A founder’s guide to eCommerce funding: What are your financing options?

Nearly 90% of eCommerce companies fail within their first 120 days of business, and when they do, running out of cash is a top-five reason for failure. Founders who can secure the right type of funding for their journey will be in a much better position to keep cash in the bank and products on their way to customers.

Learn the best type of financing for where you’re at in your brand’s journey and what you plan on putting the cash towards. You’ll get the most value out of your funding and successfully grow your business.

Here are seven ways you can fund your eCommerce business:

1. Revenue-based finance

Revenue-based financing offers founders a flexible, fast way to access working capital and efficiently pay for inventory and marketing.

How it works: You apply for funding from a provider and get approved within 48 to 72 hours, based on your projected revenues. You then have access to the funding immediately, and you start to pay back remittance as a fixed percentage of your daily sales.

Benefits

• Flexible remittance: If you don’t sell anything on a given day, you don’t have to make any remittance back to your financing provider. On days with higher sales, you’ll transfer more back as remittance, but it stays as a fixed percentage. This way, there’s very little risk to your cash flow.
• Pay for large invoices upfront: You can use the funding to directly pay for inventory POs or marketing spend up front since it’s tied directly to your projected revenue. As you start to sell your product to customers, you’ll pay off what you owe without stretching your cash flow too tightly. Low-risk form of financing: You’re not diluting your ownership or putting up any collateral to secure funding.
• No personal guarantees: Companies are assessed on their potential to generate revenue, and you don’t need to give up any security or assets as a guarantee.
• Quick access to cash: Revenue-based financing gives you access to funding within days — freeing you to make efficient, secure decisions.

Read more: Learn how Joolca used revenue-based finance to accelerate growth

Drawbacks

• You might not get approved for the highest offer: Revenue-based financing offers are based on exactly how much revenue you generate. Depending on how much growth you can show and the amount of revenue you can project, you may not be able to get the best offer or the most capital.
• Best for short-term investments: Revenue-based financing is best suited for inventory and marketing spend, and it shouldn’t be used to cover staffing costs or other operational costs.
• Not for pre-launch brands: You need to have existing revenue streams, so it doesn’t work for pre-launch brands

When to use revenue-based financing

You’re looking to fund your working capital cycle, such as inventory orders or marketing campaigns, without too much strain on your cash flow. For example:

• To ramp up marketing spend, SPOKE used revenue-based finance and generated around 30,000 new customers.
• Dock & Bay uses revenue-based finance to support its cashflows around the periods where it has to order inventory ahead of the brand's peak sales months.

2. Personal savings

Founders can use their own capital to get their business off the ground and avoid going into debt or paying high interest rates. But when you bootstrap it, you’re entirely on the hook for that cash.

How it works: You front your business, operating expenses, and working capital with your own money. You draw from your personal savings, a retirement account, or a similar source of savings, but the money is all yours. In some cases, you might also borrow from close friends or family members, but the idea is the money comes from within your inner circle rather than an external investor or lender.

Benefits

• You’re debt-free: You don’t have to take on any debt in order to finance your business. You also avoid racking up fees and interest, saving you more money in the long run.
• You don’t answer to external investors: You maintain control over the direction of your business. Other than trusted friends and family, outside lenders won’t have a stake in your company.
• You keep all of the profits for yourself: The money to finance your business comes out of your own pocket. All of your revenue goes right back into your own pocket as well.

Drawbacks

• You have little cash flow flexibility: There’s a lot more pressure on you (and your finances) to manage cash flow when you’re going it alone. Once your savings run out, that’s the end of your runway for marketing, inventory, and operating expenses, so you have to stick to a much tighter cash flow schedule.
• All of your savings are at risk: You’re the one on the hook in the worst-case scenario. If you have a rough quarter or your business fails, you’ll have lost all of your savings — not an investor’s money.
• Friends and family aren’t necessarily the best lenders, either: You might be able to inject some extra cash into your business from friends and family. But you’ll probably owe them something in return — a position and a salary, for instance.

When to use personal savings

You want to keep control over your company while avoiding high-interest loans or fees. Bootstrapping makes the most sense for founders who have a clear vision and want to retain this level of control over both their business and their profits. If you find yourself cash-strapped, consider pairing this method with a working capital finance solution, so you’re not going it alone.

3. Venture capital

An experienced venture capital firm brings expertise and experience in achieving fast-paced growth, but they’ll also be looking to see results quickly and collect their own return on investment.

How it works: You seek out a valuation and investment from a VC firm in return for an ownership stake in your company. Your investor will want to see your company increase in value so that they can eventually sell their shares at a profit. In the meantime, you can use their capital to invest in long-term projects and sustainable growth for your company, helping you both realise a return on investment.

