Why every eCommerce company should use revenue-based financing

May 15, 2020
Written by
Aidan Corbett

If you are selling physical goods online, and you want to grow quickly, then you need finance. Specifically, you need Revenue Based Finance.

Revenue Based Financing is a simple, fast way to get funding for your business. It's unsecured and un-dilutive, meaning you get to access large amounts of capital, without giving up any ownership. Using Revenue Based Financing, you'll no longer have any cash flow challenges and you'll have all the funding you need to grow.

In this article, we go deep on exactly why you need finance for your eCommerce business and show you all the different options you have to get this finance. We also explain exactly what Revenue Based Finance is and why it’s the best funding option for growing your business. 

Why is finance so important for eCommerce businesses?

eCommerce companies have a massive cash flow problem. They always need more cash than they have available. This isn’t driven by bad cash management, or slow paying customers, it’s driven by your suppliers!

Let me explain. 

One of the biggest costs for any eCommerce company is purchasing inventory. Most eCommerce brands source their inventory from the Far East and the reason for this is obvious - prices are much lower and sourcing products from China gives you a higher gross margin. 

But there’s a catch. 

You will almost always get terrible payment terms. These terrible payment terms are the reason you need finance. Most of our customers at Wayflyer have to stomach the classic 30/70 split - 30% payment on order and then 70% payment on shipment. It is these terms that create the cash flow problem for your company. 

Let’s look at an example to understand why this is a problem for your company;

  • Day 0: you decide you need to make an order for new inventory, let’s say it’s $100,000.
  • Day 1: you contact your supplier to place the order. They demand payment of 30% ($30,000) immediately. You send them the money. 
  • Day 28: your goods are ready to be shipped. Your supplier demands you pay the remaining balance of 70% ($70,000) before they ship the goods. You send the money. 
  • Day 60: After 4 weeks at sea, your goods arrive. Now, you need to get them to your warehouse and start selling them. You spend another $20,000 on marketing to make sure you make some sales. 
  • Day 70: You are now $120,000 in the red. You’ve had to pay for EVERYTHING, but still haven’t made a sale.
  • Day 100: Your marketing campaigns were successful and you’ve sold all your stock. You mark up your goods by 4x so you made $400,000 in sales. A gross profit of $280,000!

As you can see, the return on investment of purchasing inventory is HUGE. This is thanks to the high gross margins of your product.

But you have to pay A LOT of money up front before you can get this return. Getting the money to make these inventory orders is very, very hard. If you don’t get the money, you can’t order stock and you can’t grow.

The bad news is that this problem gets even worse. 

If you are growing fast, you need to make larger and larger inventory orders each time. This means greater and greater demands on your cash. 

The final nail in the coffin is the seasonality of eCommerce! Peak periods such as Thanksgiving and The Holiday Season put even bigger demands on your cash. You need to make big inventory orders before these seasons arrive, otherwise, you run the risk of being out of stock and missing out on sales.

If you run an eCommerce business, you are very familiar with this problem.

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So, what is the solution to this cash flow problem?

There are lots of options out there to get cash for your business. These include selling equity in your business, using bank loans or using your own savings. However, none of these solve the cash flow problem for eCommerce companies.

But there is another option, specifically designed to solve the cash flow problem of eCommerce companies. It’s called Revenue Based Financing. Revenue Based Financing solves your cash flow problem, allowing you to grow faster without giving up equity or taking on expensive debt.

What is Revenue Based Financing?

Revenue Based Financing gives you the cash you need to buy inventory and make other investments in your business. It is an easy way to solve your cash flow problem, without giving up any equity or taking on expensive bank debt.

Here’s how it works. 

Revenue Based Financing is provided by finance partners (like Wayflyer). They assess your business using analytics and send you cash to make inventory purchases or investments in your company. You then repay the finance provider using a % of your revenue. You use your revenue, to get financing - that’s why it’s called Revenue Based Financing.

Why is Revenue Based Financing the best funding option for eCommerce?

Revenue based financing is perfect for eCommerce companies. It solves  your cashflow issues and lets you grow faster without a lot of the drawbacks of traditional funding options. Let’s take a look at some of the other options.

Some founders can use their own funds to grow their business. But most founders don’t have this option. If your company is growing fast, it becomes almost impossible to fund your growth using your own funds.

When you bring on investors in exchange for shares in your business, you are giving up a share of all future profits. This may seem like a good deal in the short term but can often turn out to be a very expensive way to fund your business. You also give up some control over your business. With Revenue Based Financing, you keep full ownership of your business, not giving up any control or any share of your future profits. 

Bank loans usually ask you to put up collateral (which is very difficult for most eCommerce companies). They also have very long application and legal processes. This makes Bank Loans very hard to access for eCommerce companies, especially when you need the cash fast.

A final advantage of Revenue Based Financing is that it keeps your risk low. Because you make repayments as a % of your sales, if you have a slow month, you will just pay back less. This is not the case with bank loans or other traditional forms of finance. 

What is the cost of Revenue Based Financing?

Providers of Revenue Based Financing make money by charging a % fee on the funds you get. This fee is typically ranges from 2% - 8% and depends on your size and performance.

Let’s run through an example.

You want $100,000 in funding. In this example, let's say it the fee is 4%, so the fee you pay is $4,000. 

Is paying this fee a good deal for you? 

To find out, let’s compare it to the return you get from the funding. If you purchase $100,000 of stock and sell it at a 3x markup, you’ll make $300,000 in revenue and get a gross profit of $200,000. So it cost you $4,000 in fees to make $200,000 in gross profit. It’s easy to see that this is an incredible return on your investment. Revenue Based Financing is not free, but it’s got one of the best returns of any investment you can make in your business. 

What is the impact of Revenue Based Financing 

You can now see how Revenue Based Financing solves your cash flow challenges and how it allows you to grow faster. 

One of the biggest benefits of Revenue Based Financing is that it means you never leave a sale on the table because you were out of stock. A lost sale due to being out of stock will never show up on your financial statements, but it is a loss for your business. 

If you have already paid the marketing dollars to get a customer to your site, but they don’t buy because you are out of stock, that is lost revenue. How much revenue are you leaving on the table because you are out of stock? Using Revenue Based Financing for purchasing inventory means you never need to worry about this issue.

If you run an eCommerce company you should use Revenue Based Financing. It will give you easy access to the cash you need to accelerate your growth, without giving up ownership or dealing with expensive bank loans. It will allow you to grow your company faster and help you achieve the goals you’ve set for yourself and your business. 

If you want to talk to someone about how to fund your eCommerce company, send an email to grow@wayflyer.com, we’re always interested in chatting.

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Written by
Aidan Corbett
Aidan Corbett is Co-Founder & CEO at Wayflyer

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