What is Working Capital for eCommerce Stores?
Working capital is the cash flow you have available to cover expenses like payroll, inventory, and operational costs at any given time. Having flexible working capital allows eCommerce sellers to invest in technology and expert services for growth. Effectively managing working capital is an essential component of business finances.
You can temporarily use working capital to bridge the gap when your expenses outweigh your cash flow. This will enable your business to continue as usual, avoiding potential revenue or growth stagnation. Access to working capital is also essential for supporting ecommerce growth, as it provides the necessary funds to scale operations and expand your business.
Working capital is the metric that measures a company’s operational liquidity. Put another way, it’s the cash flow you’ll need to cover current (and unexpected) expenses and keep your business running.
Furthermore, an eCommerce merchant usually pays all kinds of expenses long before seeing any sales revenue. Working capital is the cash flow that enables companies to cover expenses such as employee salaries, vendor payments, advertising, inventory, product research, and other operational costs.
Working capital for eCommerce merchants can be highly beneficial in helping them meet current, short-term obligations while also keeping their business running smoothly.
What are Working Capital Loans for eCommerce?
Working capital loans are a vital funding solution for ecommerce businesses looking to maintain smooth operations and fuel growth. These loans are specifically designed to provide the capital needed to cover everyday operational expenses, such as inventory purchases, advertising campaigns, and payroll. By securing a working capital loan, ecommerce businesses can access flexible financing that helps them manage short-term cash flow gaps, respond to unexpected expenses, and seize new opportunities in the market.
Whether you’re running an established ecommerce brand or launching a new online business, having access to working capital loans can make all the difference. These loans empower businesses to invest in inventory, ramp up marketing efforts, and expand product lines without disrupting daily operations. With the right loan, you can ensure your ecommerce business has the funds it needs to stay competitive, adapt to changing market conditions, and achieve long-term success.
Maintaining profit is essential for sustainable growth, and understanding the costs associated with borrowing—such as the annual percentage rate (APR)—is necessary to manage your expenses effectively.
Why Do eCommerce Businesses Need Working Capital?
Poor working capital management can be fatal to a business, making it crucial to understand its importance. According to a survey by MarketingSignals.com, the eCommerce business failure rate was approximately 90% within 120 days. 32% of the businesses surveyed failed due to a lack of funds.
Because of the pandemic, successive lockdowns, and physical restrictions, there has been a significant shift toward eCommerce businesses. Today, almost everyone selling products or services has an online presence as part of the business model.
This rapid increase in online purchases has coincided with a significant shift in consumer behavior. In 2016, 209.6 million people in the United States were online shoppers who had browsed products or bought merchandise online.
In 2021, these figures were expected to reach 230.5 million, making the United States one of the top eCommerce markets in terms of online consumer shopping penetration.
Working capital can support eCommerce businesses to stay afloat as they try to keep up with the fast-paced market. With a bit of extra cash, you can invest in inventory, logistics, marketing, as well as your overall business growth and development, while still staying true to your bottom line. Effectively managing profits is essential for sustainable growth and financial planning. Additionally, raising capital can be a key strategy to support business expansion and ensure you have the necessary funds to scale.
What Problems Does Working Capital Solve?
Whether you like it or not, expenses add up in the business world. Payment from your vendors may not yet be in your pocket as costs and liabilities rise. Working capital can help an eCommerce store in the following scenarios.
A working capital solution provides flexible financing, allowing you to quickly access funds for marketing, inventory, or other growth opportunities. Short-term capital can also address urgent business needs, such as covering immediate expenses or seizing time-sensitive opportunities.
Fund advertising campaigns
A working capital injection can be used to boost your marketing budget, allowing you to spend more on digital marketing and advertising. Email and social media advertising are just two examples of outlets that can help you increase sales, especially during busy seasons. Investing in technology and marketing can be difficult without sufficient working capital, limiting competitive ability.
Purchase inventory
Working capital can be used to purchase inventory, particularly in advance of high-volume sales periods such as Black Friday and Cyber Monday. Excess inventory enables you to prepare for expected customer demand and secure vendor discounts. Ecommerce businesses often miss revenue opportunities due to the inability to restock inventory when demand surges quickly.
Scaling new niches
As your business grows, you’ll probably want to expand your product and service offerings, potentially entering new niches. However, increased inventory requires more storage space and additional costs, such as a new fulfillment center and new marketplace fees.
Boosting the growth of your team
As your company’s revenue grows, you’ll need to scale your workforce. eCommerce business loans can help you build out customer support, promotion, or R&D divisions.
