Finance is an essential part of business, and it can be daunting for both first-time entrepreneurs and experienced ones. However, as your idea becomes a reality or your part-time job demands full-time attention and more money, financing will likely become a necessity. It’s an exciting period! 

There are many ways to get financing: crowdfunding, personal savings, and credit cards. You can also borrow money from friends and family. We will be looking at three types of financing, along with some things to keep in mind.

It is a crucial decision to obtain financing. This decision can have long-lasting and significant consequences. WooCommerce does not make any recommendations for stores, as every store is different. Take the time to think about all of these things and get objective, independent advice from a financial professional.

Common types of financing

This is where you get a loan from a bank. You will usually agree to repay the loan in equal installments over some time. As a fee, the bank will charge interest. The bank will require you to provide collateral. This is something that has a predictable, stable, and tangible value, such as a vehicle, building, or other property. If you are unable to repay the loan, the bank may take it over.

Equity financing When you think about Shark Tank, the majority of their deals are equity-based. In this scenario, you will give up a portion of your business to receive cash or other valuable items such as your new business partner’s knowledge and connections.

Revenue-based Financing: An organization may provide an unsecured loan to you (meaning that you don’t have to put up collateral like with debt financing). This is based on the sales history of your store. The lender is paid a small amount each month through a percentage on each purchase until all debt and fees are paid.

Financing is a good option.

Many companies obtain financing to expand or start their business. Some companies will apply for financing if they want to keep their business afloat or grow their company. This could be dangerous.

Financing might be the best option if you are starting a store, or expanding an existing one. These are some common reasons to finance:

Finance is required for major purchases

It’s your dream come true, and now a trustworthy buyer is interested in making a large purchase at your store. After the excitement wears off, you may be faced with the question: How are you going to honor such a huge commitment?

This is a great scenario for financing, as you have a steady source of income. You may be able to find financing at a lower cost because you can pay the loan back quickly (in months rather than years).

You are ready for growth

Your sales record is impressive and you are growing. It is difficult to keep up with the orders. You may have had to limit how many orders you place each day because you lack the resources or systems to manage them all. Although this is a dream problem for entrepreneurs, it is still a problem. It can, however, be solved by financing.

You wish to increase your margins

Many eCommerce companies purchase inventory in advance. Some use print-on-demand eCommerce solutions, which can be great for getting started.

However, most stores like to purchase large volumes in advance as they grow and become more confident in their ability to predict sales. Why? Margins could be much higher.

This is where the growing pains become worse. While your margins increase as you place more orders, you still have to pay a lot of money before you can make one retail sale. Between production costs and break-even, it could take months. If you are trying to grow, it could take months before you can pay for production.

This problem can be solved by financing. You can spend more on larger inventory purchases. This will result in higher margins and eventually more profit.

Considerations for eCommerce financing

You have many options when it comes to financing. Each type of financing has its pros and cons. Each type of financing has its pros and cons. You should evaluate each one based on your priorities — control, ownership, risk, etc. Find the best solution for you.

Below we have discussed how the three main types of financing impact common considerations.

Ownership and control

Favors – Debt and revenue-based financing

Equity financing

You retain 100% ownership of your company if you finance your needs using debt or revenue-based models. However, equity financing means that you lose a small amount. While there is no one way to determine the company’s value, common metrics include past revenue and proprietary technology. Every percent of ownership is important if you are confident in your idea’s future. Although it may be tempting to give 10% away for a $10,000 check now, if the 10% is worth ten million in a few decades, you will regret this decision.

You are the ultimate decision-maker. You are the boss. You can take your entire team to expensive, random reward dinners. You can also save every penny by locking the water cooler. You can make the calls, and no one will stop you. This is a great reason to retain your equity if you have a clear vision. Control is key for businesses that have to make a lot of subjective decisions (like design),

Keep in mind, however, that 100% ownership does not mean that you are 100% responsible. All areas of the business depend on you. You will be the sole owner if you work late to get through a slump or complete a busy season.

