Revenue-based financing: Why it’s the best way to finance your eCommerce company

Date
April 26, 2022
Category
Finance
Written by
Peter McGrady

Pillow Cube, an eCommerce company pitching an innovative pillow design for side sleepers, kept growing steadily since their Kickstarter campaign in 2019. Then Black Friday 2020 hit, and they saw more sales in one weekend than they had in the entire history of their company.

All of a sudden, they had a slew of orders to fulfill, and they needed funding to source that inventory and get it shipped out to customers. When it came time to decide which type of funding to use, they knew revenue-based financing would be the best and safest option. Why? Commercial lenders wanted personal guarantees and Pillow Cube's founders wanted to avoid the risk of losing their house or other personal assets.

Unlike traditional bank debt or credit cards, revenue-based financing is simple and fast for eCommerce companies to obtain. And flexible remittance schedules protect you from risk, so you’re not exposed at times when cash is tight. It’s the safest way to manage cash flow and accelerate growth, and here’s why.

Flexible remittance makes it less risky to your cash flow

Unlike traditional debt financing such as bank loans, revenue-based financing solutions are tailored to your working capital cycle, and remittances are based on a percentage of your daily sales. If sales aren’t very high, the amount collected will be lower, so there’s less impact on your cash flow.

Banks and credit card companies don’t really care about seeing your business succeed or understand why it might take you three months to see profits from the inventory order you’re trying to finance today. They want and expect to be paid the same amount every month, no matter what. If your stock is stuck on a container ship at a port in California instead of being sold to customers, they still want to be paid. That creates a cash flow issue for you.

Here’s an example of the typical timeline with commercial lending:

  • Day 0: You get approved for a $100,000 loan from the bank.
  • Day 1: You contact your manufacturer to place an inventory order and sign the PO. You owe them 30% upfront, so you pay them $30,000.
  • Day 30: You owe your first payment on the loan, but your goods haven’t even shipped yet due to a backlog at the factory. There’s no wiggle room with the bank, so you make the first payment of $8,500.
  • Day 45: Your stock finally ships, and you owe your supplier the remaining 70%, so you send the final $70,000.
  • Day 60: You owe the bank again, tightening up your cash flow at the end of the month so you can make the payment.
  • Day 90: After shipping delays, your goods finally arrive at your warehouse, and you can start selling that stock to customers. But cash is tight once again as you still need to make your third payment to the bank.

Revenue-based financing protects you and your cash flow if business slows for a month or stock doesn’t arrive on time. Use the cash advance to finance your working capital needs like inventory, so you’re not in the red when you need to place large purchase orders. Your remittances automatically scale as sales increase or decrease, reducing monthly cash flow bottlenecks. Here’s that flexibility in action:

  • Day 0: You get approved for $100,000 in funding from your financing partner.
  • Day 1: You place your inventory order and pay the first 30% ($30,000) upfront. Because of the revenue-based remittance structure, your funding provider immediately starts collecting a percentage of your daily sales. Your remittance percentage is 15% and you sell $500 in stock, so you pay $75.
  • Day 45: Your stock ships, and you pay your supplier the remaining 70% ($70,000).
  • Day 60: Due to shipping delays, you’re still waiting for your stock to arrive, and sales have been a little slow this month. But there’s no added pressure on your cash flow, because you don’t owe a lump sum today. You only sell $250 in stock, so your financing provider collects $37.50.
  • Day 90: Your new inventory is in stock, and you start selling it to customers. Sales pick back up, and you easily make bigger remittances directly from the uptick in profits. You make $2,500 in sales today, so you pay $375.

Revenue-based financing doesn’t require collateral or dilution

Banks often want a guarantee of security for the funds they’re lending to you in the form of collateral. Equity investors receive an ownership stake in your company in exchange for funding. But with revenue-based financing, you don’t need to give up collateral or dilute your ownership shares to receive access to capital.

Banks are primarily looking to minimize the risk to themselves and collect on their investment, regardless of the risk it poses to you. They might ask you to pledge real estate, inventory, or equipment — all assets that would be very risky for your business to lose. If you have any trouble paying your loan back, you could be in real danger of losing those assets.

Equity financing is useful when it’s done sparingly, but too many rounds will dilute your ownership to the point where you’re no longer in control. This is why equity financing is risky and inefficient for funding your working capital cycle. You lose the ability to determine the best path forward for your company. Even when you retain decision-making power, you’re forced into making short-term decisions that hamper your company’s long-term future.

Revenue-based financing leaves you in full control of the ownership of your company and doesn’t require you to pledge assets to secure a cash advance. Companies are assessed on their potential to generate revenue, and as long as it’s a good opportunity, you don’t need to give up any security.

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You can access funds almost immediately

Applying for a loan or line of credit from a bank or credit card can take weeks. Revenue-based financing gives you access to funding within days — freeing you to make efficient, secure decisions.

Traditional debt financing lenders take longer to approve because they need time to review the current state of your assets and your profits. They want to protect themselves from a bad investment, so they’re going to run all the necessary checks first. But waiting for funds causes even more strain on your cash flow.

Quick access to funds helps you make healthier, well-informed decisions. Revenue-based financing partners like Wayflyer have the ability to advance cash very quickly. As long as you’re generating revenue, you don’t have a history of cash burn, and the potential for revenue growth is there, you can have funds in your account by the next day. Order inventory to get ahead or promote your brand to customers strategically — before you’re behind on orders or desperate to find new customers.

Funding is based on the potential for revenue, not current assets

Some banks will approve you for less funding overall because your assets on paper don’t amount to much at first. With revenue-based financing, the funding you’re granted is all based on potential revenue, not just the current assets, so you’re more likely to get the full amount you request when you apply.

eCommerce startups who try to navigate through funding hoops from commercial lenders often find it especially challenging, and even contradictory. Your company has only been around for six months, so of course, you don’t have major profits or assets to show yet. But funding is exactly what you need to get off the ground, so you can buy stock, pay for ads, and generate revenue.

Revenue-based financing providers like Wayflyer evaluate companies based on their future revenue growth opportunities and what those companies are likely to do with an infusion of funding. eCommerce founders are already facing hefty challenges, and they need funding partners who will help them face those challenges and drive profits — not limit their funds. Flexible access to greater amounts of capital is the key to unlocking success, because it leads to faster revenue growth.

When you’re granted more funding than a traditional loan, there’s more cash for you to order surplus inventory or spend more on marketing to acquire more customers. You have more wiggle room to prioritize long-term decisions that are best for your company’s future while riding out downturns.

Structure your remittances to match the cost of what you initially financed

You can make revenue-based financing even safer and more efficient with the way you structure your remittances. You can dictate the level of remittance that makes the most sense for your business model — such as matching the daily percentage rate to the cost of your inventory. You’ll alleviate cash flow constraints by paying back what you financed at the same ratio, so you’re still making the same net profit.

Say inventory costs 15% of what your product retails for. Set your remittance rate to be 15% of daily sales. Your funding provider will collect the equivalent of your inventory costs each day from your total sales, and your cash flow will match up almost exactly.

Wayflyer provides flexible, fast revenue-based financing to eCommerce companies so they can grow faster, all while protecting their long-term interests. It’s the safest form of financing available to eComm startups. Learn how to get funded today.

Fill out the form and discover what rates Wayflyer can offer you

Written by
Peter McGrady
Head of Portfolio Management at Wayflyer

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