A Key to eCommerce Success: What is Inventory Funding?

A Key to eCommerce Success: What is Inventory Funding?

We’re living in an era of eCommerce - and that’s good news for everyone. Customers who need or want something are not limited by their immediate surroundings and can find what they are looking for from anywhere in the world. Businesses that want to offer their products to a broad audience are not limited to locale and business hours to thrive.

Customer demands are rising, and their expectations are getting more fierce. With the prevalence of online shops, customers can be sterner with their needs. It’s no longer enough to be able to place an order at any time of day and receive goods to your doorstep. Now customers want the immediacy of in-person shopping with the convenience of buying online.

That means inventory availability and management should be amongst your primary concerns.

Of course, not all online shops have the luxury of unlimited cash flow. In fact, most don’t. Cash flow problems are one of the most common issues companies face, and for eCommerce sellers, your cash conversion cycle almost always impacts your cash flow. 
Traditional funding options are not tailored to eCommerce, so you may not be aware of your options to help build and maintain a successful online business. This article will cover what inventory funding is and how aligning it with your cash conversion cycle will help you meet customer demands.

What is Inventory Funding?

Before we share how it can help your eCommerce business succeed, let’s cover what inventory funding is.

Inventory funding (or inventory financing) is capital made available for the express purpose of purchasing products for sale. This type of financing typically takes your existing inventory into account without adding the pressure of additional collateral. 

Boiled down, the answer to the question, “What is inventory funding?” can be summarized as an ally in growing your business by securing more products so you can serve your customers more effectively. The key to keeping the right level of inventory on hand is having enough cash flow at your disposal.

Related: The Basics of Funding for eCommerce Businesses

Inventory Loading to Meet Demands

Inventory loading is a delicate matter. When done well, it can help your business weather fluctuations in sales cycles and keep up with inventory demand. As with any strategic business practice, there’s a trick to it.

Tracking your previous years’ sales and analyzing trends will go a long way in helping you to forecast for the future. Leveraging the insight of past sales will help inform better decisions about inventory. Front-loading inventory can feel like a risky decision, and it requires smart planning that considers your cash conversion cycle, so let’s cover some reasons why it can work in your favor.

Prepare for Peak Shopping Periods

Inventory funding will help you to stock products to prepare for busy periods. This includes holidays and, if your product is seasonal, preparation for those seasons when it is most in demand.

Of course, your entire catalog may not see the same spikes. By making decisions based on previous sales and promotions or focus products you’d like to sell, you can stock inventory accordingly. Since the cost of manufacturing can fluctuate, stocking up on products means you’re protected from constraints or spikes in manufacturing or supply costs.

Political Climates and Weather Challenges in Supply Chain

There are unpredictable factors that can affect your ability to receive stock. Changes in the climate - that includes both weather and politics - can drastically affect the production and supply of goods.

We’ve all gained experience in navigating the unpredictable in the last year and a half. The Coronavirus pandemic has strained more than relationships and tolerance for closed spaces. While eCommerce grew - driven by-and-large by necessity while consumers were housebound - the supply chain has felt drastic effects.

Restrictions on the flow of goods, lower employment numbers, general uncertainty about political and financial climates have wreaked havoc on the supply chain. The pandemic has shown us how fragile the supply chain can be by highlighting just how globally dependent we are.

Not limited to pandemics and supply chain issues, the holiday and peak seasons also have a big impact on business. Where your competitors may end up with long lead times they need to pass on to customers, you can be sure to fulfill as needed by front loading stock in advance. In the holiday season, deliveries to customers may be affected by inclimate weather throughout the country. Those same delays would apply to receiving stock into your warehouse, so you’ll save a lot of time on behalf of your customer by carrying stock on hand.

In this globalized world, many eCommerce companies have become dependent on certain suppliers for products or components. Not without its benefits, this can also lead to some risk in the supply chain. With relations between the US and China - the world’s two largest economies - strained as negotiations remain at a stall, a globalized society pays the price. The cost of goods has been in flux as a result of tariffs, meaning business expenses that were previously predictable are now in a shakeup. Many Chinese companies have required upfront payments to cover tariff costs and have restricted credit purchasing from vendors.

Leveraging inventory funding to buy and hold stock means you can forecast your costs and profits and avoid fluctuations due to increased tariffs.

Build a Reputation for Being Reliable

In a saturated market, your reputation is crucial. There are a lot of eCommerce sites out there with nice storefronts and robust catalogs. What sets you apart is your service and capabilities.

Inventory funding will enable you to stock what your customers want so you can ship it quickly when they make a purchase. Shipping delays can cost you customers. It may sound fickle, but that’s the unfortunate truth.

Having funding devoted to stocking inventory means you can use other cash flow for different aspects of your business, like customer service and support. Your sales must be efficient to cover your inventory costs, and the typical cash conversion cycle for an eCommerce business spans 60-120 days. Midway through that cycle, you’ll need more cash to purchase more inventory so you don’t stock out. You’ll also need cash to pay for advertising, packaging and shipping. 

There is often a deficit between incoming sales dollars and outgoing inventory purchases, but with the right inventory funding, you can ensure you always have cash on hand to finance inventory and other short-term assets. Traditional bank products fail to consider the unique cash conversion cycles of eCommerce businesses, forcing sellers to look elsewhere for cash flow support.

Related: 3 eCommerce Financing Options to Grow Your Business

Advantages of Inventory Funding

By sharing what inventory funding is, we’ve covered a lot of advantages. There are a few more to consider when you’re looking to leverage this financing option for your business.

Free Up Cash Wrapped Up In Inventory

As a business, you have many ongoing expenses, most of which are not directly related to inventory. That is, of course, unless you devote a majority of your cash flow to keeping stock on hand.

You can reinvest in other business initiatives by freeing up cash flow otherwise directed toward purchasing products. That includes marketing, operating expenses and diversifying your offering.

A Revolving Line of Credit

One appeal of inventory funding is that it can serve as leverage for a revolving line of credit. For small business owners, this is a significant advantage. You can draw funds from your credit line within a predetermined limit any time you need them. Then, you can use the funds to restock inventory, meet payroll or cover operational expenses.

Your Credit Line Grows As You Do

Inventory funding is an excellent approach to meeting your financial obligations and enabling your business to grow. As your business grows, however, so do your expenses.

The benefit of inventory funding is that you’ll strengthen your credit report as you build rapport with your lender. That means it will be easier to apply for additional funding as your business demands, and you’ll be able to accommodate the needs of your growing operation.

Find Security Even in the Slower Times

There are natural ebbs and flows in the sales cycle of virtually every business. Depending on the products you offer, you may feel this more deeply.

If your products are seasonally focused, you are liable to have lower periods. Anticipating a sales dip will help you prepare, but it doesn’t put more cash in your account. You’ll need to cover operating expenses even with less money coming in and still be able to stock up for the upturn in sales before it arrives.

Inventory funding will allow you to weather the storm. You’ll be able to meet the demands of operating costs and to order stock to have on hand when the peak season returns.

Onramp is not just any lending program. We’ve built our offering with eCommerce in mind. We understand the pain points of eCommerce business and that traditional loans just don’t hit the mark. Whether you’re selling through sites like Amazon or Shopify; or you have your dedicated online storefront, Onramp can help you meet customer demands so you - and your business - can thrive.