8 Ways to Turn Ecommerce Funding Into Profit
Successful online sellers are often limited only by the available cash they have to grow their business. They can source products, optimize listings at scale, and deliver experiences that create customer loyalty. The only thing slowing their growth is waiting for revenue to reinvest in the business. This is where ecommerce funding enters the equation.
Though ecommerce businesses have historically struggled to secure working capital, the landscape is changing. There are now funding alternatives designed specifically for ecommerce sellers and the platforms they use to run the business. But as is the case with any form of debt, ecommerce businesses need a plan for how much capital they’ll take, how they’ll use it, and what type of return they should expect.
In this guide, we’ll cover 8 ways to use ecommerce working capital, and how you can translate it directly into profit. Before you apply for ecommerce funding, consider which of these use cases would be most effective for your business.
1. Purchase Inventory
The most straightforward way to turn ecommerce funding into profit is by stocking up. Established ecommerce business owners know what sells. Their challenge is getting their hands on as much product as they can sell, especially during the holidays and other busy seasons.
Established sellers almost always have access to additional capital. The question is when to take it and where to use it.
Start by funding additional inventory to your most profitable and best-selling listings. The more your projected profit exceeds your cost of funding, the higher priority that product should be.
Let’s say you can sell an additional $50,000 worth of product at a 20% margin, but you don’t have the cash. This is a perfect opportunity to apply for funding to front the cost. Here’s the basic math:
- $50,000 in working capital at a 5% fee.
- $2,500 cost of funding
- $10,000 gross profit (estimated from 20% projected margin)
- $7,500 in net profit (after repayment with cost of funding)
Whenever your projected profit is higher than the cost of funding, it’s a good opportunity. The larger the gap, the higher your priority.
Most successful ecommerce businesses use working capital for numerous restocks at the same time. If you fund $500,000 worth of seasonal inventory under the same circumstances, you’ll expect to net around $75,000 in profit.
Reseller, wholesalers, and arbitrage sellers can use this model over and over. But what about private label ecommerce brands?
Any successful brand owner can attest that selling a higher volume of an established product is the easy part. The hard part is establishing a successful product in the first place. This leads us to our second use case for ecommerce funding: product launches.
Product launches are a primary growth driver for ecommerce businesses. As we covered earlier, ecommerce businesses can be very successful focusing on their top performers. But in order to establish top performers, you need to keep launching products. So why don’t sellers launch products all the time?
The simple answer is, launches are expensive and can take time to plan. There’s a lag time of a few months between the initial investment and the revenue, which means product launches require lots of liquid capital to execute. It’s difficult for ecommerce businesses to generate cash flow for numerous launches. While it’s possible to fund launches exclusively from profit, the process is slow and taxing on your cash flow. Ecommerce funding is the only way to launch products quickly and accelerate growth.
By using ecommerce funding for product launches, the payoff is not as immediate as it is for restocking an established listing. However, every successful launch creates a new revenue stream and another place where you can stock up for high-volume seasons.
Here’s a basic example. Let’s say you have $5,000 of your own cash. You would like to launch a new product that requires about $10,000 in upfront costs, and you believe you can sell this product at a 20% net profit margin. You secure an additional $10,000 of working capital at a 5% fee for a 90 window to launch a new product. That means you now have $15,000 in total capital which will support all expenses for your orders (inventory, marketing, shipping, storage, marketplace, etc.). Your profits will more than cover the cost of funding, as you can see in the chart below.
After your product is launched and you’ve settled with the funding provider, you now have $6,500 in cash ($1,500 in profit so far). You also have a successful listing that’s generating reviews, and you have the cash flow to support additional growth. Prior to securing this funding, you could never have afforded the upfront costs, let alone sustained momentum beyond the first month.
Now imagine this model scaled across numerous product launches during the year. Launching a new product is one of the most effective ways to use working capital for the long term growth of your business.
3. Advertising
To this point, we’ve used static, predictable numbers to simplify the math. The reality is that competition will challenge your product launches as well as your established listings. Your primary weapons against the competition are pricing, customer service, and of course, advertising.
Advertising, and particularly PPC on Amazon, is often a requirement for successful listings, but it’s getting increasingly expensive. Despite the cost, 74% of third-party sellers on Amazon used PPC ads in 2022 according to Jungle Scout.
Sometimes your best opportunity for growth is to improve the performance of listings you already own. Advertising campaigns drive traffic to your website or your marketplace listings, improving your keyword rankings on Google, Amazon, or wherever else your customers are. Improved rankings lead to more sales and higher profits. If liquid capital is the only thing stopping you from launching a PPC campaign, this is a perfect use case for ecommerce funding.
4. Storage and Shipping
When you first start out, storage and logistics are fairly straightforward. Many Amazon FBA sellers prep all their products themselves and send them to an Amazon fulfillment center—job done. But as your business grows, this model doesn’t always scale.
You need more space, more labor, and more scalable processes to handle business logistics. At the same time, you still need to run your business. So, some of the key investments for business owners involve storage, shipping, logistics, and fulfillment. Here are some examples.
Warehouse Space
A commercial warehouse is a worthwhile investment for many ecommerce businesses. It allows you to better manage and store inventory. It can even serve as a brick and mortar storefront as you build a brand and expand revenue streams. In addition to the space, you might need a budget for payroll to handle additional inventory prep and operations.
If you rent the space, it will likely require a significant security deposit—a great use of working capital for two reasons. First, you’ll get the deposit back if all goes according to plan. Second, this space will add to your bottom line over time as you scale into new revenue streams.
3PL Services
Many sellers add 3PL (third-party logistics) services for their business when storage gets tight, shipping becomes cumbersome, and distribution becomes too much to manage.