Personal Risk

Favors – Equity and revenue-based financing

You are committing to sharing the benefits of your company’s growth with an equity partner. However, they also share in the risks. You are not responsible for paying your partner back the investment if it fails. Although this arrangement is not favorable for them, they are investing in the hope of a huge return — it could one day be worth billions.

Store owners who are looking to reduce risk can also benefit from revenue-based financing. The loan is paid back through each sale. If orders slow down, the amount will be repaid. The lender is not responsible for store failures.

Disfavors – Debt-based Financing

The institution will “secure” your loan with collateral if you take a debt-based, traditional loan. The collateral can be used to repay the loan if the business goes under. Many business owners will pledge some personal property, such as a home, car, or other substantial asset. The borrower is at risk when a debt-based agreement is entered into.

Additional expertise

Favors – Equity-based financing (sometimes), and Wayflyer   

Depending on the agreement and the equity partner you choose, you may be able to benefit from more business knowledge and expertise. Many agreements include this. This could include cash exchanged and equity being exchanged to the investor for their value. This could be extremely powerful if your partner can make introductions, close deals, and offer valuable advice. It might even be something your money can’t buy.

Wayflyer, which is a revenue-based funding option, offers additional support. While other financing options don’t offer this, it does. Wayflyer gives you access to a dedicated Success Manager and a team of data scientists, who are experts in eCommerce, to help you overcome common problems when growing your online business.

Wayflyer offers equity investments and partnerships that provide cash and the support you need to succeed.

Disfavors – Debt and (traditionally) revenue-based financing

You can only finance your purchase through debt or revenue-based agreements. Your lender won’t be able to advise you on marketing or inventory decisions. They don’t have a good idea of your target audience, and their expertise is limited to financing.

Cash flow

Favors – Equity financing

Investors are often interested in the long-term value and growth of your store. The investor is not obligated to repay your company. All of your revenue can be used for business operations. Your business will be able to move more quickly and continue its growth by keeping your monthly obligations low.

Disfavors – Debt and revenue-based funding

You will have to pay back the debt financing immediately, unlike equity financing. Instantly, you’ve added another monthly payment. Revenue-based financing allows you to pay back your loan as soon as the next sale is made.

This could be a smart move if you plan to use the money immediately to increase revenue (such as a marketing campaign or the fulfillment of a major order). If your financing doesn’t pay off in the short term, or for years (like for a complex new product), then it could be a headache. This is why most revenue-based financing institutions don’t offer to fund for long-term investments such as product development.

One last note: Since revenue-based financing is based on daily sales you will pay less for days with slow sales. However, debt requires you to make a minimum monthly payment regardless of how much you sell that month.

Accessibility

Favors – Revenue-based financing

Revenue-based financers examine your sales history and your plans to raise money. They then make a quick decision. Wayflyer is a company that integrates with WooCommerce. This makes it very easy to hand over the data they require.

Disfavors – Equity and debt-based funding

It is more difficult to obtain debt-based financing. To fully understand your options, it is a good idea to meet with multiple banks. Each bank will need to fill out a lot of paperwork, such as a business plan and documentation of personal assets that can be used as collateral. You will need to collect all the information manually as most banks do not integrate with eCommerce platforms.

It is not easy to find quality investors. While they will require the same documents as you, they won’t have any collateral to protect their investment. They will want to learn more about your company, personal expertise, and plans. Partnering with an investor might be necessary. You should expect to pitch many times before you find the right match. Although it is a time-consuming process, equity-based financing can be a good option if you have the right team.

A rising star in revenue-based financing

Wayflyer is a great option if you believe revenue-based financing is the best choice. They can quickly gather all the information they need from WooCommerce. Shop owners can receive offers within hours. Yes, hours.

If you are a small business with a track record of success, this is a great option. It’s great for large companies. They can provide financing of up to $10,000,000

Wayflyer will take a percentage of your daily sales from your bank account once you have accepted funding. This continues until you meet your agreement. You’ll be paid less if it’s a slow day. If it’s a record-breaking day, you will pay more. It is a popular choice for both experienced and new stores due to its flexibility.