Rainy day fund
Seasonal peaks are sometimes predictable, but crises are not. There will always be unforeseen setbacks, whether a pandemic or another catastrophe. Working capital solutions can act as a vital rainy-day fund, allowing you to navigate and manage any future crises.
Healthy cash flow in times of crisis
A perfect example would be the COVID-19 pandemic in 2020. Although eCommerce sales surged, backorders, customer dissatisfaction, and a lack of employees reached new highs.
Having ample working capital was critical in this situation, allowing many eCommerce businesses and fulfillment centers to make much-needed hiring surges to help them weather the storm.
What Kind of Working Capital Loan Does Your eCommerce Business Need?
Traditional business loans from banks and credit unions, as well as alternative business funding options, have fundamental differences. The best type of loan for you will be determined by your business’s needs, its current life cycle stage, and the available lending options.
Businesses can secure working capital in as little as 48 hours with specialized eCommerce lenders, and some lenders even offer same-day funding, allowing you to access funds within the same business day. As you consider your working capital options, keep the following questions in mind:
- Do I need multiple funding options to meet my business’s current and future needs?
- Which funding options provide me with the most flexibility in terms of repayment?
- How do I determine the appropriate loan amount for my business needs?
- What impact does applying for this type of loan have on your credit?
- Are there any penalties for paying off this type of loan early?
- When will I get my money? Is this a quick enough turnaround to meet my business needs?
How Can Working Capital Help Your eCommerce Business Grow?
An online seller is no exception when it comes to having a consistent cash flow. However, for various reasons, some times of the year see a lot of activity while others are slow. This is where good working capital management can help. Below are some growth benefits of eCommerce working capital and how it can help you succeed.
Adaptability in operations
Online commerce trends change daily. In the present time, social media commerce is booming; tomorrow, brick-and-mortar stores may resurface; you never know. In the world of eCommerce, having working capital on hand is always beneficial in keeping up with ever-changing consumer behavior and trends. It makes it much easier to adapt to changes, streamline operations, and quickly launch channels and products.
Improved inventory management
To avoid backorders during peak seasons like the holidays and back-to-school shopping, eCommerce stores must have extra inventory on hand. You can buy additional inventory and stock up for these seasons if you have working capital. This not only helps you better serve your customers, but it can also help you save money by allowing you to place bulk orders and receive other special perks from suppliers.
High rankings in the market
If you sell on Amazon, you already know how much effort it takes to get your products to the top of search results: excellent customer retention, exchange rate, relevancy factors, etc. Professional images, quick shipping, engaging product information, response to customer concerns, stock control, and more all take a lot of time and money. Your ranking efforts can suffer if you don’t devote enough time and funds to building a marketplace presence.
Better marketing campaigns
Lack of online visibility causes 36% of eCommerce businesses to fail. If you’re selling goods and services online, you’ll need a website. Additional funds can be used to fund a comprehensive online marketing strategy.
Resiliency
The pandemic has taught us about the significance of creating a resilient business. Companies with a consistently high level of working capital are much better equipped to deal with crises and unexpected events.
Why is Working Capital a Problem for eCommerce Entrepreneurs?
Many ecommerce businesses face cash flow challenges as sales increase due to slow payment schedules from platforms like Amazon. Traditional lenders, such as banks, aren’t always an option for eCommerce stores, despite the global eCommerce industry’s rocketing growth. Traditional banks often lack an understanding of the unique challenges that ecommerce businesses face.
In reality, only about 13.5% of small businesses meet the criteria for a traditional bank loan, and the majority of those are brick-and-mortar stores. Most banking institutions tend to stick with what they know, as eCommerce remains a relatively new industry.
Moreover, the underwriting process for online sellers can be a bit more complex. Algorithm changes, data breaches, and website downtime can result in lost sales, which banks may deem too risky.
In recent years, online funding platforms have stepped in to fill the void left by big banks and have become a more reliable source of working capital for eCommerce businesses. Turnaround is much faster with a fully digital application process. Ecommerce funding providers frequently offer quicker turnaround times for loan applications compared to traditional banks.
Depending on the lender you choose, you could boost cash flow in a matter of days—something that traditional lenders can’t guarantee.
What Are Some Working Capital Management Tips for eCommerce Stores?
Poor working capital management often results from mismanaged inventory and vendor terms. To elaborate, maintaining excessive inventory for an extended period depletes an eCommerce store’s working capital.
Similarly, strict vendor payment agreements make it difficult for eCommerce stores to maintain sufficient working capital when payments must occur within a few days, and a large portion of their inventory remains unsold.
eCommerce businesses can effectively solve their operations and maintenance capital-related problems by implementing sound working capital management strategies.
