e-Commerce Funding: A Guide to Your Options
Table of contents
Cash flow is the lifeblood of every business. It makes all other business activities possible.
However, obtaining funding for your online business is not easy. In fact, lack of access to capital is the number one challenge faced by small business owners, according to a survey by Guidant Financial.
- Why do e-commerce companies need funding?
- What are the available e-commerce funding options?
- What is the best funding option for your e-commerce company?
- Some last words
Why do e-commerce companies need funding?
Growth is a common reason for e-commerce companies to obtain funding.
Advertising, new hires and product launches — all these need money.
Whether you run a small e-commerce company or an established one, business growth often comes hand in hand with fundraising needs.
If growth and expansion are items on your company’s roadmap, then funding is something you need to learn about.
What are the available e-commerce funding options?
Bootstrapping is the practice of funding a business with no or minimal external capital.
In other words, funding comes from yourself or your company, such as owners’ personal savings or operating revenue of the business.
Advantages of bootstrapping
- Quick and easy: No lengthy applications or investor pitching involved.
- Low cost of capital: This funding method is interest-free. No additional fees involved.
- No equity dilution: Bootstrapping does not require you to give up equity or board seats to outsiders.
Disadvantages of bootstrapping
- Relatively slow growth: Compared with raising capital from external investors, bootstrapping provides less funding for your business.
- Increased chance of business failure: For early-stage companies, bootstrapping may not provide sufficient resources to build traction and survive beyond the startup phase.
- Increased risks assumed by owners: Initial funding usually comes from owners’ personal savings. If your online business goes under, you would lose the money invested in the company.
Is bootstrapping right for your e-commerce business?
The idea of funding business growth with cash reserves has probably crossed your mind at some point.
While this e-commerce funding method is non-dilutive, flexible and relatively easy to obtain, it could put pressure on your company’s cash flow, harm liquidity or even inhibit growth.
In addition, owners of bootstrapped companies assume most, if not all of the risks associated with running the online business.
There could be a total loss on investment if your company runs out of cash, or your growth initiative falls short of expectations.
On the whole, bootstrapping involves multiple pros and cons. There is no definitive guide on which factors matter more than others.
It is for you, the company’s decision-maker, to determine which advantages you find valuable, which disadvantages you wish to avoid, and whether bootstrapping is suitable for your e-commerce company.
2. Angel Investors
Angel investors, also known as business angels, are high-net-worth individuals who put up funds for early-stage business ventures in exchange for equity.
In many instances, angel investors have developed a personal or professional relationship with you (e.g. being a friend or mentor) prior to investing in your business.
As such, they provide financial backing to your company because they have faith in you.
Advantages of angel investors
- No repayment: You do not need to pay back the funding.
- Strategic support: Oftentimes, angel investors are also experts in your company’s industry. They may give guidance, share business know-how or open up networking opportunities for you.
Disadvantages of angel investors
- Equity dilution: In exchange for funding, business angels usually get a portion of your company’s ownership.
- Loss of control: Angel investors have vested interests in your company’s growth. They may request board seats and take an active role in business decision-making.
- Relatively small funding amounts: As individual investors, business angels usually provide smaller sums of money than their institutional counterparts.
- Less structural support: Compared with institutional investors, business angels provide less structural support to your company.
Are angel investors right for your e-commerce business?
Unlike venture capital firms, angel investors are generally more willing to work with companies without strong track records, such as those in the proof of concept stage.
If your e-commerce business is still in an early, pre-revenue stage, business angels may be what you are looking for.
On the minus side, finding an angel investor who trusts you and whom you trust is not easy. It may take months or even years to find the right fit for your business.
Besides, raising funds from angel investors has an equity price tag attached.
Therefore, it would be best to consider all ramifications of this funding method before kicking start your search for business angels.
3. Venture Capital
Venture capital (VC) firms invest in companies in exchange for ownership stakes, usually accompanied by seats on your board of directors.
Advantages of venture capital
- No repayment: You do not need to repay VC funds.
- Large funding amounts: Prior to investing in your company, VC firms raise funds from pools of accredited investors and institutions. As such, VC firms usually offer larger sums of money than individual investors.
- Strategic support: VC firms may provide non-financial forms of support to facilitate your company’s growth. These include networking opportunities with their portfolio companies, mentoring and consulting services, etc. Having VC investment could also help you gain media exposure and publicity.
Disadvantages of venture capital
- Equity dilution: Raising VC funds requires you to give up partial ownership of your company.
- Loss of control: Investors on the board of directors will have a say in major decisions and the direction that your company takes.
- Time-consuming fundraising process: Investor outreach and pitching could be arduous. It could take years to raise capital via this route.
- Substantial pressure for growth and exit: Having made a sizable investment in your business, VC firms have high expectations for your company’s growth. VC firms need to make a return on their investment. Huge pressure may be imposed on your company to undergo a liquidity event (e.g. IPO, acquisition or merger).
Is venture capital right for your e-commerce business?
VC firms typically invest in businesses that have proven their revenue model. For e-commerce companies that want to grow large and fast, VC could be a solution to your fundraising needs.
But there is no such thing as free lunch in the world.
VC firms give you a fat cheque, but they take a portion of equity and control from your company. You may be pressurized to accelerate exit-oriented growth, too.
Above all, equity dilution could be a heavy price to pay for raising capital, and is avoided by many e-commerce sellers who want to retain control and ownership of their businesses.
While you still have 100% control over your e-commerce business, it would be wise to evaluate all fundraising options carefully before you make the call.
4. Revenue-based financing
Revenue-based financing (RBF) is an alternative financing method in which companies receive funding based on future revenue.
