Why Is Cash Flow Management Such an Issue for Ecommerce Sellers? (And How a Revenue Advance Can Help)
March 17, 2021
Are you an eCommerce wholesaler looking to move a large volume of inventory? Or maybe you’re a private label brand determined to become the next market leader. Whichever category you fall under, at some point you’re likely to find yourself in the same position so many other online retailers find themselves in.
In 2019, 32% of online sellers listed ‘running out of cash’ as a major pitfall for their eCommerce business. The dreaded cash flow problem is way more common in the world of eCommerce than you might think.
Despite the fact that eCommerce businesses have far less overhead than brick-and-mortars, cash flow problems remain a serious issue for the industry. This is in part due to the fact that many eCommerce marketplaces (looking at you, Amazon) won’t release sales immediately, causing serious gaps in the amount of revenue on your balance sheet, and the actual liquid cash you need to pay your expenses today.
Luckily, there is a growing number of fair and flexible ways to close the cash flow gap and get your business back on the profit-generating fast track.
We’ll help you uncover the real impact healthy cash flow can have in driving eCommerce ROI, and the types of cash advance options available to keep your business moving firmly and profitably forward.
What Is Cash Flow? A Quick Refresher
Cash flow is the net amount of cash your eCommerce business preserves after your expenditures have been met. Think of it as the difference between your net sales income and expenditures over a given period of time, such as a month, quarter or year.
To remain in business, you need to maintain a certain level of cash flow and keep a healthy balance between the amount of money coming in and the amount of money going out.
Why Is Cash Flow Important for Your Ecommerce Business?
The first thing to know is that cash flow is important for every type of business.
For eCommerce businesses, where competition is on the rise and the distraction factor is far greater than with a local or franchise brick-and-mortar brand, the risk of falling into a cash flow gap is perhaps subtler—but just as real.
For example, your business will have an inflow of cash from customer payments and possibly investment profits, and it might feel like the right time to go after those big hairy sales goals by expanding into a new market or product line.
But you also have the outflow of cash for payroll, marketing and other business-related costs, and it’s easy to underestimate these expenses when your incoming revenue is tied up in your marketplace or new business investments. While it’s normal to have cash flow gaps during slow seasons, ongoing negative cash flow can lead you to bankruptcy.
It’s also important to keep in mind that cash flow is not the same as revenue. Your revenue is the total income your business earns through the sales of products and services before deducting expenses. In other words, your company can be generating millions of dollars in revenue, while still burning a hole in the bank due to high operational costs or a lack of proactive planning.
This is where a cash or revenue advance can help.
Revenue Advance: An Alternative Source of Cash Flow for Sellers
Just as its name suggests, a revenue advance is a funding solution based on a business’s revenue projections.
Unlike a traditional loan, for which you repay a monthly fixed amount, you pay a percentage of your monthly turnover to the lender until the revenue advance is paid in full.
Revenue advances are ideal for online startups and businesses such as eCommerce, who generally do not qualify for traditional bank loans. With a revenue advance, you simply borrow what you need and repay what you make.
Another way to think of it is as an investment, where your lender essentially ‘invests’ in your future revenues.
What Are The Benefits of a Revenue Advance?
By improving cash flow, a revenue advance keeps your eCommerce business running smoothly.
Rather than having to wait through your marketplace’s cash conversion cycle or fight your way through the loan application process at a traditional bank, you now have the means to invest back into your business so you can grow and scale on your terms.
Let’s take a look at a few scenarios where a revenue advance can help.
Many eCommerce businesses experience seasonal peaks in their sales patterns. For example, if your business sells Christmas tree ornaments, it’s likely not to make as much profit in July as it would in December. Let’s say you only made $1,000 in sales in July and $8,000 in December. A $600 fixed repayment amount of a traditional loan would require over half of your July profits, which could be a financial strain for your business during the summer season. Alternatively, a 10% repayment rate for a revenue advance would take $100 in July and $800 in December, saving you money in the long run.
Fully stocked inventory keeps happy customers returning for more. But you need money to buy the inventory in advance. If cash flow hasn’t been steady, you might decide to apply for a business loan. Unfortunately, the loan approval process may take much longer than anticipated—over two months is common for banks. Meanwhile, several customers are seeing many of your top-selling inventory as ‘out-of-stock.’ You need the money to replenish your inventory, and fast.
