Revenue-based financing: Why it’s the best way to finance your eCommerce company

Pillow Cube, an eCommerce company pitching an innovative pillow design for side sleepers, kept growing steadily since their Kickstarter campaign in 2019. Then Black Friday 2020 hit, and they saw more sales in one weekend than they had in the entire history of their company.

All of a sudden, they had a slew of orders to fulfill, and they needed funding to source that inventory and get it shipped out to customers. When it came time to decide which type of funding to use, they knew revenue-based financing would be the best and safest option. Why? Commercial lenders wanted personal guarantees and Pillow Cube's founders wanted to avoid the risk of losing their house or other personal assets.

Unlike traditional bank debt or credit cards, revenue-based financing is simple and fast for eCommerce companies to obtain. And flexible remittance schedules protect you from risk, so you’re not exposed at times when cash is tight. It’s the safest way to manage cash flow and accelerate growth, and here’s why.

Flexible remittance makes it less risky to your cash flow

Unlike traditional debt financing such as bank loans, revenue-based financing solutions are tailored to your working capital cycle, and remittances are based on a percentage of your daily sales. If sales aren’t very high, the amount collected will be lower, so there’s less impact on your cash flow.

Banks and credit card companies don’t really care about seeing your business succeed or understand why it might take you three months to see profits from the inventory order you’re trying to finance today. They want and expect to be paid the same amount every month, no matter what. If your stock is stuck on a container ship at a port in California instead of being sold to customers, they still want to be paid. That creates a cash flow issue for you.

Here’s an example of the typical timeline with commercial lending:

• Day 0: You get approved for a $100,000 loan from the bank.
• Day 1: You contact your manufacturer to place an inventory order and sign the PO. You owe them 30% upfront, so you pay them $30,000.
• Day 30: You owe your first payment on the loan, but your goods haven’t even shipped yet due to a backlog at the factory. There’s no wiggle room with the bank, so you make the first payment of $8,500.
• Day 45: Your stock finally ships, and you owe your supplier the remaining 70%, so you send the final $70,000.
• Day 60: You owe the bank again, tightening up your cash flow at the end of the month so you can make the payment.
• Day 90: After shipping delays, your goods finally arrive at your warehouse, and you can start selling that stock to customers. But cash is tight once again as you still need to make your third payment to the bank.

Revenue-based financing protects you and your cash flow if business slows for a month or stock doesn’t arrive on time. Use the cash advance to finance your working capital needs like inventory, so you’re not in the red when you need to place large purchase orders. Your remittances automatically scale as sales increase or decrease, reducing monthly cash flow bottlenecks. Here’s that flexibility in action:

• Day 0: You get approved for $100,000 in funding from your financing partner.
• Day 1: You place your inventory order and pay the first 30% ($30,000) upfront. Because of the revenue-based remittance structure, your funding provider immediately starts collecting a percentage of your daily sales. Your remittance percentage is 15% and you sell $500 in stock, so you pay $75.
• Day 45: Your stock ships, and you pay your supplier the remaining 70% ($70,000).
• Day 60: Due to shipping delays, you’re still waiting for your stock to arrive, and sales have been a little slow this month. But there’s no added pressure on your cash flow, because you don’t owe a lump sum today. You only sell $250 in stock, so your financing provider collects $37.50.
• Day 90: Your new inventory is in stock, and you start selling it to customers. Sales pick back up, and you easily make bigger remittances directly from the uptick in profits. You make $2,500 in sales today, so you pay $375.

Revenue-based financing doesn’t require collateral or dilution

Banks often want a guarantee of security for the funds they’re lending to you in the form of collateral. Equity investors receive an ownership stake in your company in exchange for funding. But with revenue-based financing, you don’t need to give up collateral or dilute your ownership shares to receive access to capital.

Banks are primarily looking to minimize the risk to themselves and collect on their investment, regardless of the risk it poses to you. They might ask you to pledge real estate, inventory, or equipment — all assets that would be very risky for your business to lose. If you have any trouble paying your loan back, you could be in real danger of losing those assets.

Equity financing is useful when it’s done sparingly, but too many rounds will dilute your ownership to the point where you’re no longer in control. This is why equity financing is risky and inefficient for funding your working capital cycle. You lose the ability to determine the best path forward for your company. Even when you retain decision-making power, you’re forced into making short-term decisions that hamper your company’s long-term future.

Revenue-based financing leaves you in full control of the ownership of your company and doesn’t require you to pledge assets to secure a cash advance. Companies are assessed on their potential to generate revenue, and as long as it’s a good opportunity, you don’t need to give up any security.