In revenue-based financing, RBF platforms provide funding to companies without getting equity in return.
Rather, RBF platforms would share a portion of your company’s revenue until a predetermined amount is paid back. Typically, the predetermined amount is assessed at the capital plus a small flat fee.
Advantages of revenue-based financing
- Flexible repayment: No fixed monthly installments. Repayment is based on your company’s monthly revenue. You repay less if you earn less, repay more if you earn more. Total repayment is capped at the predetermined amount.
- Non-dilutive: You do not need to give up ownership or board seats in return for funding.
- Grow at your own pace: RBF platforms do not take part in management of your business, nor will they interfere in your decision-making process. RBF platforms do not need to sell their stakes in your company in order to make money. There is no pressure for liquidity events such as merger, acquisition or IPO. No covenants will be imposed to restrict how you use the funding.
- Easy to apply: Most RBF platforms allow online application. No pitch deck or presentation required. (For example, Choco Up’s online application form only takes a few minutes to complete.) RBF platforms make use of data integration and analytics to assess applicants’ financial performance. There is no need to prepare elaborate financial reports and projections manually. No collateral is needed to ‘secure’ the funding.
- Low cost of capital: The only cost of capital is a small flat fee. No interest is charged on unpaid amounts. No other fees are involved (e.g. loan facility fee).
Disadvantages of revenue-based financing
- Pre-revenue companies may not be eligible: You need to have recurring revenue in order to apply for and repay RBF funding.
Is revenue-based financing right for your e-commerce business?
In the past, business owners were hesitant to raise funds from angel investors or VC firms for fear of shared ownership and losing control of their companies.
By taking away the most unfavourable feature of equity financing, revenue-based financing has found favour with fast-growing e-commerce sellers in recent years.
A case in point is eBuyNow, a consumer electronics technology company which sells through both online and offline channels.
Prior to obtaining RBF funding, eBuyNow faced a number of challenges:
- They needed to increase ad spend as part of their growth initiative
- High volume of B2B credit sales impeded cash flow
- Financial constraints limited inventory purchase, which in turn inhibited growth
With RBF funding provided by Choco Up, eBuyNow was able to overcome bottlenecks and achieved 5X revenue growth in six months.
eBuyNow is but one example of how revenue-based financing helps e-commerce companies turn growth barriers into growth drivers.
Following the ‘grow now, pay later’ approach, eBuyNow also enjoys flexibility in repaying RBF funding with a small percentage of their monthly revenue.
As its name suggests, crowdfunding is the practice of raising funds from the crowds.
Typically, a project or venture is funded by gathering small amounts of money from a large number of individuals.
Crowdfunding campaigns can be divided into four categories:
- Donation-based: Individuals make donations to your project purely as a token of support. They will not receive rewards of any kind.
- Rewards-based: Contributions are made to your campaign in exchange for non-monetary rewards (e.g. the finished product).
- Debt-based: Instead of offering non-monetary gifts, you will repay contributors with money plus interests.
- Equity-based: You can also choose to give away shares in your company in return for funding.
To create a crowdfunding campaign, you first need to map out the title, goal, description and other details of your project.
You can then post your campaign on crowdfunding platforms (such as Kickstarter, GoFundMe and Indiegogo), where members of the online community could invest in your project.
Generally, money will be collected from individual contributors only if a crowdfunding campaign reaches its fundraising target. If not, then no money will be taken from your supporters.
Advantages of crowdfunding
- Usually no repayment: With the exception of debt-based crowdfunding, there is no obligation to repay your supporters.
- Usually non-dilutive: Most forms of crowdfunding are non-dilutive. You will share ownership with contributors only if you opt for equity-based crowdfunding.
- Quick access to funding: The average crowdfunding campaign lasts for weeks to months.
- Market validation as an added benefit: Online response to your idea helps you gauge market readiness and consumer demand.
Disadvantages of crowdfunding
- Resource-intensive preparation process: A lot of work needs to be done before a crowdfunding campaign goes online. You may need to build a prototype, create videos, set up social media accounts, and the list goes on.
- High failure rate: According to Statista, 61% of crowdfunding projects fail to raise the target amount within the allotted time.
- Many fees involved: A crowdfunding campaign involves many fees from start to finish. These include platform fees, payment processing fees, etc.
- Intellectual theft: Putting your business idea online means everyone could see it. There is a possibility that someone may use your idea and build on it.
Is crowdfunding right for you?
For creators with an idea, crowdfunding is a route to gather funding and bring their ideas to life. New businesses could, arguably, also benefit from financial backing of the crowds.
If you have an established business looking for growth capital, however, crowdfunding may not assist as much.
What is the best funding option for your e-commerce company?
As the saying goes, nobody knows you better than yourself.
If you are in control of your company’s financials, then it is safe to say that nobody knows your company better than you.
To help you compare the pros and cons of different e-commerce funding options, Choco Up has compiled the following table:
Some last words
When it comes to e-commerce funding, business owners naturally prefer not to have too many strings attached to the money they get. In many instances, ownership stakes are too much to ask for. But founders are reluctant to give up equity for good reasons. To begin with, you become accountable to investors, having to take into consideration their opinions and interests when making decisions. On top of that, investor directors may have steering power at board meetings. Folk tales even have it that underperforming founders could be ousted from their own companies.
At Choco Up, we believe that funding a business is not always about trading equity for money. There are plenty of non-dilutive funding methods, and revenue-based financing is one of them. As a founder-friendly funding option, revenue-based financing does not require business owners to share ownership or control with funding providers. Choco Up’s data integration platform is also tailored for e-commerce businesses, allowing you to access capital quickly, repay flexibly and grow without worry.
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