Though many talk about rising to the top and reaching their maximum potential as an e-commerce brand, that summit is a place of fiction.
There’s always a higher peak to strive for — room to grow, expand, and increase your sales and profits. But your growth can be limited by your capital.
In an inventory-driven business like e-commerce, cashflow challenges are inevitable. Fortunately, there are now many options for securing flexible, transparent working capital to help you continue scaling your business no matter what challenges may come your way.
In this article, we’ll help you understand the real role of working capital in driving e-commerce growth and the criteria to consider when searching for the right funding solution for your business.
Understanding Working Capital for Healthy E-commerce
- What Is Working Capital? And How to Calculate It
- Why Is Working Capital a Challenge for E-commerce Businesses?
- What Problems Does Working Capital Solve?
- Working Capital for Healthy E-commerce: Bank Loans vs. a Flexible Line of Credit
What Is Working Capital? And How to Calculate It
Working capital is the amount of money available to a business to meet its current liabilities and expenses. To calculate your working capital, you can simply subtract your liabilities from your current liquid assets, such as cash and accounts receivable.
Cash on Hand – Current Liabilities = Working Capital
While some working capital formulas include less liquid assets like inventory and prepaid expenses, for the purpose of this article, we’ll be focusing on the amount of cash on hand today to help you scale to the next level tomorrow.
Whether it’s shipping delays, sudden stockouts, or a limited-time advertising opportunity, unexpected expenses are a reality in this business. But unplanned cash flow disruptions can stagnate or even derail your sales.
While your competitors take advantage of peak season opportunities, discount inventory, or exciting new advertising deals, you’re left trying to restock inventory and set aside the budget for your next big product launch.
Unlike your brick-and-mortar counterparts, turning to traditional lenders isn’t always an option. Many banks and credit unions simply don’t understand the unique challenges of e-commerce. Among those that do provide working capital solutions to online retailers, many offer unfavorable terms that may seem doable in the short term but can leave your business in a vulnerable position over the long run.
Why Is Working Capital a Challenge for E-commerce Businesses?
With the global e-commerce industry valued at $6.3 trillion, you might think growth is inevitable.
But often, the speed of your growth is faster than your cash inflow.
Many high-momentum Amazon sellers see an increase in sales combined with tighter cash flow simply due to a slow seller payment schedule that they have little to no control over. Without the cash in hand to restock inventory, fuel your ad campaigns, or launch new products, it becomes much harder to build on that increased sales velocity.
Unfortunately, failing to meet the demand created by sudden sales growth can lead to missed revenue opportunities.
In this scenario, applying for a traditional bank loan or credit line doesn’t always help. Often the bank loan application process is slow, taking anywhere from three to five weeks before you can access the funds.
E-commerce funding providers have stepped up to fill the gap left by traditional lenders. With a completely digital application process and a deep understanding of how e-commerce works, turnaround is often much quicker. Depending on the working capital solution you choose, you may even be able to access funds in as little as 48 hours.
What Problems Does E-commerce Funding Solve? How Does Working Capital Work for Healthy E-commerce?
If you’ve been in the e-commerce game for any amount of time, you know expenses can add up quickly.
Even if marketplace payouts aren’t an issue for your store, balancing the day-to-day cost of doing business with the necessary investments required to stay competitive is a constant battle for high-growth sellers and brands.
Working capital solves this problem in the following ways.
Smarter Inventory Purchasing
As an e-commerce entrepreneur, a large portion of your time is spent preparing for high-volume sales periods.
Peak seasons such as Q4 require more marketing budget and inventory. Working capital helps you purchase inventory when needed and lock in favorable terms with suppliers.
Of course, there are always things you didn’t prepare for. Whether it’s an unforeseen supply chain issue or a viral product getting dangerously close to stockout, working capital for e-commerce helps you keep the right amount of inventory on hand at all times.
Better Advertising Campaigns
It can be hard to scale your marketing when you’re using most of your cash for inventory and operational expenses.
Experienced sellers are constantly looking for new and ROI-friendly advertising opportunities and with ad prices on the rise, it’s best to jump on those opportunities quickly.
You might also find that a particular advertising or marketing channel is giving you great results and you want to increase your budget immediately to boost sales. With flexible working capital, you can access additional funds to capture those opportunities faster than your competitors and accelerate the cash conversion cycle.
With a working capital solution that does not include restrictions around how the funds can be used, you’ll be able to invest in high-ROI ads and email campaigns, or even ramp up your influencer marketing to boost revenue during peak seasons.
