What’s the biggest challenge in scaling an e-commerce business? Of course, you’ll need to create and maintain a well-designed storefront, manage logistics and supply chain operations, and promote your brand so that it stands out from other online stores. But, no challenge is quite as critical as maintaining cash flow.
In the absence of adequate working capital, all these efforts will likely not yield the desired results. Whether you want to sell new products, build up your inventory, or hire more employees, you’ll need a living cash flow that is constantly being pumped. Therefore, we are going to discuss 4 ways to finance your e-commerce business without a bank in this guide.
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E-Commerce Financing Without a Bank
The most obvious way to obtain funds quickly is by receiving external financing for your e-commerce business. However, choosing the right financing approach is not always so simple, as it depends on your unique business’s goals and your goals as an owner. In this blog, we’ll take a look at four popular financing options for e-commerce businesses. Let’s get started.
1. Revenue-Based Financing
Getting a loan from a bank, credit union, or lending company is one of the most common ways to finance your e-commerce business. It lets you retain complete ownership of your company while injecting more funds into your cash flow.
However, traditional loans involve paying back a fixed amount every month. If your sales fluctuate and your default on your monthly installments, you might have to pay a penalty. Worst still, the lender could seize your business assets.
Revenue-based financing is a clever alternative to traditional debt financing, in which your monthly installments are not set in stone. Instead, you pay a percentage of your revenue each month. The higher your sales, the faster you can repay the loan.
However, if you don’t reach adequate sales in a month, with revenue-based financing, you don’t have the burden of repaying what you can’t manage. This approach is particularly suitable for e-commerce businesses that operate in a specific niche and experience seasonal revenue spikes.
An example of revenue-based financing is 8fig, an ecommerce funding platform that also offers tools for business owners to manage their supply chains and plan long-term based on growth analytics. Instead of offering a lump sum payment, 8fig releases funds in a steady stream to optimize a company’s cash flow towards sustained growth according to its supply chain data.
8fig was able to help Phenom Elite, a football apparel and accessories brand, to stabilize inventory and scale operations. In just six months, the store experienced a 50% growth in revenue.
With emerging tech platforms like 8fig, it’s becoming easier for small and medium-sized e-commerce businesses to use a revenue-based financing approach that offers extra benefits such as management tools and growth analytics.
2. Equity Financing
Equity financing involves getting funds from an investor in exchange for part-ownership of your company. This type of funding is typically offered by angel investors and VC firms. You can also raise capital from friends and family in exchange for equity.
The equity you must give up for the required funds depends on your business valuation, which is based on various factors, including cash flow, assets and liabilities, and growth potential. Seasoned investors perform due diligence to vet your business before investing in the company.
A key benefit of equity financing is that you don’t have to worry about repaying the investment. That gives you time to focus on more crucial aspects, such as breaking into new markets, growing your team, and implementing new marketing strategies. Moreover, experienced investors often bring their networks and strategic guidance to the table.
However, depending on their share in your company, investors can try to control or influence various business decisions. They might even pressure you to start generating profits so that they can make money. That, in turn, can alter your company’s goals and vision.
Nevertheless, if you choose the right investors, equity financing can take your e-commerce business to great heights. It’s evident from the success of companies like DoorDash (funded by Sequoia Capital) and Dollar Shave Club (funded by Venrock).
3. Crowdfunding
Crowdfunding is a clever way to test the waters while raising money for your business idea. All you have to do is start a crowdfunding campaign on a platform like Indiegogo or Kickstarter. And then, you have to wait for some of the billions of internet users to give you money.
In most cases, crowdfunding campaigns offer perks, such as early access to products/services or freebies, in exchange for funding. Alternatively, you can offer each investor equity in your company.
The good thing about crowdfunding is that it helps you determine whether there’s actual market demand for your product or service. If people on the internet are willing to invest in your business idea, it must have struck a chord with them. It can be an excellent way to find early adopters and loyal brand advocates.
However, crowdfunding is yet to become as mainstream as other funding options, such as debt and equity financing. It works best for unique business ideas and innovative products. Also, you’ll need to promote your campaign on various social media platforms and make sure it cuts through the online clutter.
The remarkable journey of MVMT highlights the power of crowdfunding. The premium watch and eyewear brand raised $300,000 through a campaign on Indiegogo. In the next six years, the company reached $80 million in annual revenue and was acquired for $100 million.
4. Grants
Grants are usually awarded by government agencies, non-profit organizations, and large corporations. If your e-commerce business receives a grant, you don’t have to worry about paying it back or giving up ownership of your company.
However, that doesn’t mean grants are synonymous with “free money.” Applying and qualifying for a grant usually requires a ton of paperwork and effort. You have to convince the awarding body that you’ll make good use of the grant money. Also, not all businesses may be eligible to receive grants.
Most grants promote specific types of businesses, such as women-owned businesses, minority-owned businesses, or green businesses. Therefore, the money is usually awarded to businesses that align with the grant’s cause or vision.
Some of the most popular grants in the U.S. include the Small Business Technology Transfer (SBTT) program, the Small Business Innovation Research (SBIR) program, the FedEx Small Business Grant Contest, and the Halstead Grant.
Final Thoughts
Whether you’re looking to scale your e-commerce business or deal with a seasonal slump in demand, finding the right financing option is crucial. From revenue-based and equity financing to crowdfunding and grants, there are various ways to fund an e-commerce business. You must first assess your business’s goals and needs to choose the most suitable option for you.
