within 48 to 72 hours, based on your projected revenues. You then have access to the funding immediately, and you start to pay back remittance as a fixed percentage of your daily sales.

Benefits

• Flexible remittance: If you don’t sell anything on a given day, you don’t have to make any remittance back to your financing provider. On days with higher sales, you’ll transfer more back as remittance, but it stays as a fixed percentage. This way, there’s very little risk to your cash flow.
• Pay for large invoices upfront: You can use the funding to directly pay for inventory POs or marketing spend up front since it’s tied directly to your projected revenue. As you start to sell your product to customers, you’ll pay off what you owe without stretching your cash flow too tightly. Low-risk form of financing: You’re not diluting your ownership or putting up any collateral to secure funding.
• No personal guarantees: Companies are assessed on their potential to generate revenue, and you don’t need to give up any security or assets as a guarantee.
• Quick access to cash: Revenue-based financing gives you access to funding within days — freeing you to make efficient, secure decisions.

Read more: Learn how Joolca used revenue-based finance to accelerate growth

Drawbacks

• You might not get approved for the highest offer: Revenue-based financing offers are based on exactly how much revenue you generate. Depending on how much growth you can show and the amount of revenue you can project, you may not be able to get the best offer or the most capital.
• Best for short-term investments: Revenue-based financing is best suited for inventory and marketing spend, and it shouldn’t be used to cover staffing costs or other operational costs.
• Not for pre-launch brands: You need to have existing revenue streams, so it doesn’t work for pre-launch brands

When to use revenue-based financing

You’re looking to fund your working capital cycle, such as inventory orders or marketing campaigns, without too much strain on your cash flow. For example: 

• To ramp up marketing spend, SPOKE used revenue-based finance and generated around 30,000 new customers.
• Dock & Bay uses revenue-based finance to support its cashflows around the periods where it has to order inventory ahead of the brand's peak sales months.

2. Personal savings

Founders can use their own capital to get their business off the ground and avoid going into debt or paying high interest rates. But when you bootstrap it, you’re entirely on the hook for that cash.

How it works: You front your business, operating expenses, and working capital with your own money. You draw from your personal savings, a retirement account, or a similar source of savings, but the money is all yours. In some cases, you might also borrow from close friends or family members, but the idea is the money comes from within your inner circle rather than an external investor or lender.

Benefits

• You’re debt-free: You don’t have to take on any debt in order to finance your business. You also avoid racking up fees and interest, saving you more money in the long run.
• You don’t answer to external investors: You maintain control over the direction of your business. Other than trusted friends and family, outside lenders won’t have a stake in your company.
• You keep all of the profits for yourself: The money to finance your business comes out of your own pocket. All of your revenue goes right back into your own pocket as well.

Drawbacks

• You have little cash flow flexibility: There’s a lot more pressure on you (and your finances) to manage cash flow when you’re going it alone. Once your savings run out, that’s the end of your runway for marketing, inventory, and operating expenses, so you have to stick to a much tighter cash flow schedule.
• All of your savings are at risk: You’re the one on the hook in the worst-case scenario. If you have a rough quarter or your business fails, you’ll have lost all of your savings — not an investor’s money.
• Friends and family aren’t necessarily the best lenders, either: You might be able to inject some extra cash into your business from friends and family. But you’ll probably owe them something in return — a position and a salary, for instance.

When to use personal savings

You want to keep control over your company while avoiding high-interest loans or fees. Bootstrapping makes the most sense for founders who have a clear vision and want to retain this level of control over both their business and their profits. If you find yourself cash-strapped, consider pairing this method with a working capital finance solution, so you’re not going it alone.

3. Venture capital

An experienced venture capital firm brings expertise and experience in achieving fast-paced growth, but they’ll also be looking to see results quickly and collect their own return on investment.

How it works: You seek out a valuation and investment from a VC firm in return for an ownership stake in your company. Your investor will want to see your company increase in value so that they can eventually sell their shares at a profit. In the meantime, you can use their capital to invest in long-term projects and sustainable growth for your company, helping you both realise a return on investment.

Benefits

• VCs bring a wealth of experience to help you grow: VC firms regularly invest in businesses with the intent of growing their profits and their value. These firms have not only the funding but also the experience to enable that growth throughout your partnership.
• You’ll gain access to networking opportunities: Your investor will also have a portfolio of other startups and brands, likely within the same industry. They can help you network with other like-minded founders to talk through pain points and hear workable solutions for similar companies.
• You have cash on hand for growth: Venture capitalists deliver good amounts of cash for you to invest in your company’s future. And you don’t owe them monthly payments, interest, or fees, so there’s no short-term impact on your cash flow.

Drawbacks

• You’re diluting ownership in your company: This is by far the biggest disadvantage to VC funding: it is one of the most expensive financing options available to eCommerce companies. You’re giving up equity in your company to an outside investor.
• You don’t have quick access to funding: The VC funding process is a lengthy one. You’ll have to make your pitch to multiple firms after researching and narrowing down a shortlist. Then there’s a negotiation period as you settle on your company’s valuation. All of that can take months before the funds actually come in.
• You’re no longer the one calling all of the shots: Along with purchasing ownership shares, your investor will also likely take up a board seat. They’ll have some decision-making power moving forward, and you’ll have to report to them on profits and performance.

When to use venture capital

You’re seeking out larger amounts of capital to invest in projects that will bring sustainable growth for the long term. Research & development, expansion to new locations or regions, and product development are all investments that can build long-term growth for your brand.

Read more: Learn why one eCommerce founder turned down VC investment and commercial lenders and chose flexible funding through Wayflyer.

4. Credit cards

Credit cards can be a way to access financing quickly, especially if you’re already pre-approved. But business owners who rely on credit cards for funding will find interest fees adding up in a hurry.

How it works: eCommerce founders or startup owners can apply for business credit cards or even use their own personal credit cards in a pinch. You don’t have to make payment on the balance until your next statement, 30 days later. Certain cards will also offer rewards such as air miles for travel or cash back on expenses.

Benefits

• Quick access to funding: You can get approved and start using a credit card almost immediately with a digital version; you might have to wait a week for the physical card to show up in the post. Plus, it’s a way to buy some wiggle room if you’re trying to balance your cash cycle and just need to pay a quick business expense.
• Interest-free options are available: Some cards will run promotions where you don’t accrue any interest for the first year or 18 months. You can take advantage of that deal and earn a cash buffer while you pay down expenses. Or you can just pay off the balance each month to avoid interest.
• Rewards often deliver ROI: If you travel a lot to attend conferences, networking events, or visit your manufacturing partners, then you might find it useful to redeem points for airline miles or a hotel stay. Or a card with cash back rewards could help you save on other business expenses.

Drawbacks

• Sky-high interest rates: The average APR for a business card is 17.91% as of June 2022. Those charges can quickly compound if you don’t pay off a decent chunk of your balance month to month, putting your business at risk.
• Credit cards have spending limits: Even with a business card, you’ll be approved for a maximum credit limit. They aren’t an unlimited source of capital.
• Annual fees can also accrue: Along with interest rates, you may also have to pay annual fees on credit cards. Sometimes these are waived for the first year, but not permanently.

When to use credit cards

For smaller, month-to-month business expenses, especially if you know you’ll pay the balance off within 30 days, so you’re not accruing interest. If you have a card that offers great perks, like travel points or cash back, take advantage of those rewards. But don’t rely on credit cards to finance all of your operating expenses.