A very Happy New Year to you all! If you have plans to make this your most successful year of eCommerce yet – then I urge you to take note of what I have come to realize is a crucial message:
Utilizing funding solutions is NOT a ‘last resort’ – instead it’s a natural event in the life cycle of nearly every business.
Let's look at where we stand as we enter 2022:
The evolution of eCommerce has meant that following the initial explosion in online shoppers, the number of merchants has also increased dramatically. Today’s most profitable eCommerce sellers understand that to succeed in a crowded marketplace they absolutely MUST approach their activity as a professional business, no matter their size.
There are two basic challenges that eCommerce sellers face, and these fundamental issues are GROWTH, and CASH FLOW.
GROWTH – This typically consists of 3 recurring stages:
1. Identifying and launching the correct product (this can take anywhere from 3-9 months), and then penetrating new markets.
2. The active growth stage, with the requirement to scale sales fast and in larger quantities. This should lead to an improvement in your ratings and reviews, which at this juncture is more important than profit.
3. Finally we see the emergence of the ‘cash cow’ – regular revenue from the ongoing sales of a familiar and popular product.
Of course, to sustain growth CAPITAL is required – the more money you have the faster you can grow.
SUPPLY CHAIN CASH FLOW:
Any business that has an active supply chain – manufacturing, shipping, customs, warehouses etc. – has by definition a negative cash flow. We are living in times of increased inflation, shipping is ever more expensive, and delivery times can be uncertain – all meaning that we are compelled to order larger batches of inventory in one go, and face an ever longer wait for return on our investment.
An average timetable for eCommerce sellers who have made a down payment would usually look something like this:
· Approximately a month for inventory production
· A further 1 to 2 months for arrival at a third-party logistics company (3PL), with the caveat that further delays could be possible (adverse weather or shipping queues for example)
· It’s not until 3-4 months after paying their supplier that they could expect to start receiving payments for goods sold.
During this period where no revenue is incoming, there are still manufacturing costs, marketing expenses, salaries and taxes to be paid – all this, BEFORE we can start to see any ROI.
So, here’s the first problem: How do we get through these initial months of negative cash flow?
There are 3 potential solutions:
1) Dig into savings
2) Look for an external investor
3) Inventory funding
Savings? For many smaller eCommerce merchants any savings have already been utilized during set-up, and are no longer a viable or sufficient source of income. An external investor as ‘fairy godmother’ can sound appealing, but do you really want to give up a proportion of your company equity? Loss of equity inevitably means giving up some degree of independence. This leaves the inventory funding solution, which is my focus today. The preceding options encompass so many variables – and very much depend on the maturity of your eCommerce activity.
So, how can we access this working capital?
First and foremost – the traditional banking system. Unfortunately, whilst their rates can be good, the securities they require can be too steep to provide a solution for the average eCommerce business. Fluctuating foreign exchange rates can pose a substantial risk to the eCommerce entrepreneur.
Certain eCommerce platforms provide ‘invite only’ programs, and payment processors also offer financing options – however none of these solutions really connect to your overall cash flow. They will fund your deposits, but this means they will start charging you payments immediately, so you pay back almost half the funding before the new inventory has even begun to sell.
There are also a variety of revenue share plans, all with different financing and return models. An in-depth analysis of what each can offer would be too lengthy for this blog, but the main disadvantage in common is that they usually require a long-term commitment you are unlikely to be ready for at this stage.
Finally, we come to inventory funding – specific funding that provides capital in order to purchase (or to repurchase) inventory.
Whilst there is always going to be some element of risk when working with eCommerce entrepreneurs – funding companies aim to minimize their risk by various methods. For example, only funding repurchases of products with an existing track record – those ‘cash cows’ I mentioned above.
Problem number two: What do we need to know in order to be able to compare offers from different funding options?
1. The period for which you need the funding – when you want to START and END repaying the amount received – and the payments you wish to make.
2. What collateral is required in order to receive the funding?
3. The cost of the financing solution.
4. What are any other obligatory requirements?
5. Is the solution available to you?
When all these fundamental parameters are the same, you will be able to compare the offers and decide which solution is best for your activity, establishing what the added cost per item deriving from the funding will be.
Let's take a look at the consistent ongoing costs every eCommerce seller has:
1) Supply chain costs (manufacturing, shipping, 3PL)
2) Marketing costs (PPC, design, promotions etc.)
3) Selling costs (selling fees, fulfillment fees)
Selling and marketing costs are expenses that are made close to the selling period – therefore the ROI on both is very short term, whereas salaries are to be covered by the cash flow of the activity, and supply chain costs are of a long-term ROI nature.
Using cash reserves for inventory? It just doesn’t make sense!
Instead of dipping into your available cash reserves – cash that is much needed for paying salaries, marketing initiatives or developing new products and markets – and then waiving these in order to pay your supply chain vendors, why not utilize accessible funding solutions that require you pay a small portion of your profits?
In addition, if you believe you can increase your sales, after accessing the added cost per unit due to the funding – you can increase your profit without creating any additional stress on your working capital! And that means GROWTH.
By effectively utilizing an inventory funding solution, you will improve your cash flow and be able to increase your overall inventory order – increasing your sales potential with just a minor reduction of your profitability on an increased turnover. This improved working capital will enable you to focus on marketing efforts or on introducing new lines of products – improving both your short- & long-term growth, AND profitability.
It’s now clear why a substantial proportion of companies of all kinds – not just eCommerce – make the sensible decision to utilize funding options. I just wish I could say it was my invention!