Mind the gap – and how to bridge it

Currencies Direct May 23rd 2016 - 5 minute read

You may have set up your online business with personal savings and/or financial help from family or friends. Your business is ticking over quite nicely. Sales are growing steadily. You are building up a solid reputation on Amazon, eBay and other online marketplaces. Customers are coming back for repeat purchases.

You may be happy to continue on this track – after all, online selling may be just a side-line to your day job. But if you are looking seriously to grow your online business – to take it to the next revenue level, then at some point the issue of financing will raise its head.

Having access to the right kind of financing, at the right time can make available the funds you need to take that next step; and make them available at the right cost.

Three main scenarios spring to mind when online sellers are likely need additional funding.


Finance sales growth 

To state the obvious – if you want to sell more, you will need to buy more stock. Your cash flow may be good but not sufficient to make a major investment in new lines – or in stocking higher quantities of existing lines. You could try to ask suppliers for longer payment terms, but ultimately, some form of short-term financing will be required to fund the exercise.


Manage seasonal revenue fluctuations

Most online sellers experience highs and lows over the course of the year. The obvious high season for toy and gift sellers would be pre-Christmas; for holiday leisure products – the summer months. You will obviously be aware of these patterns and so will mitigate them by pre-emptively adjusting stock levels or extending payment terms with suppliers. You may also hold flash sales to generate funds and reduce stock levels – but this will obviously hit your margins and may also damage your ‘brand’ as repeated flash sales may make consumers reluctant to buy from you at full price.

So, provided that your inventory is still viable, you may look to external financing to overcome a short-term liquidity gap until your peak sales season kicks in again.


Take advantage of new business opportunity

Being successful as a retailer often depends on being flexible enough to seize new opportunities; and this flexibility all too often relies on having quick access to additional funding.

For example, you may have an opportunity to buy repeat stock or new items in bulk, at a discounted price. This means a higher up-front investment but higher margins too; and it needs to be funded. You may want to enter an overseas market or set up a new online store – this requires initial outlay. Or you may want take your business in a new direction – move to private labelling for example. All of these opportunities will incur set-up costs and additional inventory/operational costs.
These are the kind of scenarios that may oblige you to look for external financing. The traditional route would be to approach your bank for a short-term business loan – and it may still be your first port of call.
The problem is that the criteria on which banks base their lending decision are often not tailored to the way online businesses operate or the most appropriate indicators of success: reviewing Amazon or ebay account histories for example.


Filling the gap

Happily, a number of other organisations have entered this arena, with the specific aim of providing (generally) unsecured finance to online sellers. Unlike banks, they will take account of your account history on Amazon, eBay – or whichever other platforms you may be selling on, to assess your creditworthiness. These are a better indicator of ability to repay as they include the most up to date figures and so can demonstrate whether or not existing selling activities will generate sufficient revenue to repay the loan.

So you have a better chance of being accepted for a loan – plus you are likely to get that decision quickly; and speed is often essential to grabbing a new business opportunity.

The downside, however, is that the interest rates from these providers are likely to be higher than those of bank loans.

It may be worth looking at the following loan providers:

Bitbond  https://www.bitbond.com/
PayPal Working Capital  https://www.paypal.com/uk/webapps/mpp/working-capital
Kabbage  https://uk.kabbage.com/
Ezbob  https://www.ezbob.com/
Iwoca  https://www.iwoca.co.uk/
You may have to reject some of these immediately as some only offer cash advances in specific geographic areas. Indeed Bitbond is the only company in the above list to describe availability as ‘global’ – although the UK and U.S. are covered by the others.

And, if you are not using PayPal in your business – then PayPal Working Capital will not be available to you.

Additionally, minimum qualification requirements differ across the group: ezbob, for example requires a  minimum annual turnover of £100,000 and at least twelve months trading history; while Bitbond only asks for a minimum of one year in business as an online seller on one of the major platforms.


Amazon – By invitation only

Then there is Amazon.

To benefit from Amazon Lending, you have to wait for an invitation; and, as usual with Amazon, no-one knows exactly what you have to do to be invited! It is fair, however, to assume that it is only Amazon’s top performers and those with highest customer ratings who will be considered.

Alternative financing

A study by Nesta[1] of 94 crowdfunding and P2P lending platforms reports that in 2015, the online UK alternative finance market grew by 84% to £3.2 billion to become a significant source of funds for start-ups, entrepreneurial businesses and others to whom the banks have traditionally said “no”.

A quick perusal of alternative finance sites did not reveal specific references to online sales business, so their services may not be specifically tailored to this sector.

But – it may be worth an application.

Alternative financing is characterised by:

  • Peer to peer (P2P) lending

P2P loans are flexible, unsecured arrangements between individual investors and existing businesses, usually SMBs. P2P lending has been described as “financial match-making”. It is carried out totally online. Loans are typically used to fund business growth, provide additional working capital or fund one-off purchases essential to the business. Rates are slightly lower than when borrowing through a bank. Any creditworthy business can apply – and P2P lending has proved popular with companies which don’t have solid assets against which a loan can be secured as per the traditional bank model – software houses and media companies, for example. 

Well-known P2P lenders for business include Funding Circle, RateSetter and ThinCats.

  • Crowdfunding

Crowdfunding is an offshoot of P2P lending and is apparently the fastest growing model, up by 500% to £12 million (from a £2m initial base) according to Nesta’s 2015 figures[2]. Businesses advertise their venture/requirement on one of the established crowdfunding platforms and potential investors express interest through the same. Crowdfunding is particularly attractive to start-ups.

  • Invoice trading

Online ‘invoice trading’ uses a P2P model to connect businesses with investors and enable them to sell their outstanding invoices to improve cash-flow and avoid having to draw from an overdraft or take out a loan.

Whereas traditionally with factoring or invoice discounting, businesses would have to sign over the whole of their receivables ledger, the alternative online marketplaces are more flexible and allow companies to sell individual invoices.


Spoiled for choice?

Well that may be overstating the situation, but certainly you have more choice than ever before when looking for additional finance for your online business.

But, you still need to be absolutely clear why you want the money and what it will help you to achieve. Don’t be tempted to take out financing to pay off debts or to support an online selling business that is not financially viable long-term; don’t ‘throw good money after bad’ in other words.

And explore all the options available to you now, comparing the various costs and commitments of each.
Finally, before approaching any external party for finances, make sure you have a business plan/cash flow prepared – even if it just looks 6-12 months ahead. You will need this for some applications – and it will make it easier to check that you will be able to afford the repayments.


[1] http://www.nesta.org.uk/publications/pushing-boundaries-2015-uk-alternative-finance-industry-report#sthash.EcKEngXk.dpuf

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