Benefits

• VCs bring a wealth of experience to help you grow: VC firms regularly invest in businesses with the intent of growing their profits and their value. These firms have not only the funding but also the experience to enable that growth throughout your partnership.
• You’ll gain access to networking opportunities: Your investor will also have a portfolio of other startups and brands, likely within the same industry. They can help you network with other like-minded founders to talk through pain points and hear workable solutions for similar companies.
• You have cash on hand for growth: Venture capitalists deliver good amounts of cash for you to invest in your company’s future. And you don’t owe them monthly payments, interest, or fees, so there’s no short-term impact on your cash flow.

Drawbacks

• You’re diluting ownership in your company: This is by far the biggest disadvantage to VC funding: it is one of the most expensive financing options available to eCommerce companies. You’re giving up equity in your company to an outside investor.
• You don’t have quick access to funding: The VC funding process is a lengthy one. You’ll have to make your pitch to multiple firms after researching and narrowing down a shortlist. Then there’s a negotiation period as you settle on your company’s valuation. All of that can take months before the funds actually come in.
• You’re no longer the one calling all of the shots: Along with purchasing ownership shares, your investor will also likely take up a board seat. They’ll have some decision-making power moving forward, and you’ll have to report to them on profits and performance.

When to use venture capital

You’re seeking out larger amounts of capital to invest in projects that will bring sustainable growth for the long term. Research & development, expansion to new locations or regions, and product development are all investments that can build long-term growth for your brand.

Read more: Learn why one eCommerce founder turned down VC investment and commercial lenders and chose flexible funding through Wayflyer.

4. Credit cards

Credit cards can be a way to access financing quickly, especially if you’re already pre-approved. But business owners who rely on credit cards for funding will find interest fees adding up in a hurry.

How it works: eCommerce founders or startup owners can apply for business credit cards or even use their own personal credit cards in a pinch. You don’t have to make payment on the balance until your next statement, 30 days later. Certain cards will also offer rewards such as air miles for travel or cash back on expenses.

Benefits

• Quick access to funding: You can get approved and start using a credit card almost immediately with a digital version; you might have to wait a week for the physical card to show up in the post. Plus, it’s a way to buy some wiggle room if you’re trying to balance your cash cycle and just need to pay a quick business expense.
• Interest-free options are available: Some cards will run promotions where you don’t accrue any interest for the first year or 18 months. You can take advantage of that deal and earn a cash buffer while you pay down expenses. Or you can just pay off the balance each month to avoid interest.
• Rewards often deliver ROI: If you travel a lot to attend conferences, networking events, or visit your manufacturing partners, then you might find it useful to redeem points for airline miles or a hotel stay. Or a card with cash back rewards could help you save on other business expenses.

Drawbacks

• Sky-high interest rates: The average APR for a business card is 17.91% as of June 2022. Those charges can quickly compound if you don’t pay off a decent chunk of your balance month to month, putting your business at risk.
• Credit cards have spending limits: Even with a business card, you’ll be approved for a maximum credit limit. They aren’t an unlimited source of capital.
• Annual fees can also accrue: Along with interest rates, you may also have to pay annual fees on credit cards. Sometimes these are waived for the first year, but not permanently.

When to use credit cards

For smaller, month-to-month business expenses, especially if you know you’ll pay the balance off within 30 days, so you’re not accruing interest. If you have a card that offers great perks, like travel points or cash back, take advantage of those rewards. But don’t rely on credit cards to finance all of your operating expenses.

5. Debt financing or bank loans

Founders can go the traditional route and seek out a loan from a bank or commercial lender. But financial institutions are typically lacking in eCommerce savvy, so you’re not likely to get the best or friendliest terms for your business.

How it works: Apply for either a secured or unsecured loan. With a secured loan, you’ll be backing it with an asset like your home or another piece of property. This gives the lender more security, so you can usually land a better interest rate — but you’ll be putting that asset at risk if you can’t pay off the loan. You’ll go through an application review process with the bank or lending institution and eventually receive the funds. Then, you’ll pay back your loan in monthly installments with interest.

Benefits

• Secure, flexible capital: Banks and commercial lenders are a secure source of capital, and you can spend the funding however you like. Once your application is approved, the funds are yours to use as you please.
• Predictible repayments and interest rates: You can stick to a monthly repayment schedule with reasonable interest rates, at least compared to other sources of financing like credit cards. You won’t have to pay off the loan all at once.
• Specific loans are geared towards startups: In the U.S., you can gain easier access to capital and friendlier terms through a Small Business Association loan. Grants and loans with lower interest rates are also available to small businesses in the EU as well.

