The world of eCommerce continues to grow with each passing year, and with each year, it gets more complex and challenging to start and be successful.
Not too many years back, you could pick almost any category to sell, find a factory making a product within that category, slap your private label on it, and you were on your way to success.
Now, it’s much more difficult in all aspects.
Sourcing products is more complicated than ever, getting your first sales is more demanding, and managing costs is more difficult.
However, difficulty creates new offerings to solve these problems.
For example, traditional product research doesn’t work as well as it used to, so advanced polling was created that simulates the shopping experience to test your product before you ever start production.
Similarly, costs suffer from the same issues.
It’s more expensive to launch products, advertising is going up, and when you add up all of these costs, you won’t have enough cash to restock and launch new products at a consistent rate.
On top of that, traditional banks don’t typically lend to eCommerce sellers since they fundamentally don’t understand how they work.
Modern funding solutions have also been created as better tools emerge to help with sellers’ evolving problems.
Now that it’s 2023, two forms of funding have emerged as the go-to eCommerce sellers that work with the unique cash flow and growth struggles they face.
Those two funding forms are Revenue Based Financing (RBF) and eCommerce Lines of Credit.
Let’s go over both methods, and you can choose which is best for your growing business.
Funding Type #1: Line of Credit
One thing that matters for an eCommerce business is speed and the ability to get funds quickly.
A line of credit accomplishes just that.
You can get approved for an amount of money based on specific business metrics (for eCommerce, this typically involves revenue and the amount of product you have on hand, among other metrics).
After you’re approved for a certain amount of cash, you can simply pull from that reserve any time you need money to restock your product line, launch a new product, pay for PPC ads, pay you and your employees salaries, or other business expenses.
As long as you have the money, you are charged a certain percentage of the remaining balance, and as you pay back the balance, the balance shrinks, and thus the percentage fee you pay gets smaller and smaller.
It’s a form of funding that works best when you can quickly pay off the balance to prevent fees from hurting you too badly.
Benefits of a Line of Credit
- Quick cash when you need it. When you’re approved for a line of credit, it’s similar to a credit card, where the funds are available to you at any time. This is a good thing because you don’t have to worry about where you will source your money if needed.
- Looks at business metrics for funding amount, which will get you the amount you need. When you get an eCommerce line of credit, they typically look at your online business metrics rather than traditional metrics. This is generally done through technology that hooks into the platforms you sell on.
- Once approved, you don’t need constant re-approvals or invites. Reapplying for loans can be something people don’t enjoy doing, especially if they need funding multiple times per year. A line of credit is funds that, once approved, don’t need to be re-applied for.
- Pay less or more if you want for a pay period. If you are expected to make solid seasonal sales at a later date, or there is a delay in getting your products restocked, you’re not on the hook for substantial repayment bills; you can “delay” paying off your balance by just paying the interest fee for a period and then continuing with your regular payments after your sales pick up.
- No early repayment fee. If you have a bit more cash than you expected to make, you can wipe out your balance earlier than anticipated and save yourself from paying fees on your existing balance.
Disadvantages of a Line of Credit
- Fees can be high if not paid back quickly. A line of credit is simple. You’re charged a percentage based on the amount left on your balance for each pay period. However, that system means paying back the amount quickly is in your best interest, which can’t always happen. If you take longer than expected to pay back your balance, you can pay a hefty amount in fees you didn’t initially expect.
- You might come up short on the amount you need. Like a credit card, your available credit might not be as high as you want. Lenders still have to assess your business to minimize risk, and you might not get the same amount of funding if you did something like equity financing (but with credit, you don’t give up any % of your business).
Funding Type #2: Revenue-Based Financing (RBF)
Revenue-based financing, or RBF, is a type of financing that uses business revenue as the primary metric for everything.
That means the amount loaned, payment amounts, etc., are all primarily based on revenue.
How is this done? Usually, a lender will hook into an eCommerce seller’s selling platform of choice by utilizing technology to quickly assess the funding amount a business qualifies for.
After that, it’s simply a matter of agreeing to terms and a repayment plan; then, the seller can have funds in their account as fast as one day.
Even better, revenue-based financing repayment is typically based on a percentage of top-line sales, so if you don’t sell as much as the previous period during one pay period, you are on the hook for less cash than a payment.
Benefits of Revenue-Based Financing
- Lower minimum payments if sales are lower. With a traditional loan, you’re on the hook for a large minimum amount + interest every month, but with RBF, your minimum payment can go down in proportion to what your sales look like for a pay period.
- A more precise form of eCommerce funding. Analyzing business metrics by plugging into your selling platform lets you find the perfect loan amount and repayment schedule to fulfill business needs and keep overall fees low.
- Potential for lower fees than traditional funding. While not always the case, due to the ability to customize your funding amount and repayment schedule, you can work around your terms to pay a lower fee than you would with traditional funding.
- Fast funding. Revenue-based financing is primarily based on your business revenue (shocker). With the ability for lenders to utilize technology to assess your business quickly, you can go from nothing to funds in your account in as fast as one day.
Disadvantages of Revenue-Based Financing
- Not as much flexibility with repayment. RBF is designed to work in sync with your business, so you must calculate repayment and fees before funds are sent out. If you can repay faster and you’re not happy with fees, then you’ll have to adapt that for your next round of funding.
- The amount might be smaller than you want. Just like a line of credit, RBF can only work off your current business metrics, and this is not investing; it’s funding, so you’ll, at a minimum, be able to restock, take care of business expenses, and launch some new products, but you won’t be able to quadruple your product line or other extravagant, riskier ideas.
As you can see, a line of credit and revenue-based financing works best for eCommerce sellers today because they prioritize speed, focus on business over personal metrics, and work within the business model of an eCommerce business to help it grow rather than be a hindrance.
Modern sellers need to utilize funding if they hope to grow at the pace required by today’s
Onramp, Inc. is a revenue-based financing lender and can get you approved for funding quickly and build a funding plan around the unique needs of your business. If you’re a seller looking into financing for the first time or looking to get a new funding source that is better for your growing eCommerce business, give Onramp a try.