The most efficient uses of working capital, equity, and profits
Many eCommerce startups find it hard to secure funding through traditional channels or are hesitant to raise equity funding because they don’t want to dilute ownership of their business. But a lack of efficient financing can have massive effects. CB Insights has analyzed over 110 startup post-mortems since 2018 and found that the inability to secure capital is the number one reason why startups fail.
There’s a way to deploy multiple financing options that’s sustainable for revenue growth and allows you to retain your majority ownership shares. In fact, eCommerce startups should be using all the funding options at their disposal to gain more stability, become profitable quickly, and reach their potential.
To keep your eCommerce business growing, you need to understand when to deploy each type of financing and how best to make each one work.
Here’s what you need to know about working capital, equity, and profits…
Working capital is ideal for marketing and inventory
Working capital financing is great for immediate investments like marketing and inventory. You’ll get financing when you need it and remittances are based on a percentage of your daily sales. And you don't have to give up equity to secure this type of financing, so you can retain future profits and decision-making power.
Suppliers often require eCommerce companies to pay for purchase orders on inventory upfront before they’ve sold the stock and turned a profit. Working capital financing is deposited directly into your bank account. You’ll be able to place orders with suppliers and replenish your inventory so growth is sustained into the future.
You typically need to spend money to acquire new customers, and working capital financing can come in handy there, too. You can use the funds to pay for marketing and advertising costs upfront. As you increase brand awareness, convert more customers, and sell more stock, you’ll see a quicker return on your investment.
Say your company uses a subscription-based model and sends a monthly box to customers. You’ll need to spend on advertising to acquire new customers. You then need to sell each customer four months’ worth of boxes before you recoup what you spent on ads and inventory. A working capital solution provides you with immediate funding to cover the cost before you make a profit on that customer.
How to manage working capital: Seek out revenue-based financing options
Traditional debt financing lenders just want to be repaid, regardless of what happens to your business. They’re not looking out for your best interests, and they don’t understand the unique challenges that impact eCommerce companies, such as seasonal sales cycles. Instead of going the traditional route, seek out a flexible revenue-based financing option like Wayflyer that puts your business first.
In revenue-based financing, remittances are based on a percentage of your daily sales instead of paying one lump sum every month. This way, there’s never too much strain on your cash flow if sales are down.
For example, say you receive $250,000 in funding to buy inventory. You agree on a remittance rate of 12% of your daily sales. Your remittances automatically scale based on how much you sell. If you sell zero products one day, you won’t transfer a cent. If you sell $1,500 the next day, your remittance will be $180.