The Ultimate Guide to E-Commerce Funding
March 01, 2021
The #1 Challenge Facing E-Commerce Founders
Start an online business, they said. It’s never been easier, they said…
While it’s true that e-commerce platforms, like Shopify and BigCommerce, have democratized online entrepreneurship and lowered the barriers to entry, there are still many challenges that face e-commerce business owners.
Like all founders, these new-age entrepreneurs require funding to grow; however, the financial world hasn’t evolved to meet the needs of online founders.
Lack of capital is the number one barrier to e-commerce growth.
50% of all startups won’t survive their first 5 years and lack of access to capital is cited as a major barrier to success.
Over 80% of Americans do not have access to equity or debt financing—and e-commerce businesses get an even shorter end of the stick since they have fewer hard assets. As a result, only about a third of new businesses survive their first decade.
So what’s an e-commerce entrepreneur to do? The first step to securing the right kind of business funding is to fully understand the different types of e-commerce funding that currently exist, and the pros and cons of each.
Lack of capital is the number one barrier to e-commerce growth.
When Is The Right Time To Raise Business Funding?
Are you looking to purchase new equipment? Do you need to stock up on inventory or boost your advertising?
There is no correct time to start raising business funding, but you must be clear about your goal and how much funds
you’ll require to achieve it.
If you’ve ever watched Shark Tank or Dragon’s Den, you’ll know that they always ask why you need the money, and what your plans are for executing your strategy.
Not all types of funding will be appropriate for the stage of your company, especially if you want to retain full ownership. However, growth capital - when allocated effectively - can help you take your business to the next level.
In the next section, we’ll walk you through the different types of business funding to help you determine what’s right for your business.
6 Ways to Fund an E-Commerce Business
What is e-commerce financing?
E-commerce financing is funding that provides much-needed capital to online merchants. This capital allows retailers to grow, cover marketing expenses, inventory costs, and in some cases, operational expenses while meeting all other financial obligations.
There are many ways to fund an e-commerce business but the six most popular are:
- Equity financing
- Debt financing
- Revenue-share financing
Not every funding model is right for every business. And certain forms of funding make the most sense at different stages of a business
So let’s dive into these six funding solutions and find out which type of financing is right for your business.
Not only is it difficult for online businesses to get the funding they need to grow, but their options seem to be shrinking as well. As banks become bigger through expansion and consolidation, small and medium-sized banks are disappearing. This creates a gap in banking solutions for newer companies. In addition, newer, more digitally focused, business models are emerging that traditional forms of funding simply aren’t designed for.
Luckily, at the same time, there are newer forms of funding emerging for the growing segment of e-commerce founders. It’s important to understand all your funding options and know when the best time is to leverage each type.
The businesses that successfully scale are the ones that understand the various ways to acquire business funding, which are best for them, and know when to leverage them for the best business outcomes.
Step-by-step Guide to Getting Funding for Your E-Commerce Business
Option 1: Pitch to VCs in 8 steps
Do your research
Raising capital is a big decision. Before starting the process, do comprehensive research into the pros and cons of raising capital. For most entrepreneurs, the raising process takes anywhere from 6 to 9 months.
Build a business plan
A strong business plan is required for pitching to VCs. Essentially, you want your business plan to persuade investors to provide you with the capital you need to achieve the goals you’ve set out. This means you need to be convincing, yet concise.
Your business plan should at least include the following sections:
Executive Summary: a brief introduction and summary of your business plan
Company Analysis: information about your history, management team, and competitive advantage
Industry Analysis: outline industry trends that show opportunities for your company, and how you plan
to overcome any threats
Competitive Analysis: list the strengths and weaknesses of your direct and indirect competitors, and determine what sets you apart
Customer Analysis: clearly define the demographics
of your target market
Marketing Plan: describe your products, promotions, price, and placement
Operational Plan: depending on your products or services, use this section to explain your supply chain, production workflow and processes, teams, and any associated costs
Financial Plan: include your revenue streams, projected statements, and how you intend to use your capital
Create a shortlist of potential investors
When pitching to a VC, you also want to make sure that their values are aligned with your goals. While it may feel like you have less bargaining power and just want access to capital, remember that you’re giving away ownership of a percentage of your company.
Identify individuals or firms that have experience with companies in your industry and stage, and make sure there’s a personal fit.
How to Scale Your E-Commerce Business with Growth Capital
Here are four strategies and resources you can use to allocate your business funding and achieve your growth goals.
Invest in the right technology
When growing your e-commerce business, having the right technology in place can help streamline your operations and save time. The best technology partners will vary depending on your product and your vertical but typically, successful e-commerce companies will have:
- Automated Email Marketing
- Customer Service Helpdesks
- Shipping & Fulfillment Software
If you’re unsure where to start, think about your current tasks and figure out what can be automated. As a founder, your time is valuable and should be dedicated to growing your company.
