Why working capital is still a challenge for founders
June 15, 2021
If you’re a founder, you’re no stranger to cash flow problems. Anything from unexpected expenses and increased liabilities to downright emergencies can greatly slow down your growth at critical points. And while working capital challenges can occur with any business, e-commerce companies are especially prone to disruptions because their funding options can be few and far between compared to brick-and-mortar stores.
Let’s say you have a small e-commerce business and you’re trying to access working capital either through a bank loan or investor equity. Funds can take anywhere from 3 to 6 months to become accessible, so what do you do in the meantime? A working capital problem can truly leave you spinning your wheels in the mud, not to mention stunting your growth and revenue. Unfortunately, it’s a commonplace problem that’s part of the reality of owning a business. But it’s not all doom and gloom: today, there are many options to circumvent potential working capital problems through various traditional and alternative funding options.
What is working capital?
Over 32% of e-commerce businesses list “running out of cash” as one of their top reasons for going under; another term for running out of cash is a cash flow problem. So how does working capital play into all of this?
Working capital is the cash flow available to you to cover expenses at a given time, such as payroll, inventory, or operational costs. When your expenses exceed the funds available to you, you can leverage working capital to bridge those gaps for a temporary time. This will allow your business to continue operating as usual, and avoid any potential issues with stagnation on revenue or growth.
What does working capital solve?
A universal truth in the business world is that expenses add up, whether you like it or not. Oftentimes, as costs and liabilities pile on, payment from your vendors may not yet be in your pocket. Instead of burning the candle on both ends to keep your business from going under, working capital can help in the following kinds of scenarios:
- Inventory purchasing: Working capital can help purchase inventory, especially in advance of high-volume sales periods like the holidays or BFCM. Purchasing excess inventory will not only allow you to be ready to tackle the anticipated customer churn, but also helps with locking in discount rates with suppliers.
- Advertising: Working capital can help bolster your marketing budget to spend on digital marketing and advertising. PPC and email campaigns are just a couple of examples of channels that could boost your cash flow, particularly during peak shopping seasons.
- New markets: As you grow, you’ll likely want to add to your suite of products and services, entering new markets as you do so. But increased inventory means more storage space needed, and additional costs associated with a new fulfillment centre and new marketplace fees, for example.
- Scaling your teams: With revenue growth comes the inevitable need to scale your team. Whether that’s building out a customer service, marketing, or R&D division, working capital can assist as you add to your payroll.
- A rainy day fund: Seasonal peaks might be predictable, but crises very often are not. Pandemic or otherwise, there are always going to be unexpected hiccups that’ll occur. Working capital can serve as a crucial rainy day fund to help navigate and manage any potential crisis down the road.
So why is securing working capital still a challenge for many founders?
Despite the global e-commerce surge in 2020 (and still going strong), e-commerce founders don’t always have access to most traditional options for funding, like banks. Only about 13.5% of small businesses are able to secure bank loans, and this figure is mostly made up of brick-and-mortar retail. The e-commerce ecosystem is constantly evolving, so even if your business qualifies for a traditional loan, it’s worth comparing alternative sources of funding, including:
- Peer-to-peer lending
- Microloans and microfinancing
- Vendor or invoice financing
Find out more about alternative ways to fund your business here.
What type of working capital is right for my business?
There are key differences between traditional bank loans and alternative business funding options. The right type of lending for you will depend on the needs of the business, where it is in the business life cycle, and what lending options you and your business qualify for. Here are a few key questions to consider as you work through your working capital options:
- Do I need multiple funding solutions to meet the current (and future) needs of my business?
- Which funding options offer me flexible repayment options?
- What’s the credit impact of applying for this type of loan?
- Are there any prepayment penalties associated with this type of funding?
- When will I receive my funds? Is this a fast enough timeline to meet the demands of the business?
Keep in mind that not all working capital solutions are the same, and that each one offers a different set of terms. As with every financial transaction you’ve made so far, take the time to do your due diligence to ensure you’ve made the right decision for your business. Remember that access to working capital means your business can continue to run smoothly. Before you take your business to the next level, take a moment to make sure you’ve got access to working capital, and that it’s...working!
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