E-commerce

Advanced technology has opened up the e-commerce industry for individuals and businesses to sell goods not only locally but globally, through the likes of Shopify and BigCommerce, direct to consumers (D2C).

Businesses now have the opportunity to reach customers all over the world with relatively lower costs, limited knowledge, and fewer contacts than in the past.

D2C businesses thrived during the COVID-19 pandemic with brands building direct relationships with their end consumers. In 2020, 85 million parcels were delivered D2C by manufacturers in the UK. That volume is forecast to grow 30 percent by 2023, exceeding 110 million packages. The current cost of living crisis is changing consumer behaviour again as they prioritise how and where to spend their money. This is likely to have a direct impact on the e-commerce industry, bringing with it financial and operational challenges affecting a business’s bottom line, whether this is an increase in return rate, supply chain disruption, reduction in luxury spend, or simply an increase in expenditure.

Regardless of whether a brand is experiencing a stable or volatile market if they are not backed by adequate initial investment they face a unique set of working capital funding issues. To compete in a global market, brands need to have high marketing budgets to fund paid advertising, for example, Google Ads and Facebook Ads. These costs are often borne by a company prior to generating any sales revenue. Indeed, before a business even considers marketing spend, a goods-based business will require inventory ready to fulfil new orders. Most businesses will be required to pay a high percentage of inventory spend up front, especially if sourcing from abroad. For seasonal goods businesses, this can be even more of a challenge. Working capital requirements are therefore considered the biggest barrier to entry in the
e-commerce market.

If ‘bootstrapping’ is not an option, then e-commerce businesses need to use a combination of debt/equity funding to bridge the working capital gap.

Options include:

1. credit cards
2. bank loans
3. crowdfunding (rewards or equity based)
4. revenue based financing (RBF)
5. merchant cash advances (MCA)
6. inventory financing
7. grants
8. equity financing.

Funding your e-commerce business

When considering funding to cover working capital, there are a number of key considerations which may influence your decision; the time required to secure funds, costs and fees, qualifying criteria, default penalties, due diligence requirements, limitations on spending, collateral requirements, flexibility and financial history; the list goes on.

Some funding options may be easier to obtain than others depending on how established and credit healthy your e-commerce business is.
E-commerce businesses are generally asset poor, meaning bank loans with good rates are harder to secure. It may be possible to attract equity crowdfunding investors to ‘up and coming’ brands but funding working capital with equity will likely come with a big price tag. E-commerce businesses should be mindful of the best time to leverage each type of funding option, whether this is short- or long-term debt, or equity.

Funding to support new product development may be best suited to equity investment as the future cost of the funds, in the form of dilution, will hopefully be outweighed by the future sales it generates. However, funding a marketing campaign may be best suited to debt financing where costs are absorbed in a shorter time period and e-commerce metrics can be used to calculate the return expected.

Traditional and alternative funding options come with their own pros and cons and should be assessed on a case by case basis.

What are the alternative funding options?

Revenue based funding (RBF) is a loan that a business agrees to pay back on a monthly basis over time from future revenue. There is a fixed flat service fee. Providers include Uncapped, Clear co, Choco Up and Wayflyer.

Inventory financing is a form of a loan or line of credit (secured on current or future inventory). Providers include Uncapped and traditional banks.

Merchant cash advance (MCA) is an advance repaid via a percentage of sales revenue when customers pay via credit card. Fees depend on the factor rate and advanced amount. MCA and RBF are both revenue-based but there are important differences to consider, in the application phase and set up. Providers include Shopify Capital, Capify and Rapid Finance.

Rewards based Crowdfunding is raising funds in exchange for rewards.  The pledger receives a reward instead of equity in the business. Rewards can be in the form of recognition/thank you, discounts, services and access to pre-orders etc. Platforms include Kickstarter and Crowdfunder.

Whether the decision is to use a traditional or newer alternative method of finance there is one common theme, your business needs access to accurate, up to date financial and operational data. In a now fast-paced, highly automated world, there are no excuses for not having access to requested data.

Below are a few examples of how your accountant can help prepare your business for its next growth spurt or tricky working capital dilemma.

• Providing advice on automating operational and accounting processes. Connecting platforms to produce up to date financial information fast (some newer alternative lenders may require direct access to your accounting system).
• Tailor made financial reports showing the information required to secure debt/equity funding.
• Assistance preparing forecasts to show how debt will be repaid or how a company will achieve an investors ROI.
• Introductions to lenders and banks.
• Providing guidance on the accounting treatment of financing options.
• On-going support reporting to VC’s/lenders.
• Financial modelling including cashflows which show the level of funding required.
• VAT and import duties advice when expanding into new markets.
• Providing advice on the VAT implications of different funding options such as grants and crowdfunding.

At Crowe we provide bespoke accounting and advisory services which can assist your e-commerce business in overcoming barriers to entry and ensuring your business is ready for growth.