Dropshipping refers to an order fulfillment method in which entrepreneurs run an online store and sell products without holding the inventory. It is relatively easy to start and operate and a great way to generate passive income.
Sellers don't need to create, hold or ship any items. When a shopper places an order in your online store, you process and forward it to your supplier. Your supplier will receive the order and ship the item directly to the shopper. Approximately 30% of eCommerce businesses have adopted dropshipping.
Although dropshipping is attractive due to its many benefits, including low barriers of entry and overhead costs, the eCommerce sector is unique, and you need a healthy cash flow to reach your full potential. Luckily, this post discusses the best dropshipping funding options to help you win.
Dropshipping is an attractive business model, and sellers can reap its many benefits. These include:
Low Entry Barriers
Dropshipping differs from traditional retail fulfillment in that you won't need to keep products in stock or the related physical infrastructure. Therefore, it does not require a lot of resources to start. The basic equipment you need for a dropshipping business is a computer and a stable internet connection. You can get your website up quickly using the many eCommerce platforms. Most of these platforms even have inventory and shipping management solutions.
Low Overhead Costs
You can keep prices down and get more profit since you don't need to pay for storage and shipment of products. Dropshipping is, therefore, a great model for starting a business when you don't want to store your own inventory.
Easier to Increase the Lifetime Value of Your Client Base
Dropshipping model allows you to maintain and increase the lifetime value of your customer base. You can keep existing customers engaged by consistently adding new product item selections.
Low-Risk Business Model
You don't need a lot to start a dropshipping business. The few requirements include a domain name, website security, web hosting, and eCommerce platform subscriptions. You can find all these packaged together for a monthly price.
Also, with dropshipping, you'll never get stuck with unsold items since you purchase products from a supplier after making an online sale. This allows you to offer some related products that your customer does not even know they need since the risk is very minimal.
Dropshipping allows you to experiment or test the market since you don't invest your resources in a single line or product. If a particular product does not seem to move as you wish, you can shift to another one quickly. You can also bring in a new product if the sales of the current one start losing steam while still having the old one in your catalog.
In fact, you can check for trending items on social media and quickly post those products for sale on the same platform where they are in high demand. Testing products lets you know your customer's preferences so you can expand your online business quickly to meet their needs.
Dropshipping is a good business model, but you also need to understand its challenges and downsides to succeed in order to find ways to overcome them. Some drawbacks of dropshipping include:
Dropshipping has a low barrier to entry, so you can expect high competition. In fact, many competitors adopt the lowest-price-possible strategy for selling, and this can significantly impact your profit margins. If you want to stand out in dropshipping, you should find a niche with less competition and distinguish your product listings with quality descriptions.
Less Quality Control
Dropshipping involves outsourcing fulfillment to suppliers; therefore, products may reach the customers directly without touching your hands. Although it sounds good for convenience, it is a challenge for quality control. You cannot check the products to ensure the quality is consistent with what you describe in your listings and what your customers deserve. Even if you are not in charge of shipping, customers will blame any delayed shipping or faulty items on you. These problems can easily tarnish your reputation and make you lose customers.
No Guarantee to Dropshipping Inventory
When you are dropshipping, you fulfill customer orders based on your supplier's stock. If the stock levels drop unexpectedly and you don't know about it, you might be making sales for products that are not available. As a result, you will have unhappy customers. However, you can look for suppliers who offer APIs to help you know their stock levels in real-time.
Returns Are Common
If you rank the biggest challenges facing eCommerce, returns will be among the top on the list. The average return rate in eCommerce was 20.8% in 2021 alone, with health/ beauty and fashion items having the highest rates. Due to the possible unreliability of some suppliers, you might even have a higher than average return rate. Sometimes, you might have to protect your reputation by buying a new product and covering shipping costs out of your pocket to satisfy customers who receive faulty products. However, you can overcome this challenge by partnering with reliable dropshipping suppliers. Some suppliers are willing to accept faulty items back and even pay for return shipping.
Types of Dropshipping Funding
While dropshipping, unlike other businesses, requires fairly minimal costs to start or operate, that does not mean the costs are nonexistent. If you are a seller, you need adequate funds in your hands to reap the most profits. Sufficient cash allows you to take advantage of discounts offered by suppliers and pay for website maintenance, among others.
Below are different types of dropshipping funding:
Line of Credit
Line of credit — also called revolving credit or alternative overdrafts — is a popular dropshipping finance option. This lending option offers you funds when you need them at a fixed credit limit, depending on your level of turnover. The credit ranges between $2,000 and as large as $1,000,000.
Lines of credits are ideal in certain cases. For instance, when one of your suppliers has a special discount on a product that you sell and is highly demanded, but you need a big order to reap from the offered discount.
Also, if you look at the sales projections and you believe you can clear the order within three months, but you don't have the cash at the moment, you can opt for a line of credit for the cash required to take advantage of the discount. You'll repay the funds after selling a portion of the entire inventory. Once you pay back the cash, your credit limit goes up, so you can take a larger amount next time.
Although a line of credit is among the most popular funding options for dropshipping businesses, it has several disadvantages. For example, many lenders require you to have a trading history of at least two years, and your turnover determines your credit limits. Many lenders are usually not willing to increase the limit even if you can prove that your online business is growing fast.
Related: Alternative ECommerce Startup Loans
Another option to finance your dropshipping business is credit card financing. You can use your credit card whenever you need some cash and even get interest-free purchases if you pay fully every month. In fact, some cards have 0% APR promotional periods, often running between 12 and 18 months.
Unfortunately, credit cards can be a costly form of financing, especially if you fail to clear your balance each month. Their double-digit interest rates can negatively impact your credit score, especially when you carry a high balance. Credit cards can be good for purchases you can pay off in full such as monthly bills and daily expenses. But using credit card financing for dropshipping funding is not ideal considering the long eCommerce cash cycle.
Inventory financing, also called stock finance, involves taking out a loan to pay for your inventory while maintaining ownership of the products. This funding option is ideal if you don't have money to pay for the wholesale prices given by your dropshipping suppliers.
The lender gives you credit for a huge inventory, and the items you buy using the funds become the collateral for the financing. While you own the inventory fully, if you don't make timely repayments as scheduled, the lender can repossess the inventory to repay their debt.
Although inventory financing is a popular funding option for dropshipping businesses, it is expensive in the long term, even if the interest is low. Some lenders even ask for an extra form of collateral other than the inventory itself.
Funding Option Aligned with Sales
One thing you note with most traditional bank products, including those mentioned above, is that each of all of them has a characteristic that is not ideal for a dropshipping business. That may be the high-interest rates, a lengthy approval process, or the fact that they require collateral. These can lead to a lot of debt because their repayment is not synced with actual sales.
Considering that eCommerce takes a long time to convert inventory into cash, the best funding option for dropshipping business models is one built specifically for them. ECommerce financing tied to actual sales allow the seller to get the funds they need with no interest, minimum payments, collateral, etc., and repayment happens only when they sell an item.
The Best Dropshipping Funding Option for You
You need a healthy cash flow solution to win in dropshipping. Unfortunately, many dropshipping funding options can break your neck due to their high interests, lengthy approval process, and even worse, their repayment is not synced with actual sales.
Onramp is truly the best funding option for your dropshipping business. The funding solution has all that a dropshipping business would want in a lender, from low fees with no penalties to same-day approval. The cash solution also provides support from industry experts to help you overcome the challenges encountered in the eCommerce industry.
Onramp also has great repayment flexibility since funding is 100% synced with your actual sales. Give us a call today to learn how we can help.