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How to Choose the Right Financial Partner for Your Business

Loop | Dimple Lalwani | Dec 7, 2020

Getloop 1 - How to Choose the Right Financial Partner for Your BusinessWhile this may be simply-stated, we're not oblivious to the fact that such a task can be a true undertaking. There are plenty of financial options out there to consider, but the true challenge is finding the one that will be most beneficial for your business.

In this article, we'll discuss a few of the most common financing options, so you can get a better idea of what's available and what might work best for your D2C brand. Read on to learn more.

Importance of the Right Growth Capital from the Right Financial Partner

As you begin searching for and comparing inventory financing solutions for your eCommerce brand, there are a few points you'll want to consider. Here are three items to keep in mind as you select the best option for you:

1. Expert advice on managing cash flow. Some financial partners don't offer this type of guidance—rather, they offer a purely transactional relationship, with little to no guidance or advice. Some financial partners will solely offer capital without any additional services, either because of the way their business model is structured or because their business does not generate sufficient revenue to provide additional resources beyond the capital provided.

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Even if you believe you can do without the extra financial services, it may end up benefiting your business to have a financial partner you can turn to for advice on maximizing your revenues and margins, as well as providing inventory loans for growth.

2. As a new, high-growth brand with a limited history, you can expect to pay a higher cost for capital than more established companies (generally from newer financial companies that operate on a revenue share model). Effective cost of capital could be costing you substantial dollars, ultimately impacting your margins, valuation, and your ability to scale your business profitably.

3. The ability to borrow funds for inventory and generate revenue in the short-term is paramount. In doing so, you can unlock the necessary cash for other working capital expenses, such as marketing efforts, ads, salaries, and more, which will help promote brand awareness and allow you to expand.

Types of Financial Partners Available to Your D2C Brand

1. Banks

Though a bank loan might seem like the most straightforward route to securing funds, a bank's business line of credit is typically on the low side—especially for new businesses that have only a few years of financials. Typically ranging from $1,000 to $250,000, it's likely that a business line of credit from the bank won't supply the growth capital you need if you are growing your business substantially month to month. Banks can also be quite slow to replenish funds at the end of a fiscal year—it would not be uncommon to receive additional capital toward the middle or end of the following year.

Pros vs. Cons

There are a few advantages of using a business line of credit. For one, they are fairly flexible, allowing you to pay only for what you actually use. It also may be convenient for you that a loan from a bank is tied to other products and services, such as credit cards, bank account, savings, and more, which will serve to keep your finances more streamlined. You'll also be able to build business credit and develop your credit history, which will speak to your reputability for future loans.

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Equally important to consider are the disadvantages of a bank loan. Specifically, banks offer less money upfront due to a lack of understanding of eCommerce business models. The challenge for high-growth eCommerce businesses is balancing cash flow for their Direct-to-Consumer and wholesale needs. Specifically, high-growth eCommerce brands often need to fund substantial purchase orders placed by large retailers or other subscription box services, and often, payment from these orders isn't received for months. The inability to process these orders due to a lack of initial funds can result in missed revenue opportunities, hence slower growth from year to year.

Banks also present the problem of higher currency exchange rates for international business, which is unavoidable in the world of eCommerce. In fact, it's likely that a good deal of your business may be conducted with overseas entities—whether it be for your products themselves or your packaging costs—so higher currency exchange rates can end up significantly hurting your profits, and may even impact your ability to qualify for more affordable capital elsewhere.

2. Merchant Cash Advance Products

Also known as revenue-sharing financing, merchant cash advances are not the same as using a revolving business line of credit. Rather, this process basically entails receiving funds from a financing company in exchange for a cut of your future sales, including a fee.

‍Pros vs. Cons

The primary benefit of a merchant cash advance (MCA) is that it's fast—you can have the funds you need (typically up to $500,000) in as little as one day. It's also easy to qualify for, even without excellent credit. Repayment is flexible, and depends upon the amount of sales you make during a given period.

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Unfortunately, merchant cash advances come with higher fees than most loan options, ranging from 6-20% of the amount borrowed. The more sales you make, the quicker you have to pay back what you've borrowed, which dramatically increases your effective cost of capital. If you have a particularly slow month, be prepared for your MCA provider to take the majority of your profits. There is also little regulation for this method of lending due to the fact that a merchant cash advance is not actually a business loan. Between the high fees and minimal regulation, it may be easy to fall into a cycle of debt.

3. Royalty Financing

Another popular option to consider for your business is royalty financing, which involves receiving funds based on future revenue. The amount borrowed is then paid back as a percentage of your business's revenue. In some ways, this process may sound similar to a merchant cash advance, though the two differ because royalty financing is a loan.

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