Does Revenue-Based Financing Make Sense for Your eCom Business?

Does Revenue-Based Financing Make Sense for Your eCom Business?

Revenue-based financing is a great addition to any capital stack and far less risky than the debt-based financing options of old. This is because financing methods that do not take revenue generation and inventory realities into account – let alone uncertain supply-chain predictions – can easily amount to tactlessly investing or stockpiling products without a sense of how it affects current profit needs.

On the other hand, revenue-based financing will fluctuate in tight lockstep with your actual cash receipts, allowing you to make clearer decisions about your present and predicted margins so that your investment efforts become more immediately profitable. These are key challenges that eCommerce sellers face when managing their cash flow, and revenue-financing resolves the lion's share of expenditure-related complexities by connecting financing to immediate inventory needs and actual sales performance.

Revenue-Based Financing Adapts to Future Needs

Before revenue-based financing, retailers had to lock into static, unchanging rates through inflexible credit arrangements (or more accurately, debt arrangements) unless they had private investment lined up elsewhere.

This fixes inventory financing to exact terms and repayment schedules regardless of near- or long-term shifts in market behavior and supply-chain realities facing those overly reliant on transpacific shipping practices.

Even when altering financing agreement terms was possible, it required time and attention just when the pressure to focus on the issues that precipitated the need for quick financing was at its highest.

Because of the decentralized nature of eCommerce, sellers can experience much more sudden shifts in buyer habits than brick-and-mortar retailers, whose customer base usually relies on whatever a small number of local storefronts have to offer.

On the contrary, even the most loyal eCommerce customers have countless e-storefronts at their disposal, and online retailers must accommodate buying habits across a much more diverse clientele that could make current supply stocks seem more or less attractive in any given week. The result is an occasional but sudden need to restock in accordance with faster-shifting trends in the online marketplace to obtain greater inventory diversity, which carries at least some risk of uncertainty.

Yet how will an online retailer do so with traditional financing options, which make no distinction for profitability? What's needed is a financing method that takes the eCommerce SMB's moment-to-moment realities into account. These could include all of:

  • Profit-loss margins
  • Current supply and demand
  • Projected supply and demand
  • Future investment opportunities (which are often higher-value & lower-dollar than for physical store owners).
  • Real-time sales figures (actual purchase receipts made available on demand)
  • Automatic accounting methods synced to every active e-storefront

The same financing methods for physical storefronts simply do not work for modern eCommerce SMBs because they aren't built to address the unique cash-flow challenges that eCommerce sellers often face. Revenue-based financing helps take all of the above into account and can be adjusted for greater customizability depending on the exact level of influence any one of those elements has on the SMB's operations.

Related: The Basics of Funding for Ecommerce Businesses

Synchronized financing methods to sales performance

The essence of revenue-based financing is in how payments synchronize directly to sales so that no more and no less than what's needed is obtained at any given moment. Rather than estimate long-term inventory needs and lock oneself into a one-size-fits-all financing arrangement, financing can now be connected directly with real-time inventory needs.

Because online transactions function at the speed of the internet, it's possible to automate and synchronize inventory and sales data reports and then synchronize your investment needs to them.

With inventory and sales data close at hand, it's then possible to make almost equally quick financing decisions – or even automate them. The needs of eCommerce retailers (especially SMBs) and their customers have never been in greater alignment.

As the success of each bolsters that of the other, businesses can obtain greater financing options immediately as their faithful customers enable them with each successive sale, which feeds directly into new working capital.

This gives online retailers the ability to fund greater products and services that those faithful customers will more quickly notice, generating enormous momentum between customer appreciation and value-added services.

The result is a novel trend where businesses are seeing tangible feedback, proving that emphasizing the quality of direct-to-customer relationships results in greater Return on Investment (ROI) when their desires are taken more deeply into account.

Financing Value-Added Services for Greater ROR

Like most things in eCommerce, the "Return on Relationship" (ROR) for online retailers can be seen faster for those who take efforts to automate their financing resources so that their working capital is ready for them to invest as fast as their customer base makes purchases.

Unlike in the top-down mega-retailer environments of yesteryear, SMBs can disperse their digital storefront activity as fast as their inventory can keep up without needing to spend those same funds on real estate financing needs.

With eCommerce, young online retailers can simply trim the whole customer-facing link of the supply chain down to nothing more than a website and focus their working capital almost exclusively on what customers want most: great products at an affordable price with consistent service.

