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.
Pros and cons of bootstrapping
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.
Pros and cons of raising funds from angel investors
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.
Pros and cons of raising funds from venture capital firms
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.
Pros and cons of revenue-based financing
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.
Pros and cons of crowdfunding
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.
About Choco Up
Founded in 2018, Choco Up is the leading revenue-based financing platform in Asia Pacific, offering non-dilutive growth capital to fast-growing companies.
Currently covering more than 10 markets and 10 sectors, Choco Up has helped hundreds of businesses capture growth while protecting equity upside.
Click here to apply for RBF funding!
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