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.
You can temporarily use working capital to bridge the gap when your expenses outweigh your cash flow. This will enable your business to carry on like normal, avoiding potential revenue or growth stagnation.
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 e-commerce merchant usually pays all kinds of expenses long before seeing any sales revenue. Working capital is the cash flow that allows them to pay for things like employee salaries, vendor payments, advertising, and inventory, among other things.
Working capital for e-commerce merchants can be extremely beneficial in helping them meet current, short-term obligations while also keeping their business running smoothly.
Why Do eCommerce Businesses Need Working Capital?
Poor working capital management can kill a business, so it’s crucial to know why it’s essential. According to a survey done by MarketingSignals.com, the e-commerce business failure was about 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 e-commerce 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 e-commerce markets in terms of online consumer shopping penetration.
Working capital can support e-commerce 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.
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 e-commerce store in the following scenarios.
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.
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 allows you to prepare for expected customer demand and aids in securing vendor discounts.
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 increased like crazy, backorders, customer dissatisfaction, and a lack of employees reached new highs.
Having ample working capital was critical in this situation, allowing many e-Commerce 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 bank loans and alternative business funding options have fundamental differences. The best type of loan for you will be determined by your business’s needs, where it is in its life cycle, and what lending options are available to it. 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?
- 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 e-Commerce 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 e-commerce 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 e-commerce, 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, e-commerce 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 e-commerce 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?
Traditional lenders, such as banks, aren’t always an option for e-commerce stores, despite the global e-commerce industry’s rocketing growth.
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 stick with who they know because e-commerce is still a relatively new industry.
Not only that, but the underwriting process for online sellers can be a little more complicated. 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 e-commerce businesses. Turnaround is much faster with a fully digital application process.
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 is frequently the result of inventory and vendor terms that have been mismanaged. To expound, keeping too much inventory on hand for an extended period of time depletes an e-commerce store’s working capital.
Similarly, strict vendor payment agreements make it difficult for e-commerce stores to keep working capital on hand when payments must occur within a few days, and a large portion of their inventory remains unsold.
Irrespectively, 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.
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.
Conclusion
Working capital challenges are real. An e-commerce business owner’s access to working capital is its lifeblood. Furthermore, e-commerce 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 effectively manage working capital and being aware of backstop solutions is one of the best protective measures against potential problems. It’s also a skill required for consistent progress for e-commerce store owners.
Fortunately, multiple funding solutions are available to help e-commerce stores survive and thrive.
