Understanding the importance of working capital for e-commerce businesses
According to a new survey conducted by MarketingSignals, the failure rate for e-commerce businesses stands at 90% after 120 days, or about four months. Out of these, 32% fail simply because they run out of money. Working capital can help — that’s why understanding what it is and why its import is crucial.
This becomes even more pertinent in the current economic climate. Due to the pandemic and the subsequent lockdowns, as well as movement restrictions, there has been a drastic shift towards e-commerce, and almost everyone who is selling products or services today has a digital presence as part of their business model. This surge in online purchasing has been accompanied by a drastic shift in consumer behavior. According to Statista, in 2016, 209.6 million U.S. people were online shoppers and had browsed products, compared prices or bought merchandise online at least once. These figures are projected to reach 230.5 million in 2021, positioning the United States as one of the leading e-commerce markets based on online shopper penetration.
Working capital can help pad e-commerce companies' bank accounts as they work to keep up with this dynamic market. While you still need to remember your bottom line, it can help you focus more on inventory, logistics, and marketing, as well as your overall business growth and development, with the help of a little extra cash.
What is working capital?
By definition, working capital is a financial metric which represents operating liquidity available to a business. In other words, it is the cash flow that you need to cover current assets and expenses in order to keep your business running.
If you are an e-commerce merchant, you typically have to pay outgoing expenses well before you generate any income from sales. Working capital is the cash flow that helps you cover these expenses such as employee salaries, vendor payments, advertising, inventory, and others. Working capital for e-commerce merchants can be extremely helpful in playing a role to aid you in meeting current, short-term obligations, and to keep the business running smoothly.
How working capital can grow your e-commerce business
Having a steady cash flow is crucial for any business, and online sellers are no exception. However, due to a number of reasons, some parts of the year can see a great deal of business, while others are slow. This is where proper working capital management comes into play. Here are the top five advantages of working capital for e-commerce, and how it can help you grow:
- Resiliency — If this pandemic (or any economic downturn, for that matter) has taught us one key lesson, it is the importance of building a resilient business. Companies that have consistently high amounts of working capital are generally much better prepared to respond to emergencies and unexpected events.
- Operational flexibility — With online commerce, trends change every day. Today social media commerce is on the rise, tomorrow brick and mortar stores might be back; you just never know. To keep up with ever-changing consumer behaviour and trends in the world of e-commerce, having working capital on hand is always helpful. It makes adapting to changes, streamlining operations, and launching channels and products quickly much easier.
- Better inventory management — For peak seasons like holidays and back-to-school shopping, e-commerce stores need to be ready with extra inventory to avoid backorders. With working capital in hand, you can purchase extra inventory and stock up for these seasons. This not only helps you serve your customers better but can also go a long way in helping you save money in the form of bulk orders and other special discounts from suppliers.
- Better advertising and robust marketing campaigns — According to the above-mentioned MarketingSignals study, around 36% of e-commerce businesses fail due to a lack of online visibility. This makes sense — if you’re selling products and services online, then you need to have an online presence. Additional funds can help you invest in a full-fledged online marketing plan.
Now that we understand what working capital is and its numerous benefits, it’s time to evaluate if this is an ideal choice for you. If you are running an e-commerce store, working capital is very likely a good financing solution. That said, every business is different and requires individual analysis to know for sure if working capital is a good fit. Let’s dive in.
How do you acquire working capital?
Generally, businesses see if they qualify for a traditional loan, such as through a bank or traditional lender. A pro of going the more traditional route is that it often comes with better payment terms. That said, the favorable payment terms from banks and traditional lenders are often accompanied by hefty requirements, such as a long time in business, high revenues, and excellent credit, not to mention that funds can take up to 3 to 6 months to hit your account.
In today’s digital world, there are many other working capital solutions for e-commerce available through online lenders. These typically take less time to fund, in addition to being more flexible about requirements such as your credit score. Here are a few solid options to look into.
With an A+ rating on Better Business Bureau, OnDeck is your go-to for small business loans. For the purposes of having working capital, a line of credit is probably the best fit, and OnDeck’s product will extend anywhere from $6,000 to $100,000. With a line of credit, you only pay interest on the amount that you use. Note that OnDeck can have stricter requirements than some of the other options we’ll explore later. Among the necessary qualifications are at least one year in business and a minimum of $100,000 in annual gross revenue.
Specifically designed for e-commerce sellers, Payability offers two working capital solutions: daily payouts and capital advance (Instant Advance). Neither of them require credit checks, as eligibility is based off of your seller account that includes sales history and performance. Both could be good options depending on your needs.
Daily payouts are exactly what they sound like — they provide you with daily access to your previous day’s earnings for a 1-2% fixed fee, calculated based off of your gross sales. To qualify, you need to be selling over $2,000 each month, have 90 days of sales history, and “good performance” metrics.
Payability Instant Advance is a little more difficult to qualify for, requiring 9 or more months of consistent sales history and average monthly sales of $10,000. The fees associated with the capital advance vary with your receivables, but are a weekly flat fee. If you sell more than $100,000 in a month, then you could qualify for a reduced rate.
Another company that specializes in financing specifically for online businesses is Clearco. To qualify, you need to have at least six months of revenue history, with a flat fee that varies, but could be as low as 6%. The main perk of Clearco over other working capital solutions is that it’s built for companies that are looking to scale. When you go with Clearco, you can get access to their vendor network, VC network, and all the tools you need to scale from early-stage startup all the way to going public. The best part of this is that Clearco allows you to fund advertising and inventory for your e-commerce startup with debt instead of equity, meaning that you don’t need to give up any control of your company to investors.
Though Fundbox’s products aren’t specifically designed for e-commerce merchants, they are intended to serve small businesses. Fundbox provides both term loans and lines of credit, the latter of which is a better fit to fill any working capital related needs. To determine eligibility, Fundbox doesn’t pull your business credit score — instead, creditworthiness is based off of your business accounts, such as your business bank account. The line of credit is paid back on a 12 or 24 week plan, and your available credit replenishes as you pay. An extra benefit of going with Fundbox is their transparent pricing model. Simply input the amount you’d ideally like to take out into their pricing tool to see an estimate of how much it will cost (note that fees will vary based off your business’s financial profile).
Last word on working capital for e-commerce businesses
Working capital is the cash flow every business needs to cover current expenses. Whether you’ve been hit hard by the pandemic or simply want a boost so that you can invest in payroll, inventory, and marketing, working capital can help keep you afloat, or aid in growing your business. If you're not ready to take the plunge to take out a loan, or don't quite have the credit score to qualify, there are also plenty of business credit cards for e-commerce businesses that can help you earn rewards off the purchases you make most often. With so many accessible and modern lending options, it has become easier to acquire working capital today, making it possible for small business owners to survive, thrive, and scale.