Revenue advances, especially from online funding providers, have quick turnaround approval time. Ecommerce businesses can generally receive access to funding in a little as 48 hours. No hassle, no time wasted.
Launch New Products and Services
As the demands for online shopping increase, eCommerce businesses are forced to keep up. According to a recent retail survey by Software Advice, over 25% of traditional retailers launched an eCommerce store over the past year. For online sellers trying to expand into new markets, now is the time. But more competition means increased pressure to stay ahead of the curve: new products, new POS systems, and new delivery service methods will set your business apart from the rest. The downside is many online sellers may not have the cash on hand to invest in these things. In these cases, revenue advance offers a way forward.
As a business owner or entrepreneur, you know just how much time and money go into outreach. And it’s not about what you think looks nice—it’s about the numbers. For eCommerce businesses specifically, your bread and butter come from digital advertising, where Facebook Ads and paid searches drive traffic to your page. You’re also investing in a marketing and sales team to handle these metrics…and yes, all of this requires more money spent.
Remember, the money going into the marketing and outreach strategies is your cash outflow from daily business operations. If you hit a slow season where inflow has decreased, customer outreach and other advertising tactics would need to go on hold, preventing your business from scaling. Fortunately, a revenue advance fills in those financial gaps, allowing you to continue running the business as normal, paying back the advance faster as sales pick back up in the busy season.
Revenue Advance vs. Merchant Cash Advance: Why It Pays to Know the Difference
Some lenders use ‘Merchant Cash Advance’ and ‘Revenue Advance’ interchangeably, but there are some important distinctions between these two types of funding.
Two key differences: daily fixed payments and interest rates.
Financial lenders who offer merchant cash advances typically target companies without collateral, such as online businesses with low or poor credit. This allows the lending companies to charge higher interest rates.
While not all merchant cash advances are bad, you don’t want your business to get locked into poor interest rates—especially when the other terms (including a rigid daily repayment schedule common with merchant cash advances) don’t help you drive ROI.
When it comes to eCommerce funding, it’s important to know your options, which leads us to our next point.
Where to Secure Funding for Ecommerce
While searching for the best eCommerce funding, there isn’t a one-size-fits-all approach.
Ecommerce is still a relatively new concept for banks and traditional lenders, and their underwriting process doesn’t account for online metrics and other digital factors.
Instead, online sellers are more likely to receive approval from lenders who cater specifically to eCommerce customers. Fortunately, there are several types of funding providers who do. Let’s review them below:
Also known as private investors, these individuals use their own funds to invest in startups and small businesses. Generally, with these types of investors, their funds serve as capital for the business in exchange for ownership equity.
If you sell on Amazon or Shopify, you may already be aware of the lending options offered through those marketplace platforms. While these funding options are convenient, they’re only available to certain marketplace sellers who qualify based on their business’s performance.
Similar to fundraisers, crowdfunding is a peer-to-peer funding method. Here, dozens (or even hundreds) of people, such as family, friends, and colleagues, financially support your business through donations. This is ideal for eCommerce startups short on cash who most likely can’t afford to take out a loan or pay back interest rates. The only disadvantage is turnaround time, and it can potentially take months to hit your financial goal.
Last but not least are fintech companies, those who generally specialize in eCommerce funding and understand the online world by definition. These funding providers offer flexible funding solutions, such as lines of credit and short-term loans. Since they operate primarily online, fintech companies can pre-qualify your eCommerce business and distribute the funds within days. But bear in mind that as with banks and traditional lenders, some of these organizations may have hidden fees and misleading repayment plans.
This is where SellersFunding stands apart.
Meet the SellersFunding Revenue Advance: A Simple, Straightforward Cash Flow Solution for Ecommerce
Unlike many traditional lenders and even other fintech companies, at SellersFunding we base our Revenue Advance solution on your next 3-6 months of sales. This allows us to advance you the funds you need right away so you can quickly get your business back on the fast track.
We don’t waste our time on arbitrary credit scores or bulky application procedures. Our analysis is based on a combination of your score and the company’s performance. Fast, fair, and affordable.
With SellersFunding’s Revenue Advance, you can qualify for up to $1 million of eCommerce funding, hassle-free. We strive for complete transparency with our customers, with no hidden fees and no daily repayment schedule.
Join the 12,000+ sellers who saw an 85% increase in sales year-on-year after partnering with us. Set up your account today!