Guide to Understanding E-Commerce Working Capital

As an e-commerce brand, keeping your cash flow under control can be difficult. In a digitized business environment where consumer behaviors and supply chains are always changing, unexpected expenses and fees can sneak up on you. 

It’s an all-too-familiar story. According to a survey by Marketing Signals, 32% of failed e-commerce businesses fail because they ran out of money. 

As an e-commerce business, how do you buck this trend? Ensure your business has sufficient working capital to pay operating expenses and cover cash flow gaps.

In this article, we dive into what working capital is, how it can help your e-commerce business, and some important considerations when you’re securing a working capital loan.

What is working capital?

Working capital is the money used to keep a business running and growing. It’s the money your business can access at any time to address day-to-day financial needs like inventory, payroll, and overhead costs, or to take care of unexpected expenses.

In other words, working capital lets you cover cash flow gaps quickly so that your business can continue operating smoothly.

You can calculate the working capital your business currently has by subtracting your current assets from liabilities. Positive working capital shows that your business is in good financial health. Negative working capital means your business may lack the cash necessary to handle your daily operations. 

Why is e-commerce business working capital important?

The e-commerce industry is changing rapidly and online sellers have to keep up. As the demand for e-commerce products continues to grow, e-commerce owners must continue adapting their strategies to meet shifting supply chain requirements and consumer demands. 

E-commerce working capital not only helps businesses stay afloat in the event of a financial setback, but it can also be used to fund the growth of the e-commerce business as founders navigate the twists and turns of an unpredictable e-commerce market. 

How working capital can help your e-commerce business

Working capital gives your e-commerce business the following advantages:

1. Better inventory management

In a digital environment where customers can easily switch to a competitor in a few clicks, going out of stock is the last thing you need. In fact, stockouts cost retailers about $1 trillion per year.

Stockouts happen for many reasons. Suppliers may get delayed in delivering items. You could receive a large order from a retailer. Or you may simply fail to predict an unexpected surge in consumer demand. Whatever the cause, stockouts can be quite detrimental to a growing e-commerce business. 

To ensure you don’t lose sales — and customers — from back orders, secure the working capital you need to stock up your inventory when there’s an unexpected surge in demand. Having that extra cash also allows you to take advantage of discounted rates when you buy in bulk from suppliers. 

2. Better advertising and robust marketing campaigns

The same Marketing Signals survey that evaluates why e-commerce startups fail, exemplifies the importance of funds to allocate to digital marketing. The survey found poor online marketing and lack of online search visibility to be top reasons behind e-commerce startup failure. 

The world of e-commerce is as unpredictable as it is competitive. If you want to stand out from the crowd, capture your target market, and, ultimately, drive more sales, you need to make a proactive effort to reach your target audience, promote your products, and grow your customer base. 

Marketing budgets can be a balancing act. Spend too much and you might end up with a negative cash flow. Spend too little and fail to reach your audience or generate the brand awareness necessary to fuel growth. 

However you allocate your budget, you’ll need additional funds to support your marketing and advertising campaigns as you scale your business.

3. Resiliency

It’s easy to overlook the hidden costs of running an e-commerce business. By having access to working capital, you can rest easy knowing you’ll be able handle any unexpected expenses  that sneak up on you.

Working capital ensures you’re better equipped to address unexpected costs, so that your e-commerce business remains operational and efficient should the unexpected occur.

4. Operational flexibility

E-commerce businesses need to stay nimble in order to keep up with changes in the industry. Fail to do so and you risk being outrun by competitors.

It’s important to have available funds that allow your e-commerce business the operational flexibility to react quickly and strategically to shifts in market conditions and customer sentiments. For example, it gives you the flexibility to invest in a new marketing trend or channel and reap the rewards for striking while the iron is hot. 

Questions to ask yourself when considering e-commerce working capital

When you’re short on capital, don’t jump at the first opportunity to secure a working capital loan. The right loan terms depend on the unique needs of your business and the market you serve. 

Here are some questions to consider while you’re seeking working capital financing for your small business:

1. Do I need multiple funding sources to address the needs of my business?

Given the volatility of the e-commerce ecosystem, you may need to use multiple funding solutions to maintain a positive cash flow as you cover day-to-day expenses and address unexpected costs and emergencies. 

Diversifying your funding sources or working with a lending partner that offers multiple lending products can help you secure working capital that suits your business needs today, but also has the potential to grow with you as your business grows.

2. Which working capital providers offer me flexible repayment options?

You need to seek loan terms that can accommodate your unique cash flow needs and account for unexpected expenses.  Finding online funding options that offer flexible repayment schemes is a good start as it reduces the EMI (Equated Monthly Installment) burden and reduces your risk of defaulting.

3. Will this impact my credit score?

Some lenders perform a credit check to find out if you’re eligible for financing, which may tarnish your credit score. 

When looking for working capital providers, ask whether they run personal credit checks. If so, is it a hard or soft pull of your credit? A soft pull should not impact your credit score when you apply for the loan.

4. Will there be any prepayment penalties?

A prepayment penalty is a fee some lenders charge when you pay off your loan early. A prepayment fee is usually expressed as a percentage of your total remaining balance.

If you’re considering a working capital provider that charges a prepayment penalty, take the time to determine if paying the fee is worth it for the benefits you’re getting out of the loan.

5. How fast will I receive the funds?

What does the application process look like and how quickly can you expect to receive the funds after applying? Depending on the reason and urgency behind your working capital needs, applying for the loan without understanding the timeline beforehand, may risk the funds reaching your account too late. In case you need working capital for emergencies or large orders, there are working capital providers that offer same-day funding options.

Why is securing working capital still a challenge for many e-commerce founders?

If you experience cash flow gaps, you have the option to apply for working capital loans from banks, fintechs, or private lenders.

The problem? 

Many e-commerce businesses struggle to get the funding they need. In fact, only 14.3% of big banks approve loan applications from e-commerce merchants. Those odds are not in your favor especially if you’re an earlier stage startup. 

The truth is that traditional banks are often not positioned to lend to e-commerce businesses. They lack the processes to properly evaluate an e-commerce store’s creditworthiness. Without these mechanisms, big banks aren’t likely to trust you enough to grant you the loan you need to grow your e-commerce business.

And even if they did, you would have to wait anywhere between three to six months to access those funds. As an online seller, you can’t afford to wait that long. Running an e-commerce business costs money and unexpected costs can blindside you.

Get working capital to cover operating expenses, eliminate cash flow gaps, and fuel business growth

E-commerce business working capital is key to growing quickly and keeping up with the dynamic demands of the e-commerce market.

If you’ve been trying to secure capital from banks with no luck, don’t despair. 

There’s now an increasing number of alternative funding providers that offer working capital to e-commerce sellers, giving you many opportunities to secure the working capital loans you need to cover operational costs, fill cash flow gaps, and accelerate your growth. Not only that, but these providers also offer loan terms tailored to the unique needs of your e-commerce business.

Aion helps e-commerce businesses grow now, pay later with cost-effective working capital. Grow Now, Pay Later product or chat with a funding expert to determine whether Aion working capital is right for your business.