Expanding into New Products or Markets
At a certain point in your growth, you may find that it’s time to expand into new products or territories. That could mean creating additional product lines, launching subscription boxes, diversifying into new sales channels and marketplaces, or even expanding to a new country.
Unlike traditional loans that limit the way you can use the funding, working capital designed for e-commerce can be used to invest in new product research, secure relationships with new suppliers, invest in new or improved product imagery, translations, local ads, and more.
Investing in Experts
Whether you’re bringing on an SEO specialist, social media expert, or web designer, investing in up-leveling your brand’s presence often yields huge ROI — but these results can take time to materialize.
A return on something like SEO can take up to six months. Working capital can help you invest back in your brand and accelerate the path to ROI by hiring the right professionals without putting your current operations at risk.
Boosting Team Capacity
As sales increase, so does the pressure on your existing team.
Modern shoppers expect not just prompt customer service, but an elevated brand experience from initial impression to purchase and beyond.
Whether it’s investing in data-driven performance tools, new delivery options, or simply hiring more staff to help keep your customers happy, working capital gives your business the flexibility to get the help you need when you need it.
Increasing Sales through New Technology
Technology is constantly advancing. If your competitors are actively embracing new tools, you’ll need to follow suit or risk falling behind.
Working capital can help you make the initial investment and keep your brand on the cutting edge.
Expand via Acquisition
If a competitor or adjacent brand is selling its assets, acquiring them could be an excellent way to expand your business. But purchasing a new business is often a hefty investment and while you could stand to make a lot more in the future, you’ll need a large cash payment upfront to start the acquisition process.
Whether purchasing the business in one lump sum or putting down a sizable down payment followed by regular installments, working capital can help you undertake this venture without impacting your everyday operations.
Secure Higher Marketplace Rankings
If you’re selling on Amazon, you know how much work it takes for your products to rank. You need excellent customer retention, a high conversion rate, relevancy factors — the list goes on.
This requires significant time and money for professional images, engaging product descriptions, responding to customer concerns, and more. Without investing in developing a strong marketplace presence, your ranking efforts (and sales) can take a hit.
Here again, working capital can help you tick all the right boxes for a healthy ranking position on Amazon or any other marketplaces where your brand is actively selling.
Meet Rising Costs
An influx of working capital can help you meet rising inventory costs and help bridge the gap between fulfillment expenses and increased pricing while your sales and margins catch up.
Working Capital for E-commerce Health: Bank Loans vs. a Flexible Line of Credit
Even if your e-commerce business qualifies for a traditional loan, it’s still a good idea to take the time to compare terms with the funding solutions offered by specialized e-commerce funding providers to see which options will best support your growth.
Below is a quick summary of the key differences between the working capital products offered by traditional lenders and a flexible line of credit from a specialized e-commerce lender.
- Credit Impact: Since the bank underwriting process uses credit factors, applying for a bank loan can negatively impact your credit score. Alternatively, many online funding providers don’t require a credit score or personal collateral and will analyze the business’s sales performance instead.
- Prepayment Penalties: Banks intend to make money from interest rates on their loans. As a result, paying off your loan early may come with a fee. Many alternative working capital solutions allow you to borrow as needed and repay without penalty, as long as it’s within the agreed payback terms.
- Approval Time: Most e-commerce businesses that request funding need it asap. While a bank loan approval process can take months, e-commerce funding solutions use performance-based metrics that can result in next-day approval.
Remember that not all working capital solutions are the same. Even from a lending provider specialized in e-commerce, terms often vary.
The first and most important factor when choosing a working capital provider is that they cater to e-commerce customers. A provider who understands the online selling experience will most likely offer the following:
- Multiple funding solutions to fit a range of e-commerce business needs
- Flexible repayment options
- Relevant qualification criteria for e-commerce businesses
An ideal funding provider will also have a strong focus on customer support and take an active role in helping you hit the next level.
Flexible Working Capital Designed for Healthy E-commerce
At SellersFi, e-commerce is in our DNA.
SellersFi funding solutions cater to growing e-commerce sellers driven to hit the next level.
With SellersFi Working Capital, you can access up to $5 million with the flexibility to withdraw as needed to fuel your next growth investment. Unlike most lenders, we look at multiple factors when creating our proposals to offer fair, flexible, and affordable working capital solutions that will actually help you grow.
Apply today with zero commitment and learn more about how our clients have achieved an 85% average increase in sales in just one year after partnering with us.