Drawbacks

• Lengthy application process: If you need quick access to financing, you likely won’t get it from a bank or commercial lender. Their application and review process can take weeks, if not more.
• Bank terms don’t favor eCommerce: Banks typically don’t have the modeling in place to give DTC or fast-growing brands the best terms. If you’re a startup and you’ve seen a lot of growth within the past six months, or you’re expecting to grow even faster over the next year, you’re not going to see that reflected in your interest rate, repayment terms, or maximum loan amount.
• You’re risking assets with secured loans: The bank might require you to secure the loan with your home or other business or personal asset. They’ll collect those assets if you can’t meet the terms of the loan, putting you at huge risk.

When to use commercial loans

Your business is more established, and you have the financial forecasting in place to secure fair terms and capital for your company. If not, you should walk away and seek other financing.

6. Crowdfunding

Crowdfunding campaigns allow you to drive brand awareness and interest in your product while drumming up financial backing. The goal is twofold: access funding while building up a passionate base of customers and early adopters.

How it works: Crowdfunding comes in two different styles: equity-based and rewards based. Equity-based crowdfunding is where campaign contributors exchange funds for shares in your company. However, unlike a venture capital firm, the shares they’re purchasing are on a very small scale; individually, they won’t gain a controlling interest.

With rewards-based crowdfunding, contributors instead gain perks in exchange for their funds. These campaigns might include benchmark numbers on the way to the overall campaign goal. Brands will often give contributors early access to products, special releases or editions, or other exclusives for their part in the campaign.

Benefits

• Build an engaged customer base: Whether you go the equity-based or rewards-based route, your earliest adopters will have a clear stake in your brand and your success. Both perks and equity will keep them engaged in long-term success.
• Use financing directly to develop your product: Set up your crowdfunding campaign and goals with the intent to develop, prototype, and eventually launch your product. All of the funds raised can then directly pay for you to go to market.
• You can gain momentum quickly: As more people contribute and you hit campaign goals, you’ll gain more momentum and visibility for your brand. You can also get an injection of capital pretty quickly.

Drawbacks

• You might fall short of your goal: You might not be able to get your product or business fully funded if you fall short of your goal, and that can have pretty big repercussions from a branding perspective.
• Marketing your campaign requires an extra lift: To get any traction, especially in the beginning, you usually need to make an extra investment just to market your campaign. Otherwise, you won’t be able to get it in front of your target audience.
• Harsh competition: Recent research shows that over 6 million crowdfunding campaigns are created worldwide in a year. Your competition is stiff, and you’ll have to make sure your campaign is unique and the benefits sufficient in order to stand out.

When to use crowdfunding

You’re trying to build brand awareness from the get-go or bring on external funding to support product development. Crucially, you’d like to do so without losing control of your company.

7. Lines of credit

Especially useful for enterprise eComm companies who need access to larger sums of cash, a line of credit allows you to draw on funding whenever you need it, up to a predetermined maximum.

How it works: You apply for a line of credit through a financing provider and get approved for a capital limit based on your sales and projected revenue. You can be approved for up to $1 million in some cases. Then, you draw on that limit when you need the capital and pay it back. As you pay it back down, your ceiling increases again, back to the approved limit.

Read more: Wayflyer Scaler offers up to two times your monthly revenue at market-leading rates. Learn more about how Scaler can help your brand.

Benefits

• Greater operating flexibility: As a larger business, you’re often trying to clear large inventory orders and expenses within tight timeframes. A line of credit provides immediate access to capital right when you need it.
• Larger amounts of capital: For larger inventory, shipping, or other invoices, you’ll have the capital you need without impacting your cash flow or taking out high-interest loans.
• Quick decision-making where needed: You can react quickly to areas of opportunity or declining sales and invest your capital where needed without prior approval or lengthy underwriting processes.

Drawbacks

• It’s not easy to attain a high capital limit: Smaller companies or those with smaller revenue projections will find it difficult to get approved for high capital limits.
• You may not be able to increase your limit quickly: As your revenues grow, you’d ideally like to increase your capital limit. But some financial providers won’t scale up your maximum quickly enough.
• Assets may be required: Traditional banks or lenders may require assets as collateral in order to secure the line of credit, especially with higher capital limits.

When to use a line of credit

You’re an enterprise brand, and you’re projecting sales to grow exponentially over the next year. You don’t have the capital up front to finance inventory, marketing, or longer-term growth initiatives, but you can borrow from a line of credit and then pay it back down. Your best option is always a financing provider that offers maximum scalability with no security requirements.

Access funding to help you grow faster for an even greater return with Wayflyer. Chat with us to see how you can use our funding and analytics alongside other types of financing to unlock more revenue.