Here are some suggestions for online stores that can help with working capital:
- Modernize your technology and business model
- Manage inventory carefully
- Offer discounts to sell stagnant inventory
- Improve your terms with vendors
- Utilize credit card grace periods to increase cash flow without paying interest.
- Choose an appropriate financing option.
- Always read the fine print in loan agreements to avoid unexpected obligations or restrictions.
What eCommerce Working Capital Loans are Available?
eCommerce businesses have access to a wide variety of working capital loan options tailored to their unique needs. To apply for an eCommerce business loan, you generally need personal and business information, a resume, tax returns, current bank statements, and a business plan.
From fast-turnaround financing to government-backed loans, here are the most common types of working capital solutions available:
Short-Term Loans: Short-term loans generally have six- to 18-month repayment terms and are easier to qualify for than long-term loans. They’re ideal for covering immediate expenses like marketing campaigns or temporary cash flow gaps.
Long-Term Loans: Long-term loans usually have a repayment period of two years or more and often come with lower interest rates. These loans are best for funding large projects or investments that generate returns over time.
Business Lines of Credit: Business lines of credit allow access to cash when needed and only require interest payment on drawn amounts. This revolving credit option offers flexibility for covering ongoing or unexpected expenses.
Equipment Financing: Equipment financing loans are specifically for buying business-related equipment, using the equipment as collateral. This allows eCommerce companies to upgrade or purchase essential tools without depleting cash reserves.
Inventory Financing: Inventory financing allows businesses to purchase inventory without having immediate cash, with inventory acting as collateral. It’s an excellent option for seasonal businesses or those preparing for high-demand periods.
Invoice Factoring: Invoice factoring involves selling unpaid invoices to a factoring company, providing immediate cash flow relief. This is especially helpful for B2B eCommerce companies waiting on customer payments.
SBA Loan: SBA loans, guaranteed by the Small Business Administration, typically offer low rates and high amounts to eCommerce companies. While the application process can be lengthy, these loans are ideal for long-term growth. They can be secured using collateral, making them a strong option for businesses that may not qualify for traditional credit.
Traditional eCommerce Loans: Traditional eCommerce loans can be secured or unsecured, with interest rates being fixed or variable. They’re often available from banks or online lenders and can be used for a variety of business needs.
Trade Credit: Trade credit allows businesses to purchase inventory on credit, to be paid at a later date, helping to improve cash flow. Suppliers commonly offer it and can be an effective tool to manage short-term liquidity.
Tips for applying for an eCommerce working capital loan:
To apply for an eCommerce loan, you generally need to gather certain documents such as your ID, bank statements, tax returns, and a business plan. Most lenders will want to confirm your monthly revenue. Be sure to include financial documents like profit and loss statements to demonstrate your business’s financial health. The type and amount of loan you need should be based on a detailed budget of how you will use the loan proceeds.
Different lenders may have varying qualifications based on credit scores, time in business, and annual revenues. It’s important to review the loan agreement carefully to understand the terms you are signing up for.
Loan approval can take as little as a few hours or as long as several months, depending on the lender. Once approved, funds from an eCommerce loan can be deposited into your bank account within one business day.
FAQS
Is it possible to use working capital for marketing?
If you’re looking for a working capital loan to help with marketing and advertising, you’re not alone; it’s one of the most common reasons business owners seek funding. You’ll have to pick and choose from several business loan options to find the one that works best for you.
What is the importance of working capital in a business?
Working capital is used to fund operations and pay off short-term debt. Even if it runs into cash flow problems, a company with sufficient working capital can continue to pay its employees and suppliers and meet other obligations such as interest payments and taxes.
What happens if you have too much working capital?
A company’s working capital ratio can be too high, indicating operational inefficiency. A high ratio indicates that a company is sitting on a large amount of cash rather than investing it in growing and expanding its business.
What is sufficient working capital?
A sufficient amount of working capital for small business owners is required to ensure that a company can continue operating and have enough funds to pay off short-term and long-term debt and cover upcoming operational costs.
eCommerce Working Capital Loans – Final Thoughts
Working capital challenges are real. An eCommerce business owner’s access to working capital is their lifeblood. Furthermore, eCommerce store owners face a unique set of difficulties. They have to deal with many inventory, often shaky supply chain operations, and volatile markets.
Furthermore, they may not always have direct access to cash due to the nature of the business. As a result, understanding how to manage working capital and being aware of backstop solutions effectively are two of the best protective measures against potential problems. It’s also a skill required for consistent progress for eCommerce store owners.
Fortunately, multiple funding solutions are available to help eCommerce stores survive and thrive.
