April is National Financial Literacy month, making it the perfect time for ecommerce business owners to educate themselves on the differences between good debt versus bad debt. No matter what you call it–funding, working capital, lines of credit, or loans–debt plays a critical role in the growth of many ecommerce businesses. If you’re hoping to scale your ecommerce business at any point in the future, it’s important that you invest time and energy into understanding how debt can impact the financial health of your business, along with the right ways to leverage it.
While Amazon sellers and ecommerce business owners have historically had many negative associations with debt, the truth is that it doesn’t have to be intimidating or scary for your business. When debt is leveraged strategically and purposefully, financially literate sellers can use good debt to boost their cash flow and scale sustainably.
Get ready to embark on an exhilarating journey as we delve into the exhilarating world of good debt versus bad debt! In this article, we’ll unravel the secrets behind distinguishing between the two, unveil the telltale signs indicating your ecommerce business is primed for good debt, and unveil the roadmap to forging a rock-solid foundation of robust cash flow for your online venture.
We’ll also unveil the ultimate playbook for securing sustainable funding, empowering your business with access to boundless resources and unlocking its full potential through the magic of good debt.
The Concept of Debt
While debt isn’t inherently good or bad, it has the potential to be both immensely beneficial or harmful to ecommerce businesses depending entirely on the circumstances. The benefits, or lack thereof, are entirely dictated by how you utilize and manage the debt your business has taken on. By consistently aligning your business with a clear purpose, well-defined plan, and structured payment schedule (PPP) for debt, you can confidently leverage external funding as a strategic move for your ecommerce enterprise.
- Purpose – What is the purpose of taking on extra capital? If you’re looking to apply for ecommerce funding it’s important to know exactly why you need it and what you’re going to do with it. If debt doesn’t have a purpose, you could find yourself wasting money on the cost of capital without a strong ROI.
- Plan – How are you planning to allocate the dollars that you receive through external funding? It’s smart to have a strategy in place for how funds will be split up (if at all) and what the predicted ROI is. This will help keep you on track to make the most of your money.
- Payment Schedule – Are you confident that you’ll be able to stay on time and reasonably meet the repayment schedule for any working capital and associated fees you take on? It’s important that you have a strong schedule to stay on track.
In fact, supplementary working capital has the potential to benefit ecommerce sellers immensely. You can utilize good debt to leverage a multitude of opportunities and scale your ecommerce business even more efficiently, if you understand how. Let’s take a look at some ways to identify good debt and avoid bad debt.
Good Debt
Good debt is debt that is acquired with the expectations of it generating lasting benefits for your ecommerce business. Additionally, good debt should come under reasonable repayment terms, meaning you’re confident that your ecommerce business can afford any fees or interest rates and stay on schedule. Examples of good debt for an ecommerce or Amazon business include funding for restocking a successful product, investing in equipment for more cost-effective fulfillment operations, or upgrading your marketing efforts before an event.
By leveraging a healthy amount of ecommerce funding for your business you can streamline your cash flow, refresh inventory sooner, expand your product catalog, and take advantage of an endless number of opportunities for growth. Good debt is a huge resource for growing businesses, providing ecommerce or Amazon sellers the capital that they need to boost their sales.
Bad Debt
Ever felt like debt is the villain in your ecommerce story? Many ecommerce sellers have strong negative associations with debt, and often for good reason. When your ecommerce business takes on external funding or working capital without a purpose, the money is mismanaged due to poor planning, or the payment schedule is unrealistic, debt can quickly turn harmful. That’s why money that doesn’t yield long-term benefits for your ecommerce business, has little to no return on investment, or exceeds your ability to make regular payments each month is considered bad debt.
Good Debt versus Bad Debt: How to Tell
The key difference between good debt versus bad debt for your ecommerce business financing is its potential to help your business scale. It’s not always reasonable to expect an immediate increase in sales or efficiency from good debt, especially if you choose to invest in aspects of your business like improved fulfillment or equipment, but there should be a demonstrable increase in the sales and/or profitability of your ecommerce business over time.
In order for you as an ecommerce seller to determine whether or not you’re taking on good or bad debt, ask yourself these three questions:
- Is there a good expected ROI on the funding you’re looking to acquire?
- How can you keep the cost of capital as low as possible?
- Is the amount of debt you’re planning to take on for your business sustainable?
Every ecommerce or Amazon seller has a unique business with different financial circumstances. To determine good debt versus bad debt it’s important to take into account your ecommerce business’ specific challenges, cash flow management practices, and growth goals. Before taking on any type of debt it’s wise to review your historical cash flow forecasts and projected cash conversion cycles for the following months. Many ecommerce sellers also find it helpful to speak with an accountant or professional financial advisor to review the potential benefits and pitfalls of debt beforehand.
Sustainable Funding: Growing with Good Debt
Once you’ve determined that securing funding for your ecommerce business is a wise move, it’s time to explore your options for ecommerce working capital. With the plethora of funding choices available to ecommerce sellers today, it’s crucial to find a provider whose offers and terms align with your business’s cash flow requirements. Keep in mind that the key difference between good and bad debt in ecommerce often lies in its ability to positively impact your cash flow over the long haul and be repaid efficiently.
Sustainable funding for ecommerce ventures aims to provide a temporary cash flow boost while contributing to sustainable growth in sales and profits for the long term. The best sustainable funding options offer tailored, short-term capital and work to synchronize repayment schedules with your cash conversion cycle. This approach helps alleviate pressure on your cash flow during critical periods while minimizing the fees associated with good debt.
With that temporary cash flow boost through funding, your business can take advantage of:
- Increased buying power. With improved buying power thanks to easily accessible capital, you can take advantage of bulk purchase discounts. In the long run this will help reduce your cost of goods sold (COGS) and improve profit margins.
- Favorable negotiations. The best ecommerce sellers understand that the more capital you have on hand for negotiations, the better. Even if you don’t use it, you can leverage capital for improved payment terms with suppliers, extended timelines, early payment discounts, and more.
- Expansion opportunities. Take advantage of unique opportunities to take your business to the next level when you can afford to do so. This includes things like entering new marketplaces, global expansion, improving operations processes, and more.
And with enough working capital available, truly anything is possible for your business!
Even for ecommerce stars who can calculate ROI in their sleep, debt can still send shivers down their spines. But fear not! Debt doesn’t have to be the villain in your ecommerce saga. In fact, with a touch of finesse, it can be your trusty sidekick, propelling your business to superhero status in no time. That’s where Viably swoops in with its custom-made working capital solutions, ready to tackle your cash flow conundrums and catapult you towards ecommerce greatness!
