A deep dive into ecommerce financing

We talked to Oliver Whelan, Storfund’s Chief Revenue Officer about his views on the market, what your financing options are, how to exit, and when you should consider Storfund.

What’s your background?

I have always been in the ecommerce space, with a focus on payments and finance, including 10 years with the ecommerce payments business, WorldFirst.

As Global Head of Enterprise at WorldFirst, I was responsible for negotiating strategic partnerships; I was also part of the team when WorldFirst was acquired by Ant Group, the world’s largest fintech. In the last couple of years at WorldFirst, I met the founders of Storfund.

Is it true that it’s harder for an ecommerce business to get financing?

Unfortunately, yes. People often say to me, “traditional lenders don’t like the ecommerce market”, and I completely disagree with that, it’s a huge market that traditional household institutions would love a slice of, but it is very difficult to underwrite an ecommerce business in the same way as they would a bricks and mortar business.

When a bank is looking at a chain of physical stores for example and there are properties and securities on the balance sheet, they can get comfortable with that, and the facility they extend to that business would reflect this comfort.

By contrast, a marketplace seller might be doing £20m in net sales across six different platforms, but have few assets on the balance sheet, micro company accounts with just two years of history and only marketplace dashboards as metrics. All of this makes it very difficult for a bank to be comfortable with a facility of £2m.

Does that make it more risky for an ecommerce business to take on financing?

No! There’s some great options out there – I’ll come to them shortly – the reason financing or cash flow is often viewed as a negative instead of an opportunity is because businesses start to consider loans and cash flow when they are in trouble, rather than viewing financing as an opportunity to scale or expand on other platforms.

When should an ecommerce business consider financing?

There isn’t a “right” time, the main thing the directors, managers and shareholders need to ask themselves is, what do they want to get out of it?

There’s no point taking financing unless you measure it against something eg revenue growth, increased margin or broader activity across multiple channels.

You should always aim to turn off the financing at some point, and this can be difficult unless you know what you want to achieve.

Then, when you get there, you can change that matrix of financing to meet your new business goals.

What are the risks to taking on financing?

Financing should be viewed as a growth tool and as an opportunity. Typically if you take on financing you are going to add a cost into the business, because there is always a cost associated with it.

Typically you will see margin decreasing, and that cost has to be viewed as an investment to reach the objectives that you set.

If you take speculative financing on the basis that you are going to spend that money on marketing and quadruple your sales at a 25% or 50% reduction in margin, and that does not come through, ultimately you’ve eaten away margin without seeing the return or the benefit of that financing.

What advice on financing options can you give to ecommerce sellers?

We don’t advise (we can’t advise!) what’s best, but there are lots of ways and means for businesses to access capital.

Traditional loan products offer the opportunity to access capital upfront and pay that capital back as fixed repayments over a period of time. These come from banks or fintech lenders, which offer products tailored for the ecommerce market.

“Revenue based financing” is a spin on a more traditional loan product. With this product, payments vary based on your revenue, rather than committing to a fixed amount every single month you commit to a % of that month’s revenue or that month’s sales which gives you an extra piece of flexibility in terms of repayment schedules, but it is still a fixed amount that you have to repay over a period of time.

Equity funding allows business owners to deploy their own equity/cash into the business. This is very appealing right now given interest rates.

Payables products, like supply chain financing, will essentially pay the invoice sent to you by your supplier and you repay the finance company on 30, 60, 90 day terms.

There are lots of options and what we see is that most sellers use a combination of two or three.

What does Storfund offer?

We provide a cash flow solution to sellers.

Here’s a very simple example. Let’s say you are selling on Amazon, and you have to wait 14 days for your funds to be paid out because of the marketplace’s reserve policy, we will advance you funds for your sales on the same day that you ship.

So if you sell 100K today, we will advance you 80K when you ship and we are repaid by the marketplace in their usual payout cycle.

What does a typical Storfund customer look like?

We have clients globally, but mainly they are based in Europe/US. They are mainly larger sellers with £1-20 million in gross sales. Smaller sellers prefer credit – like a loan – to build momentum; but once established, larger sellers often don’t need a loan, they just need to get paid! That’s why sellers with over a £1 million in sales, but definitely over £10 million, often prefer Storfund to credit. The other thing which defines our clients is that they are almost always omni-channel.

Why is cash flow important when expanding to a new marketplace?

The first things sellers think about when expanding are price point and margin. This is right, because there’s no point expanding just to diversify, sellers do it for scale and growth.

But cash flow is an important consideration too. When you start on a new platform, you will probably start with a longer or a harder reserve policy ie you’ll wait longer to get paid.

So the price point comes front of mind, but often it’s cash flow that will allow a seller to scale at the rate they want v. doubling down on their current marketplace.

What is your golden advice for sellers to ensure a healthy cash-flow (with or without Storfund)?

Businesses need to take every opportunity to have credit available. For example, if a supplier can offer you 30, 60, 90 day payment terms at a slight cost, but less than you would pay for a credit facility, take it.

The aim of the game is to make sure funds are coming in before cash is going out – that’s cash flow. Make sure you take every opportunity, as long as it’s efficient for the business, to ensure you have funds available to double down and scale when demand rises.

Often you can get a discount from a supplier if you pay upfront, that’s where Storfund comes in. If you can negotiate a discount that is blogger than the fee you pay to Storfund, you can increase margin and increase cash flow.

Given aggregators are not the option that they once were, what exit options do business owners have?

There is still a market for ecommerce businesses and decent exit valuations for businesses that are doing the basics right, solving a genuine problem, have genuine scalability without quadrupling their cash base, good margins etc.

But no doubt it’s harder than it was; that’s why we are seeing companies hunker down and focus on good quality profitable growth. When markets turn round in two years time, that’s when they’ll have their opportunity.

What can a business do to prepare for investors/exit when the market turns?

Investors want to see businesses that can weather the storm and grow, but scale without a decent return is not what investors are looking for.

The theme in the market is that the bottom line is more important than the top line and this will continue for a while.

That means sellers need to streamline their cost base, focus on products where the return is highest, and maybe sacrifice some of the top line to make sure the bottom line is strong, stable and growing.