2020 was the year the world went digital. 9/10 global eCommerce companies saw double-digit revenue growth as consumers were forced to abandon the high street and turn to online purchases to meet their needs. In other words, if you are an eCommerce business, the likelihood is that you will have had a noticeably strong year – and will be set to continue this success into the post-pandemic era. This digital revolution has showed no sign of slowing as the global economy recovers.
Whether you’re an established eCommerce business or a brick-and-mortar seller that recently transitioned to online, how do you capitalise on this momentum to propel your business to new heights?
There are plenty of ways to attract new customers and boost sales, from online advertising, influencers, and automated mailers. But regardless of whether you’re investing in inventory ahead of a marketing campaign or upgrading your site in anticipation of a big launch, there is one thing you need in order to seize the opportunities available to you and supercharge your growth: the right financing.
At Forward Advances, we see that many eCommerce companies face two key financing challenges that hold them back from reaching their business goals.
Sound familiar? While these problems are frustrating, they can be easily resolved with the right funding, used wisely.
While there are a wide range of financing options available for eCommerce businesses, choosing the right option – based on your company’s specific needs and lifecycle stage – is critical if you want to maximise success.
Let’s take a look at the financial products that are out there and how to choose between them.
Venture Capital: Venture capital (VC) is a form of financing where capital is invested into a company, usually a start-up or small business, in exchange for equity in the company.
Traditional bank loan: If approved for a traditional bank loan, a bank gives you a lump sum of cash in exchange for making monthly payments over a set term, with a fixed or variable interest rate over the life of the loan.
Merchant Cash Advance: A Merchant Cash Advance (MCA) isn't really a loan, but rather a cash advance based upon the credit card sales deposited in a business' merchant account. This means that a merchant does not owe any funds until they generate sales.
Revenue-based financing (RBF): RBF is a short-term finance solution to boost revenue and growth through inventory or marketing. RBF is designed to be flexible to accommodate for business peaks and troughs, as the advance is repaid using incoming revenue. Unlike other finance types, RBF is equity-free and does not require any personal guarantees or collateral.
When considering any financial product for your business, take note of the:
Ease of Access: Do you have the trail of bank statements and positive credit history to pass the strict underwriting system used to approve traditional bank loans?
Available Capital: How much capital do you need to meet your business goals at this particular moment? Are you chasing hyper-growth or simply looking to boost sales?
Cost: Easy access tends to come at a high price. How tight are your margins? Can you afford to pay high fees down the line?
Accessing capital via traditional sources such as high street banks often require small business owners to be prepared to put up their own assets as guarantees against the loan, or accept high interest rates.
At the other end of the spectrum, VC isn’t right for every business either – despite it often being put forward as the most desirable option. Many VC funds aim to pick companies either with the potential to generate tenfold returns, or to go public in 10 years – a pretty narrow group.
Revenue-based financing (or RBF) is an immensely versatile financing option with flexibility baked into its nature. While traditional bank loans or invoice financing agreements require a fixed sum to be paid back every month, the major advantage of RBF is that businesses pay back the loan, and interest, via an agreed percentage of their daily or monthly sales. It gives companies short-term cash injections for a clearly defined purpose, like marketing costs or inventory purchases.
Unlike other types of financing, with revenue-based financing there is no equity participation (i.e., you don’t give up any ownership in the business), personal guarantees or hidden fees involved. It’s fast too: the instant cash structure allows founders to act on immediate growth opportunities, instead of going through the lengthy process of raising funds through equity-based investment.
What’s more, when a business has found its product-market fit and is generating repeatable, predictable revenues, because RBF underlines revenue growth it can be an efficient way to boost your valuation before a forthcoming VC round.
The key advantage to revenue-based financing is flexibility. Rather than becoming a fixed business cost every month, you pay the total amount back over time as a percentage of your revenue. In other words, if your revenue goes up, so do your payments, and if you’re having a slow sales month, your payments go down. For an eCommerce business, this offers invaluable flexibility. At Advances, we charge a simple fixed fee so there are no surprises or penalties should it take longer to pay back than anticipated. We break it down and show you how it can help you grow your business faster below.
Scenario 1
It’s November. Black Friday is coming up and you decide to invest £100,000 in inventory, advertising, and PR to make the most of consumer momentum. The investment pays off and you have a month of smashing sales targets – but then everything goes quiet. If that £100,000 had come from a traditional bank loan, you would be hit with high payments just after Christmas, a notoriously slow period. With revenue-based financing, payments reduce with your revenue, meaning that you can take advantage of growth opportunities without the resulting pressure
Scenario 2
It’s a quiet month for sales after a busy period. You’ve lowered your budgets accordingly – but then one morning you wake up to find that your website traffic has spiked. You discover that one of your products have been featured in Grazia and influencers are picking it up on social media. You want to take advantage of the unexpected PR, so you apply to an revenue-based finance lender for funds to put towards digital marketing and inventory. Because your marketing data and banking information looks solid, your application is approved in 24 hours. You launch a targeted promotional campaign across Google and Facebook to make the most of the interest and put in an order with your supplier to make sure you don’t run out of stock, anticipating higher sales volumes to continue. Revenue-based financing gives you the confidence to invest, knowing that should your sales slow, you’ll be able to meet the repayments.
At Forward Advances, we use the latest technology to assess your business and build our funding offers. Rather than relying on outdated credit score metrics in our underwriting, Open Banking enables us to take cash flow into account. All of this creates a comprehensive picture of a business’ future trajectory and that means we can build a great offer for a company based on the best data possible. You can read more on this in our 'Applying for Revenue-Based Financing' article.
But how do you really know if RBF is the right financial product for your business? Let’s look at the pros and cons of revenue-based financing.
Pros:
Cons:
The growing popularity of revenue-based financing has made it an increasingly crowded space, making it more important for businesses to choose the right lender, especially in specialised markets such as e-commerce where certain providers have more expertise than others.
Some revenue-based providers (like us at Forward Advances) act as business partners as well as lenders, actively supporting a company to help them make the capital work harder for them. This is often through adding additional business intelligence or consulting services on top of the advance, such as helping to pair the company with marketing analytics or inventory specialists. These experts can analyse the current marketing performance and look at how the company can negotiate better deals with its suppliers, for example.
Shop around for bundled services and look for a partner with relevant industry expertise and a data-driven approach to help you achieve the highest possible return on investment.
For a complete checklist of questions to ask and what you need to consider when selecting a provider, download our revenue-based financing checklist here.
Interested in revenue-based financing with Forward Advances? Let's chat. See how much you could be eligible for here in less than 5 minutes.
Image from StratfordProductions via Adobe Stock.