As more people than ever are enduring psychological distress in public spaces, it could be said that brick-and-mortar mega-retailers are left holding the bag as far as underutilized properties go. This not only means more customers are going online – more independent-minded entrepreneurs are, too.

Greater Competition? Far Greater Opportunities

To be sure, this doesn't erase the competition between retailers of any size for warehousing, suppliers, and shipping, whether those retailers run online or physical storefronts. Yet this withdrawal from physical retailers still gives new online SMBs a greater head start over their brick-and-mortar counterparts, because they can now compete in new terrain with little to none of their working capital tied up in traditional overhead expenses – and to the extent the internet remains free and open, they have access to a nearly unlimited market base to boot.

As far as the competition between online SMBs and online mega-retailers, a proliferation of novel financing options is helping the former gain traction and close the gap. This is because SMB financing companies know that their young upstart partners can do more with less.

They are thus much more eager to invest in companies for whom several thousand dollars will have the same impact that tens or even hundreds of thousands would have been needed for a company trying to duke it out in the physical retail space.

Relatively little funding is necessary to establish one's own eStore and fund marketing efforts needed to pull market share away from the major online retailers so that online SMBs can maintain fuller control over the storefront portion of the supply chain. Business owners are equally ambitious and wary not to repeat the mistakes of the old centralized economic model and wind up beholden to a digital iteration of the same real-estate and zoning regulations that priced mom-and-pop shops into obscurity.

Fortunately, sales-based working capital is just as effectively being leveraged to fund savvy online marketing services in order to establish SEO dominance and outmaneuver major retailers.

Financing eCommerce for Minimized Risk

Investment companies have less risk when they know their partners will have less risk as well. As it's now possible to connect financing with accurate, real-time sales metrics, incremental financing tied directly to performance is extremely low risk. The more one sells, the more working capital they can obtain – if they sell less, the need to repay also becomes less.

Both parties can make safe, well-managed profits according to the performance of the business, and the issue of "defaulting" on debt-based financing methods does not loom overhead.

Real-time sales metrics also enable both parties to see the ROI of their relationship, and revenue-based financing companies are hungry to achieve market dominance in the online SMB-investment sphere. Their current and prospective clients, wondering if eCommerce entrepreneurship is right for them, are therefore getting a lot of attention.

This is no mere "tech bubble" phenomenon, vis a vis the early 2000s; the mad rush to online retail that marked 2020 left tangible, lasting changes to the retail landscape in general. It generated lasting shifts in demand that will unlikely be undone, and it spells new opportunities for those eager for a new career in accord with a changing economy.

Related: The Basics of Funding for Ecommerce Businesses

Established Online Retailers Also Enjoying New Opportunities

Perhaps even more so, those running online retail businesses already are able to capitalize on the support being offered for fast access to working capital to tighten up their ships. As the economy changes, so too is consumer sentiment and demand.

The need to keep up with adaptive shifts in inventory and product offerings is higher, and it's very obvious to consumers when online retailers stagnate. Securing funding for greater inventory diversity is key to keeping customers digitally window-shopping longer, and boosting sales all around – especially if they could otherwise go to a mega-retailer's website instead.

This is nothing new, but the financing that even established e-retailers had available to them was little more than to seek debt-based financing models of old. Now, they are able to almost instantly obtain financing with repayment plans that match future sales and even financing that occurs in real-time as the sales happen.

The result is an effect where profits made pave the way to higher access to investment funds, and as they establish a regular rhythm, it becomes a much more attractive way to use credit without having credit card company rates prodding them into making more tactless decisions.

Revenue-Based Financing Functions at the Speed of Your Business

Most eCommerce businesses have a continual need to develop and expand in accordance with their customer demand. Unless a business has an extremely specific niche (and has an ongoing demand for it), it's always necessary to keep financing options in mind. 

This used to be murky and uninspired territory, with few options and even fewer good options. With revenue-based financing, the funds roll in just as they're needed, and the investor doesn't have an incentive at all for their partner to flounder and default.

On the contrary, a sales-based financing system puts both parties on the same side, and the financing party will want to craft their services so that they are easy and effective as possible for the financed party's continual success.

As their success grows, so too does their ability to obtain more funding, being easier to get (and likelier to pay off) as they scale up. If you think this could benefit you with your online SMB-funding needs, schedule a call with Onramp to learn more.