Growth

Funding for growth: How, why, where and when to fund your eCommerce business

- July 11, 2022 4 MIN READ

In order to keep a new enterprise growing, there comes the point where a business owner is confronted with the decision of how to raise money to make that happen. Paul Waddy, eCommerce expert, author and strategic advisor at Wayflyer, explains the key places to start to fund the growth of your online business.

You might have started your online business in your spare room at home, with the money you saved through Sunday meal prep, or that great aunty you never knew you had who left you some money in her will. Whatever the case, chances are you’re going to need some more cash if you’re planning to take your hobby to a fully-fledged online business.

When I started my online retail career in 2005 (coincidentally, in my spare room at home), I went to the big banks, hat in hand, looking to fund the inventory I needed to buy to fulfil some large orders. After mortgaging a property, I was given a small line of credit with an interest rate that still brings a tear to my eye.

Getting with the times …

Traditional lenders didn’t get eCommerce – they still don’t. Highly profitable, cash-positive businesses can look like a mirage at times – but there are mum and dad online retailers putting away more profit each year than some of the shiniest companies on the ASX, so lenders have needed to get with the times quickly.


Fast forward to 2022, and we’ve seen the rise of alternative finance – businesses like Wayflyer – who understand eCommerce, and who have cleverly identified that they can partner with eCommerce businesses to drive growth together. In fact, some providers don’t just take your last two years’ financials and the keys to your house; they plug their systems into yours to analyse your online store and understand how their funding will help to grow the business.

Using the stacks of data available in most eCommerce platforms, these alternative finance providers can make better decisions on who to fund and whether the business can grow with the funding.

More and more online retailers are looking at these alternative finance companies, and so they should. In my opinion, too many retailers look for private equity as some sort of saviour – but giving away equity is often your most expensive form of funding. If you back yourself, you should try and hold on to as much of that pie as possible.

Stack of cardboard packing boxes with red arrow trending upwards

Where to invest to grow your eCommerce business

Bootstrapping your business isn’t cute; it’s smart. It should be celebrated more, but there often comes the point where a business owner is confronted with the decision of how to raise money for their business.


So in 2022, where’s a good place to invest your money as an online business owner? Well, you should always start with the lowest hanging fruit. What will have the biggest impact, in the shortest time, with the utmost confidence and the least effort?

Here are some areas for consideration.

Marketing

If you’re running an online store with a terrifically low marketing efficiency ratio (or MER, which is the amount of money you spend on marketing divided by the amount of revenue you generate in the same period), and you’ve got the gross margins that could allow you to push your customer acquisition budget higher – thus accelerating your growth – then you’re likely leaving good money on the table.

In this instance, the money you invest has proven to deliver a profitable return, so you scale it. For me, this is an acceptable reason to seek funding or invest your money.

A quick win

If your CLTV (customer lifetime value) is 2.5 – 3x higher than your AOV (average order value) and your gross margin is over 50 per cent, and your customer acquisition cost is under 20 per cent of your AOV, then you can probably afford to increase your marketing spend on new customers right away.

Product and inventory

If you’re holding what you think is twelve weeks of inventory cover (enough inventory to keep selling for twelve weeks of average weekly sales volume), but it keeps turning over in eight weeks and you’re blitzing your sales targets accordingly, then you know that you can invest in another four weeks cover, and the revenue should grow.

Again, this is a great time to look at funding.

The balancing act

eCommerce is going through a levelling-out period, so it’s important to understand whether or not investing more into your business will or won’t work.

Many businesses are overstocked due to buying for specific sales numbers that haven’t eventuated, which spells trouble. It’s time to invest where you’re safe.

For smart online retailers looking to grow, I would examine your Grade A inventory (the portion of your inventory that drives 80 per cent of your revenue), and check if any of it keeps depleting – costing you sales through out-of-stocks. Start by ensuring that never happens again and that you always have your Grade A products in stock.

(Tip: If you’re using Shopify, use the ABC analysis in your reporting tools.)

Overall, try not to spend your way out of trouble – always raise funds from a position of strength, not weakness. If I had to choose one area of your business to examine right now, it would be your Grade A product. If any of it is out of stock, take that money and double down, as it’s as close to a sure thing as you’ll get in eCommerce, and replenishment is one of the quickest ways to grow an eCommerce business.


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