By Aidan Corbett, Wayflyer co-founder and CEO
With sales expected to hit $5.4 trillion by the end of 2022, much has been said about the pandemic-fuelled surge across the ecommerce sector. Despite the industry’s exponential growth, ecommerce companies continue to battle against a difficult working capital cycle. It’s an issue that’s always been a problem, restricting growth for ecommerce businesses of all shapes and sizes.
The crux of the problem is that online retailers are required to pay for inventories months in advance of receiving their goods. Take the busiest retail period of the year: when a business wants to stock up on inventory to prepare for Christmas, it would need to place orders in August or September at the latest, potentially even earlier if supply chain disruption continues. Given that the majority of European and US businesses source goods from Asia – which has faced most of the disruption through the pandemic – shipping is taking longer than ever. On the day of placing an order, a retailer is obligated to pay 30% of the bill, followed by the remaining 70% on the day of shipping. All of this before ecommerce retailers have even had a chance to consider the marketing spend required to promote their goods.
This stress on finances is further fuelled at peak retail periods, where inventory orders are larger and the need for marketing even more important.
With such sizeable upfront costs making it challenging for ecommerce stores to maintain a secure flow of working capital, ecommerce merchants don’t have it easy. But all is not lost, and there is support to make the road to growth much smoother for these business owners.
Underserved from a financing perspective
Further compounding this issue is the fact that traditional finance providers tend to underserve fast-moving ecommerce companies, given their lack of physical assets outside of inventory. Venture capital funds also tend to shy away from the online retail sector. This means that for many businesses relying on family, friends or personal savings to finance initial costs is the only real solution – and even then a risky one that isn’t available to all.
A game changer?
But all is not lost – and there is a solution out there. Revenue-based financing (RBF) provides ecommerce founders with the working capital they need to grow and keep pace with growing demand.
RBF is given as a fixed sum, with remittances over time based on a business’s revenue. In the case of ecommerce companies, for instance, an RBF provider allocates money for the company to spend on marketing or inventory, and with every sale made a percentage of the funding is paid back.
Payments increase or decrease based on revenue and can be collected from the borrower’s bank account or directly from existing payments systems. Usually, the returns to the investor continue until the initial capital amount, plus a small multiple, is repaid. As an added benefit, there are typically no equities, personal guarantees or hidden fees involved, meaning qualifying founders are able to access cash for growth without needing to sacrifice ownership. This means a business can pursue more aggressive growth, without sacrificing any of their stake. We’ve found that companies often find themselves needing to take this leap at around the two year stage, as over three quarters of our customers are at this stage of growth.
And the model is working. On average in 2021, companies who took funding from Wayflyer outperformed their forecasted revenue by 30%.
The digital transformation
Instrumental to this process is digital technology, upon which the ecommerce industry depends. From customer acquisition and product engagement to revenue data and processes, investors have access to more detailed marketing and sales data than ever before. Ultimately, this means they can both quickly and accurately assess how their funding will impact revenue. And some investors also use this data to provide analytics advice on how to optimise marketing campaigns and further fuel growth, making it a win-win situation for both the finance provider and business owner.
Looking to the future
As more financing options emerge, it will become even more important to provide choice and understanding over what avenues are most appropriate for ecommerce companies. It is in everyone’s interests for the sector to continue thriving, so helping online retailers to overcome their working capital and ongoing supply chain challenges will be as important as ever as we look towards the latter half of 2022.
