One of the most common strategies used by e-commerce businesses to ensure consistent cash flow and quick expansion is revenue-based financing.
How is revenue-based financing beneficial for e-commerce businesses?
With revenue-based financing, you are immediately provided with funds to address your working capital requirements. You don’t have to invest your own money to maintain your firm, and you can avoid spending all of your funds on the necessary costs of expansion. Once you bring in revenue from sales, a percentage is used to pay back your financing. This type of financing, known as “grow now, pay later,” allows you to avoid the hassle of figuring out how much money you can spend expanding your company. You may now use the money on growth prospects without worrying too much about the future of your firm instead of operating within restricted budgets that could jeopardize its potential growth.
In this article, we explore the four major advantages of choosing revenue-based financing for your e-commerce business.
- Additional working capital for marketing and inventory
Let’s start with cash flow, which is one of the primary needs for every e-commerce business. Cash flow problems are a common occurrence in the e-commerce industry and are often unavoidable. However, that does not imply that poor business decisions are to blame for cash flow problems. Since inventory and marketing expenses must be paid before revenue comes in, additional working capital is often necessary.
- Get ready for the busy seasons
Due to significant increases in demand, e-commerce retailers frequently have issues staying in stock during peak seasons. This is especially true for companies with limited working capital and a lack of stability in their finances. It may limit their ability to capitalize on seasonal possibilities.
Revenue-based financing can be useful in this situation. You can utilize the money from this type of financing to pay for the inventory you need. Make sure you have enough inventory on hand to match demand so that you don’t risk losing any sales.
- Protect your equity upside and keep command of your company
The possibilities for financing e-commerce are extremely constrained. Theoretically viable avenues for e-commerce financing include venture capital and angel investors. However, because they place a greater emphasis on disruptive market developments, they are not suited for typical e-commerce enterprises. Revenue-based financing has no dilutive effects. You may protect your equity and keep control of your online store with revenue-based financing.
- More accessibility compared to bank loans
Banks are happy to offer financial banking services to well-established businesses with an exceptional track record. However, they are often hesitant to fund newer e-commerce businesses. When they do offer funding, it tends to be limited in scale, too.
So how does revenue-based financing help e-commerce businesses?
The conventional financial sector does not take many risks. They only lend money to people that they deem reliable, low-risk, and financially solid. They look for companies that can provide collateral so that it can be utilized to offset losses in the event of any. Revenue-based financing is intended for companies that are rapidly expanding. You won’t be turned down for financing just because your company has a high-risk return profile. Revenue-based financing does not consider the credit history of your company and does not require collateral.
Because of the complexities and trade-offs associated with equity financing, the majority of businesses have chosen non-dilutive funding solutions such as revenue-based financing. Despite being a novel type of financing, revenue-based financing has recently acquired popularity and is expanding upstream. It is regarded as a potent financing choice that enables the e-commerce company to obtain the best results. In fact, according to estimates for the worldwide revenue-based finance market’s growth from 2020 to 2027, it will expand by 61.8%.
If you’re not sure if revenue-based e-commerce financing is a good fit for your company, speak with an expert or conduct a thorough investigation to find out. The revenue-based finance model might not be the best option for all businesses. Pre-revenue businesses, in particular, might struggle with a revenue-based finance model. However, when a revenue-based financing arrangement is created, the interests of both parties are fully matched; they both gain when the receiving company’s revenue increases and lose out when revenue decreases.