3PL providers can store and organize inventory, connect with your marketplace accounts to receive orders, and even forward the items to a local shipping service. It’s a great option for sellers starting to get bogged down in business operations instead of growth.
But of course, they cost money. If your business is profitable but cash tight, and you have an opportunity for growth with a 3PL partner, it can make sense to use working capital to pay for upfront costs.
The right 3PL provider can lead to significant growth for your business Amazon provides some factors to consider when choosing a 3PL partner.
FBM (Fulfilled by Merchant)
Perhaps some of your products make more sense for FBM. For example, there’s enough demand for some products that they can be quite profitable even without Amazon Prime customers. Perhaps you already have other fulfillment services available, so you can save the costs associated with FBA. In order to scale this strategy, you may need additional storage and labor to manage fulfillment yourself. After all, you’re now on the hook for shipping, returns, and all customer service.
If executed properly, FBM can lead to additional profit for certain products. It’s a popular strategy for newbies who are not moving much inventory. But if you plan to grow with this strategy, it will require investment. You’ll need capital to secure storage and afford labor costs. Consider a funding option with longer settlement periods to launch an FBM strategy.
5. Launch in a New Marketplace
One of the best ways to de-risk an ecommerce business is to create more independent revenue streams. Launching a new product on your existing Amazon store will create an additional revenue stream, but it is subject to all the same risks as your existing listings. If anything happens to your Amazon Seller Central account, the entire business is compromised.
This leads many sellers to diversify through new marketplaces. If you’re building a brand through private label products, it makes perfect sense to open a Shopify store, and to sell those products on other marketplaces.
Of course, it takes capital to expand. There are account fees to sell on the marketplace, additional costs for inventory and marketing, and additional logistics/fulfillment costs. It requires many of the same investments as launching new products.
Therefore, working capital can play a similar role. Choose one or more of your most successful products. Plan to fund your first few orders to ensure a successful product launch on a new marketplace. Your return on investment will follow a similar track to product launches, only in this scenario, you have the added benefit of diversifying your business.
6. Negotiate Better Terms with Suppliers
Your suppliers have cash flow issues, too. That means there are two types of partners that every supplier loves: partners who always pay on time, and partners who can pay up front.
One of the advantages of healthy cash flow is that it helps you build trust with suppliers. If your business falls into one of those two categories above, it earns you more power to negotiate for more inventory and better payment terms.
Here’s an example. Say you have an agreement with your supplier—10,000 units of a popular item for $100,000. You pay 20% up front and the rest at net 60 payment terms. You’ll sell the inventory at a 20% net profit margin. The net 60 payment terms allow you to start selling the inventory to cover some of the costs before the full amount is due. In the end you make $20,000.
Now imagine you offer to pay the full amount up front through access to working capital. This is extremely helpful for your supplier, so you negotiate a 10% discount in exchange for full payment up front. You’ll pay 90,000 when you order the product, and you cover the payment with working capital that you secured at a 5% fee ($4,500). Because of your discount, you’ll make $30,000 profit from this order. Subtract your cost of capital and you’ve made $25,500.
In addition, you won’t need to worry about the pressure from net 60 payment terms on your cash flow. Instead, you’ll be paying your funding provider over a more extended period.
7. Refinance Debt
Early in the ecommerce business journey, online sellers often take capital at higher fees and APRs. There’s nothing wrong with leveraging debt to accelerate business growth, but you should hunt for the lowest possible cost of capital. As your business grows and establishes business credit, your options will improve. Make a habit of periodically shopping for opportunities to refinance or convert your debt with a more favorable funding product.
Be sure to understand the cost of capital and what it does for your cash flow. For example, cash advances might be very helpful for your business in the short term. They can help you stock up on inventory during the holidays or another busy season. However, taking a cash advance every day is not as cheap or as effective as funding your business with working capital. As your business grows and you establish a longer sales history, it makes sense to graduate from regular cash advances (your own money) to larger chunks of new capital (someone else’s money). This will give your business more flexibility to grow and save you money in the long term.
If you carry a loan or credit card balance with interest charged to the principal, it might save your business a lot of money to refinance with a funding product that carries a flat fee for capital. The average business credit card carries a 20% interest rate, which is way too expensive for growing ecommerce businesses. The problem is, it’s difficult to generate the cash flow required to pay the balance in a short amount of time. Working capital can solve this problem. Find an ecommerce funding provider that will help you eliminate credit card balances that cut into your bottom line.
8. Hire a Consultant
Ecommerce forces business owners to hone their skills quickly. In order to be successful, they need to learn to source and price their products, write optimized listings, and create efficient operational processes. But you’re only one person. It’s very difficult to be an expert in everything, and it’s impossible to execute everything yourself.
Consulting services are often a necessity for ecommerce businesses to grow. Here are some examples of areas of the business where they can help:
- Marketing and PPC
- Fulfillment, operations, and logistics
- Listing optimization
- Accounting
- Marketplace account management
- Brand building
- Growth and/or exit strategy
All of these areas for consulting services can deliver profit to your business. Some of them, such as marketing and PPC, require upfront capital but can deliver very quick returns. Depending on the need, it might make sense to use working capital for upfront costs.
The Bottom Line
There are more options for ecommerce funding than ever before. Online sellers are no longer at the mercy of banks and traditional loan or credit offerings that don’t align with their business model. They can now access working capital or cash advances tailored to their cash flow forecasts and growth trajectories.
As you explore funding opportunities for your ecommerce business, be sure to set clear objectives for how to turn that capital into profit.
To see how much working capital you might qualify for with Viably, use our calculator below.
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