There are plenty of tech options that can help your company scale. If you’re looking for the right partner, Clearco can help. We have a directory of tech partners that can provide you with the tools you need to get to the next level.
Work with an agency
If you need help acquiring more customers, improving your landing page, optimizing your paid advertising, or just boosting your overall marketing strategy, you may want to look into working with an agency.
As a founder, don’t get the impression that you have to be an expert in every part of your company. You’ll likely get better results hiring an employee or partnering with an agency to help you achieve your marketing goals, if it isn’t your expertise.
So what should you be looking for when selecting the right agency? Consider the following questions:
- Do the values of the agency align with your company’s? Is there a cultural fit?
- Does the agency have previous experience working with companies of your stage and in your industry?
- Can they show past work examples that demonstrate growth for their client?
- What is your budget?
- Will there be clear communication between your team and the agency?
- Does the agency have the proper bandwidth to focus on your business’ projects?
At Clearco, we have a network of agency partners that can help you achieve your marketing goals. Click here to get in contact with our partner matchmaker and find the right agency to help you with anything from paid Facebook ads to UX design.
Invest in sales & marketing
When running an e-commerce brand, you need to make sure that consumers know about your product, entice them to complete their purchase, and ultimately, become loyal customers.
While there are brands that have successfully grown organically, investing in paid advertising can get you to the next level. Some of the effective marketing strategies e-commerce brands have been using include:
Email Marketing: this requires sending relevant and consistent emails to your existing and potential customers. Emails can be used before, during, and after the entire purchasing journey to ensure a positive customer experience.
Social Media Marketing: this involves promoting your brand through social media channels including, but not limited to, Instagram, Facebook, Twitter, and LinkedIn. Effective social media marketing can help you connect with your audience and build your brand.
Influencer Marketing: this is a form of social media marketing that involves partnering with people and organizations that have a dedicated social following.
Pay-Per-Click Advertising: there are many types of PPC ads, but the most common is a paid search. This includes showing your advertisement at the top of your selected search engine results.
Content Marketing: this focuses on creating and distributing content for your target market with the goal of attracting and retaining customers. This can take the form of a blog, webinars, videos, educational posts, and more.
Search Engine Optimization: this involves improving the quality and quantity of traffic to your website. There are numerous ways to boost SEO for your website, from ensuring compatibility with mobile devices to using proper keywords.
These are just a few of the opportunities in the digital commerce space, and success is dependent on your target market and your execution.
If you need growth capital to invest in these marketing strategies, Clearco provides data-driven funding for e-commerce companies, without requiring a credit check, personal guarantee, or interest. Click here to learn more.
Inventory management is essential for any product-based business. While too much inventory can add unnecessary holding expenses to your business, there’s also the risk of not carrying enough product. If you don’t maintain an adequate level of inventory, you may lose out on potential customers and revenue.
As a business, you should be able to provide customers with the product they want, when they want it. Strong inventory management means having enough product on hand.
We identified a clear gap in our customers' needs to buy inventory at scale and a lack of financial products available to service companies of their size. Now, we’ll purchase inventory on your behalf and be paid back once your product sells.
5 Ways E-Commerce Founders Have Funded and Scaled Their Businesses
Haus started investing capital into paid ads and saw 500% growth.
In just six months after partnering with Clearco, Haus, the first D2C company in the liquor space, grew 5X and experienced a 2.5X increase in return on ad spend. Now, they have the capital for paid ads and can reach new audiences.
Vanity Planet used their funding to fuel inventory and meet their growing demand.
Vanity Planet faced unexpected demand as more consumers looked to bring the spa experience to their home. After reviewing their options, they chose Clearco for their easy application process. In just the first month of partnering with Clearco, Vanity Planet saw revenues grow by 98%.
Willful invested capital into paid search and saw a 300X lift in sales growth.
Willful is an online estate planning tool that makes it easier to create a will without going to a lawyer. They faced a problem: they needed to educate people about the uncomfortable yet important topic of estate planning. They used their growth capital to power paid ads and partner with influencers, resulting in 300X sales growth in their first year.
Ace Marks worked with an agency to achieve hyper-growth with Facebook ads.
Ace Marks founder Paul had a mission to change the shoe industry and he knew that in order to scale, he needed business funding to grow their customer base. They used their growth capital to partner with a digital agency, MuteSix, and built a successful ad strategy, growing their revenue by 218%.
BisouLovely freed up cash flow to spend on ads, and grew their team by 5X.
BisouLovely creates ethereal jewelry for the modern starchild. After seeing tremendous growth following their features in Vogue and Vanity Fair, they looked for funding alternatives to keep up the momentum. For the first time, they have free cash flow for paid ad campaigns and have grown their team.
The Ultimate Guide to E-Commerce Funding
A founder’s guide to D2C business fundingGet the Guide