Editor’s note: This information is general only. Always consider your own personal circumstances and business needs and consult professional advice when making financial decisions.
eCommerce businesses are nothing without cash. Without it, you can barely afford the day-to-day expenses like inventory that are essential to keeping your business afloat.
With it, you can keep your business in operation and strive toward making a profit. In light of this fact, entrepreneurs must know their financing options and which suits their unique business needs best.
Here are seven finance sources to consider:
Revenue-based financing
Revenue-based financing offers a flexible and fast way to access working capital, where if the application is approved, the founder can access funding after 24-48 hours of applying. The funding provided is based on projected revenues and not just current assets, allowing founders to access the full requested amount often while avoiding equity dilution. The financing is paid back as a fixed percentage of your daily or monthly sales.
Pros
- Flexible remittance where if you don’t sell anything on a given day, you don’t have to make any repayments.
- Low risk with no equity dilution or personal guarantees required.
- Funds can be approved within 48-72 hours, after which you gain immediate access.
- Funding can be used to pay large invoices upfront and can protect business cashflow.
Cons
- Depending on how much revenue you can project, you may not get the best offer or the most capital.
- Revenue-based financing is best suited for short-term investments and shouldn’t be used to cover staffing or other operational costs.
- 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.
Personal savings
This could be drawing from your personal savings, a retirement account, or a similar source of savings.
Pros
- You’re debt-free
- You don’t answer to external investors and can maintain control over the direction of your business.
- You can keep all of the profits for yourself.
Cons
- There’s a lot more pressure on you (and your finances) to manage cash flow when you’re going it alone.
- You’re the one on the hook in the worst-case scenario.
When to use personal savings
You want to keep control over your company while avoiding high-interest loans or fees. You have a clear vision and want to retain this level of control over the business and its profits.
Venture capital
A VC usually wants to see your company increase in value so that it can eventually sell its shares at a profit. In the meantime, you can use their capital to invest in your company’s long-term projects and sustainable growth.
Typically, you’ll seek out a valuation and investment from a VC, who in return will gain a stake in your business. Some of the big Australian VCs you may have heard of are Blackbird Ventures, Brandon Capital and Telstra Ventures, whose combined portfolio list includes Canva, EBR Systems and DocuSign at the time of writing.
Pros
- VCs can bring a wealth of experience to help you grow and network with other businesses in their portfolio
- You don’t owe your VC monthly payments so there’s no short-term impact on your cash flow.
Cons
- You’re diluting ownership in your company.
- The lengthy funding process involves research, pitches to multiple firms and a negotiation period.
- Your investor will likely take up a board seat, entitling them to decision-making power.
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.
Credit cards
Credit cards can be a way to access financing quickly, especially if you’re already pre-approved.
Pros
- You can get approved and start using a credit card almost instantly with a digital card.
- Interest-free options are available.
- Rewards often deliver ROI.
Cons
- Sky-high interest rates and annual fees – Australia’s average annual credit card interest rate is 19.94% as of August 2022.
- Credit cards have spending limits and aren’t an unlimited source of capital.
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.
Debt financing or bank loans
Founders can also go the traditional route and seek out a loan from a bank or commercial lender with a secured or unsecured loan. The main difference between the two is that with a secured loan, the lender has more security because you’ll be backing the loan with an asset, usually translating to a better interest rate for you but more risk.
The current interest rate for an unsecured business loan with Westpac is 12.59% p.a, while the secured business loan interest rate is 5.91% p.a (as of 30th September 2022).
Pros
- Secure, flexible capital that you can spend however you like.
- Predictable monthly repayments and interest rates.
- Some loans are geared towards startups.
Cons
- Lengthy application process.
- Banks usually don’t have the modelling in place to give fast-growing brands the best terms.
- You risk assets with secured loans.
When to use commercial loans
Your business is more established, and you have the financial forecasting to secure your company’s fair terms and capital.
Crowdfunding
Crowdfunding comes in two different styles. Equity-based crowdfunding is where campaign contributors exchange funds for a very small number of shares in your company. With rewards-based crowdfunding, contributors gain perks such as early access to products in exchange for their funds.
A few Australian-owned crowdfunding platforms you may have heard of include Equitise, VentureCrowd and mycause, which alone has raised over AUD$140 million across over 240,000 crowdfunding campaigns at the time of writing.
Pros
- Build an engaged customer base through early adopters.
- All of the funds raised can directly pay for you to go to market.
- You can gain momentum and visibility quickly, translating to quick capital injection.
Cons
- You might fall short of your goal.
- To get traction, extra investment in marketing the campaign is often required.
When to use crowdfunding
If you’re trying to build brand awareness from the get-go or bring in external funding to support product development without diluting equity.
Lines of credit
A line of credit allows you to draw on funding whenever you need it, up to a predetermined maximum.
Pros
- A line of credit provides immediate access to large amounts of capital.
- You can react quickly to areas of opportunity or declining sales and invest your capital where needed without prior approval or lengthy underwriting processes.
Cons
- Smaller companies will find it difficult to get approved for high capital limits.
- Some financial providers won’t scale up your maximum quickly enough.
- Traditional lenders may require assets as collateral, 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 upfront, but are confident that you can borrow from a line of credit and pay it back down.
There are a host of different ways to fund your eCommerce business, and knowing your options puts you in the best possible position to maintain a positive cash balance and continue operations.
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