The Cash Flow Problem
The importance of having enough funds on hand is well known to all entrepreneurs, and when it comes to selling online, things are no different. Even the best online sellers experience drops in sales and supply-chain complications that can impact cash flow. But sometimes, growth opportunities drive the needs for more funds.
In Quickbooks’ 2019 The State of Small Business Cash Flow Report, 61 percent of global businesses revealed that they have struggled with cash flow, with 42 percent experiencing challenges in the 12 months prior to the report. However, despite the hardships, Amazon’s 2020 SMB Impact Report shows how eCommerce continues to thrive.
As an online seller, what are some of the financial challenges you face, and how can you overcome these challenges to increase your chances of success? Let’s look at some of the most common cash flow issues businesses face.
Challenge #1: Delays in Marketplace Payouts
Whether you are selling on Amazon or one of the many other online marketplaces, many cash flow problems result from delays between the point of sale and the marketplace payout of your earnings. Even though the sale itself happens quickly, with some orders being purchased, shipped, and delivered in the span of only a day or two, it can take much longer to see the funds hit your bank account. Meanwhile, as you wait for your profits, you still must cover your inventory, marketing, fees, and logistics costs.
Challenge #2: Inventory Demands to Expand Your Business
Another common reason for cash flow issues is the inventory struggle. As a manufacturer, you need to be able to buy or produce your inventory in order to have products to sell. As most sellers leverage opportunities to manufacture products overseas to reduce costs, it adds time to the production process and further exacerbates the cash flow issue.
Newer sellers face an even steeper uphill climb. You never want to run out of inventory, as that can kill your sales momentum, so as a result, you have to place your next purchase order long before you can realize the profits from the first order.
Let’s use Luke as an example:
Luke has been selling his own self-produced line of swimsuits for years, costing him $10 per unit to manufacture. He has $50,000 to start the quarter, so he is able to manufacture 5,000 units which he will sell for $20 each. His gross sales are $100,000, but when you subtract the cost of goods ($50,000), the ~15% marketplace fee ($15,000), and the ~25% operational expenses ($25,000), Luke is left with a $10,000 profit.
If he continues to invest the profits back into the business throughout the quarter, he will begin to see growth, as illustrated in the table below:
As you can see, between months 1 and 4, Luke has only been able to grow his business by just under 25%, primarily due to the fact that his profits are tied up in additional inventory.
The constant demand for more inventory to expand your business means your funds are often tied up as well. So, how can you take advantage of an upcoming peak consumer spending season to cash in on potential sales? Everything is delayed, including your earnings, and now you need cash to get more seasonal inventory. This is the cash flow problem.
Solving The Cash Flow Problem
There are many kinds of funding solutions to solve the cash flow issue and take advantage of potential growth opportunities, each with pros and cons. Some of the most popular are:
Loans – Business Term and Personal
A business term loan is a lump sum of capital that is repaid with regular payments at a fixed interest rate. This traditional financing option can be found at banks and credit unions, and more recently, by online direct lenders. Allowable loan amounts and interest rates can vary widely depending on your Amazon’s business revenue and your credit history. Qualifying for these loans can be time-consuming and challenging.
Most lenders will need the same basic information to consider you for a business loan or other similar funding option for your online store. Some of the documents you may need to present in order to secure working capital as an Amazon merchant are:
- Business and personal tax returns
- Business and personal bank statements
- Profit and loss statements
- Business plan
- Financial records
- Credit history
Like business term loans, personal loans also require you to qualify; however, instead of using your business to determine your eligibility, lenders will rely on your credit score, debt ratio, and income. You will need to provide your social security number and a W2, plus any other documents the lender requests.
Once you are prepared with your documents, you can determine what seller funding options work best for your store, needs, goals, and potential.
Credit Card Financing and Business Lines of Credit
With often sky-high interest rates, using your business credit card as a financing solution may cost you more in the long run. While it may be tempting to use a credit card to cover some short-term expenses, seasonal purchases, unforeseen product procurement, or get your Amazon business stocked quickly, if you fail to repay the full bill amount, you can get into trouble fast.
Not unlike a credit card, a business line of credit is a flexible loan from a financial institution that gives you the ability to use money for purchases or cash withdrawals up to a set limit. You can use the money in your line of credit as needed and repay immediately or over time. You pay no interest until you use the money. Loan amounts from a line of credit vary widely and will largely depend on the eligibility of your Amazon business.
Loans and credit cards are viable ways to help you grow your business, but Payoneer is offering the Linnworks community a new approach to ease cash flow – The Capital Advance program.
Capital Advance from Payoneer
Payoneer’s Capital Advance program offers short-term cash boosts to help you pay for your day-to-day needs and inventory costs. As you accept and successfully settle your Capital Advance offers, you can become eligible to receive larger cash injections to really kick business growth into high gear or seize seasonal opportunities.
Although the size of the offers you receive will depend on your online store’s sales performance, all working capital offers include three unique features that make Capital Advance the ideal cash flow management solution:
1. Instant funds with no credit checks or collateral
Payoneer extends working capital offers based on your marketplace sales history. You can get the funds in your Payoneer account with just a few clicks.
2. Gradual settlement from marketplace sales
Once you accept the offer, Payoneer will collect a portion of your future marketplace sales. They only get paid when you do, while leaving you with cash to maintain your business between payout dates. After an offer is completely settled, a new offer will follow, subject to eligibility requirements.
3. One low, fixed fee
There is nothing more frustrating than surprise fees and hidden costs that can impact your bottom line. With Payoneer, you are only charged one fee after you finish settling your advance and you’ll see that fee amount before you accept the offer.
Capital Advance in Action
To see how this works in practice, let’s revisit Luke’s swimsuit business This time, however, Luke has accepted a $100,000 Capital Advance after his first month of sales. If he uses a third of his advance ($33,333) each month to increase his inventory without going over his forecasted sales expectancy, his store earnings and profits would look very different. By the end of month 4, he would have grown his monthly profits from $10,000 to $18,577.
As you can see, the growth potential is much greater with the extra boost of Capital Advance. Profit gains are at an impressive 86% between months 1 and 4, compared to only 25% growth from the same store without the advance.
If you are looking to grow your eCommerce business to experience growth like Luke, click here to learn more about working capital, or contact Ben Stein at Payoneer ([email protected]) today.
Marketing Writer at Payoneer
Peretz is the lead writer for Capital Advance at Payoneer and has been writing in highly-regulated verticals for the past six years. When he isn’t educating customers on the value of working capital, he enjoys reading up on news and trends in the financial sector and solving brain teasers.