Published Feb 23, 2022

4 Reasons Why e-Commerce Companies Should Consider Revenue-Based Financing

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Give us 60 seconds. We’ll convince you why your e-commerce business should use revenue-based financing (RBF).
 
We’re just kidding! Anything related to your company’s financing is a serious matter and should not be taken lightly.
 
Although we started off with a joking statement, we are serious about why you should consider revenue-based financing for your e-commerce company. Here are four good reasons:

  1. More working capital for inventory and marketing
  2. Prepare for peak seasons
  3. Protect equity upside and maintain control of your company
  4. More accessible than bank loans

Note: If you are not yet familiar with revenue-based financing, you can read our article on what is revenue-based financing and come back with a well-informed mind.

1. More working capital for inventory and marketing

Let’s start with the biggest reason why you need revenue-based financing — cash flow.
 
Cash flow problems are part and parcel of an e-commerce business. These issues are not caused by bad business decisions at all. They naturally arise given how supplier relationships work in the scene.

The root cause of cash flow problems

To minimize the costs of goods sold, many e-commerce businesses work with suppliers from Southeast Asia, where labor and material costs are significantly lower.
 
But there is a downside. Payment terms could be rough on you.
 
In China, for example, the trade practice is a 30/70 split on payment. It means suppliers usually ask for 30% down payment upon placement of an order, and the remaining 70% upon shipment of goods. You will be paying the whole price of the order before you get anything to sell. 
 
Let’s say you just discovered a $5 product from China that would sell really well in the US. You could easily go for a 3X markup. However, it takes a month to deliver and even more time before you can start selling.
 
Without revenue from sales, you do not have the deep pocket to stock up, not to mention the marketing expenses incurred prior to the sale of goods.
 
If you must proceed with purchase of this new product, inventory and marketing expenses could put you deep in the red.
 
Here is where e-commerce financing comes in.

How does revenue-based financing help?

Revenue-based financing gives you funding to fulfil working capital needs right off the bat. There is no need to skimp on the necessary growth expenses, or dig into personal funds to support your business.
 
The funding and a small flat fee will be repaid after you get revenue (more on this later). This is what we call “grow now, pay later”.
 
With revenue-based financing, you can save the trouble of calculating how much you can spend to scale your business.
 
Instead of working around tight budgets which limit growth, you can now use money on growth opportunities without worrying about the upfront payment.

2. Prepare for peak seasons

Every time a peak season draws near, e-commerce retailers have a happy problem.
 
Sellers are happy because there will be spikes in demand and revenue. But there will also be problems.
 
How can you pay for inventory before you sell them for money? You may also want to increase your ad spend to get more sales, but how much can you afford? It all depends on your company’s cash reserves.
 
If your business isn’t particularly wealthy, financial constraints could impede your ability to monetize seasonal opportunities.

How does revenue-based financing help?

It gives you financial resources to gear up for peak periods.
 
RBF funding can be used for inventory purchase, ad spending, or any other item that helps during the high season. Most importantly, it could help multiply your sales revenue.
 

Example 1: Funding inventory purchase

Let’s say you are a florist, and Valentine’s day is around the corner.
 
You expect consumer demand to reach 150 bouquets a day, but you only have enough money to stock up for 100. Had you had more money to buy inventory, you would have captured the sales of 50 more bouquets.
 
This is exactly what revenue-based financing can do. RBF funding can be used to buy inventory. Make sure you stock up enough to meet the demand, so that there is no lost sales.

Example 2: Increasing ad spend

Assume you usually make a 2X return on ad spend (ROAS). Without external funding, you only have $300 to spend on advertising. It means $600 revenue from your ad campaign.
 
However, with RBF funding, you can allocate up to $1,000 on ads. With the same ROAS, you will be getting $2,000 from sales. Your sales revenue multiplies.
 
That’s why we say revenue-based financing is a growth enabler. By taking away the cash flow limitation, it allows you to fully leverage seasonal opportunities now and pay for your expenses later. Again, you can “grow now, pay later”.

3. Protect equity upside and maintain control of your company

When it comes to e-commerce funding, you don’t have a lot of options.
 
Venture capital and angel investments are theoretically viable methods of e-commerce financing. In  practice, however, they are out of the reach of ordinary e-commerce businesses as investors have their eyes on disruptive innovators in the market.
 
More importantly, equity financing has many strings attached.

What are the disadvantages of equity financing?

The first ‘string’ is a monetary one.
 
In return for injecting capital into your company, venture capital firms and angel investors receive a portion of your company’s shares, diluting your equity.
 
While these shares may not seem significant at this moment, their value would climb as your company grows and generates more profits.
 
You could end up giving out more money (in the form of shares) than the growth capital you receive. That’s why equity finance is really expensive.
 
The second ‘string’ involves control of your company.
 
More often than not, equity investors also ask for seats on your board of directors. As their money stays in your company, they want a say in how your business is managed.

Investor directors may even push your business to scale fast and reach a liquidity event where they can realize their return on investment.
 
That’s why founders are so reluctant to give up board seats to investors.

How does revenue-based financing help?

Revenue-based financing is non-dilutive.
 
For example, Choco Up does not get any shares, options or warrants in return for providing funding to you. No board seats will be taken either.
 
With revenue-based financing, you will be able to preserve equity and maintain control of your company. Welcome to the world of non-dilutive growth capital.

4. More accessible than bank loans

Banks are happy to provide financial backing to well-established companies with stellar track records. But e-commerce businesses? Not really.

Why are bank loans so difficult to get?

Traditional financial institutions are known to be risk-averse. They lend only to credible, low-risk businesses, and ask for collateral to cover their losses in the event that borrowers default.
 
E-commerce is a ‘risky’ business from bank lenders’ perspectives.
 
This is in part due to the rapidly changing environment that e-commerce companies compete in. E-commerce performance metrics are new and unfamiliar to bank lenders, too.
 
Further, asset-light e-commerce companies often lack the requisite assets (e.g. equipment, cars or real estate) to meet collateral requirements. Younger companies do not have robust credit histories to pass the banks’ credit assessments either.
 
For online businesses that want to obtain bank loans, these are huge hurdles to overcome.

How does revenue-based financing help?

Revenue-based financing is tailored for high-growth businesses. You will not be denied funding merely because your business has a high risk-return profile. 
 
Besides, your company’s credit history is generally not taken into consideration in an application for RBF funding. Collateral is not required either.
 
Many revenue-based financing companies are happy to provide growth capital for e-commerce companies. At Choco Up, we even put e-commerce as a priority.
 
For example, we have built a data integration platform that works perfectly with your sales and analytics systems, such as Shopify, WooCommerce and Google Analytics.
 
After securely connecting your accounts to our fintech platform, application for funding can be completed in a few clicks. If everything goes well, funding will be available in as soon as 48 hours.
 
If you are looking for growth funding for your e-commerce company, you can sign up here and claim your preliminary offer on our platform. It is free and takes only a few minutes.