Inventory financing for eCommerce
There are many large cost centers that affect the trajectory of eCommerce businesses, namely marketing, inventory, shipping, and logistics. By using borrowed capital as a funding source, businesses can limit their financial restraints and better set themselves up for growth.
This guide will look at the inventory financing options that businesses can consider as alternatives to traditional bank loans.
Table of contents
- What is inventory financing?
- Why companies need inventory financing
- The benefits of front-loading inventory
- Options for inventory financing
- How does revenue-based inventory financing work?
What is inventory financing?
Inventory financing is, put simply, business financing obtained to purchase inventory.
Technically, any type of business financing could be used to buy new or additional inventory, but some financing options work particularly well for front-loading stock.
The best inventory financing options let you use your inventory as collateral when receiving a business loan. This means that if you do find yourself unable to pay back the loan as required, the worst thing that will happen is that the lender will take away your stock.
Why companies need inventory financing
There are two primary reasons why companies may consider taking out an inventory financing loan from inventory finance companies:
They need more inventory
The most obvious use of an inventory financing loan is to purchase more or new inventory. A common issue for growing businesses is the inability to afford to keep up with growing product demand.
In this case, businesses can use inventory loans or other inventory financing options to make bigger stock purchases and front-load their inventory to eliminate out-of-stock issues.
They need to spend inventory money elsewhere
A business may be able to finance inventory and avoid product shortages, but it might need to use some of its capital in other areas of management, including:
- Marketing, especially during seasonal periods
- Purchasing new types of products to keep up with trends and customer demand
- Investing in research and development to better understand its target audience
The benefits of front-loading inventory
Prepare for busy seasons
Busy seasons like Black Friday and Christmas and other relevant periods of increased sales for your business (such as Halloween or back-to-school) can be an inventory drain.
Inventory financing to front-load your inventory is especially critical during peak sales periods and for seasonal businesses. You'll ready yourself for high traffic, ensuring you have the right products in stock to keep up with customer demand. If you pay for large quantities of inventory upfront, you'll also avoid the potential for fluctuations in manufacturing costs.
The most valuable long-term benefit of front-loading inventory is that you'll give your customers exactly what they want when they want it, which is key to building better relationships. This will help you increase your average order value, and improve your customer lifetime value, bringing in more net profit per customer.
Quicker deliveries equal happier customers. A US consumer survey found that 44% of customers said they were willing to wait within two days for delivery, while only a quarter of consumers said they'd be happy to wait for 3-4 days. There's something to be said about this 20% drop-off: customers expect fast shipping when ordering online, and anything longer is a let-down.
Overcome external challenges
Unstable political climates can throw an on-demand stock buyer off guard. COVID-19 is a prime example of just how messy supply chains can get in the middle of a global crisis. eCommerce businesses dropshipping from other countries experienced decreased orders, supply chain problems, and standstill manufacturing, and even when normality resumed, there was still a huge lag in production.
If you source your products outside your resident country, front-loading your inventory will ensure that you know what you're paying upfront, which should help you avoid issues with a decrease in manufacturing, an increase in tariffs, and any other negative ramifications of an unstable political climate.
Options for inventory financing
There are several ways to access inventory financing for your eCommerce business:
Debt financing is when you sell debt to investors or other individuals, who become your "creditors", in order to raise money for your business' expenditures (in this case, purchasing inventory). You will owe money back to these individuals, plus interest.
Debt financing pros:
- Payments are considered an expense and are tax-deductible
- One of the more accessible options for small businesses
Debt financing cons:
- Risky, as you'll need to make repayments no matter what
- Interest rates can be high
A popular way for eCommerce businesses to generate interest and raise funds is to use a crowdfunding platform like GoFundMe or Kickstarter. It's possible to raise thousands, even millions, for your business using crowdfunding, with the right approach and support.
Doesn't affect personal credit score
Qualification is faster than for traditional business loans
No guarantee that you'll raise much money if any at all
Requires a lot of time and effort building up customer interest
You could also choose to sell your shares to raise capital, in a process known as equity financing. Selling company shares means giving away slices of company ownership, and getting money back in return.
Equity financing pros:
Requires no obligatory repayment
Can still be used by business owners that lack creditworthiness
Equity financing cons:
Isn't accessible for all businesses
Business owners are legally required to consult with shareholders before making any big decisions
Revenue-based financing, otherwise known as revenue sharing, is the lowest-risk, highest-reward inventory financing option on this list.
Bloom offers revenue-based financing that lets you pay back a percentage of your revenue, enabling you to keep 100% of your equity with no warrants or personal guarantees. With this type of financing, you simply take out an advance then repay the money while you generate revenue from your sales and marketing efforts.
Revenue-based financing pros:
Less risk involved; only your existing inventory will be used as collateral if you can't make your payments.
No large payments; monthly payments are based on how much revenue you earn
Faster access to funding
Revenue-based financing cons:
Revenue-based, so revenue is required
Requires monthly payments, which may not suit your company's financial situation
How does revenue-based inventory financing work?
It's simple to use Bloom to get inventory financing. Here's how inventory financing works from start to finish:
First thing's first, you'll need to look for inventory loans that are best suited for your criteria, including the financing amount, payback structure, and price.
Apply for the inventory loan
To secure inventory financing, your next job will be to apply to partner with Bloom. You'll be required to enter your business's details and indicate the type of partnership you wish to discuss.
Get funds for inventory
Your requested inventory loan will be paid directly into your bank account when you have successfully become a Bloom partner. You may also be able to arrange to pay your manufacturer directly, such as if you need to finance stock that isn't yet available. Using the funds, you purchase inventory.
Pay back the inventory loan
The final step is to pay back your inventory loan, according to your agreed-upon terms with Bloom. You'll only pay a percentage of your revenue, so the monthly cost will be variable based on your sales.
Inventory financing is often the only means of scaling your small business. Having options to front-load your stock without using cash upfront will enable you to prepare for spikes in sales and ultimately keep your customers happy, encouraging positive feedback - and increasing conversion rates as a result.
To make sure you choose the right inventory financing option, ask yourself the following questions:
What is the purpose for inventory financing - to purchase inventory or use the cash you'd usually spend on new inventory for marketing or other uses?
When do you need inventory financing - when you make a payment for inventory, when you receive a shipment from the manufacturer, or some time after?
When would you prefer to pay back your inventory loans? Would you rather pay off the full sum or make smaller monthly payments?
How big of an inventory loan do you require?
When you use Bloom to fund inventory and marketing spend, you can access up to £10M - and you only pay for what you use. Find out more about how we can help you reach your potential.
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