A guide to evaluating seller financing options

Adam Khandaker & Christian Umbach

Accelerating growth requires outside capital: Compare 20 financing products to power your growth

eCommerce sales are increasing, your business is going great and your products are selling fast. Obviously, you have one goal in mind: keep growing. Even if you are an eCommerce startup or have solidified a product-market fit, taking the next step in your growth journey requires capital. If you don’t have working capital to restock your inventory fast or expand your reach to new or global markets, you might find yourself into a downward spiral that can cost you more time and money. In fact, poor cash flow management is one of the main reasons why eCommerce businesses decline. A recent study from a popular U.S bank found that 82% of small businesses fail because of cash flow problems, and 29% run out of cash.  

The overall need for sellers to accelerate their growth and establish stable cash flow with external seller financing has seen an increase. More and more sellers are trying to get their hands on cash quickly but fail to understand which financing options are best suited for their exact needs.

Maneuvering through these various financing options for a seller is not always straightforward. Each funding option has different objectives of the financing routes and various fee structures that make direct comparisons across all funding types impossible. Yet - some level of comparison is possible, and we collected the financing information across 20 financial products for you to compare a bit more easily.

Today we will show you which funding options for sellers exist and what you need to consider when choosing one. 

Before we dig into the options, let’s start with the core concept: The cash conversion cycle

The cash conversion cycle is the time that it takes you to convert cash that is bound in inventory to cash inflow from the realized sales of the merchandise. Ideally, this is negative (i.e. you get paid by your customers before you pay for the inventory) - this is hard to achieve on Amazon though. Nonetheless the various ways of optimizing financing always go back to the idea that you minimize the amount of cash that is bound in inventory. This allows you to scale faster without making the amount of bound capital a constraint for your growth. 

Example of the Cash Conversion Cycle

To address this optimization potential, various forms of financing have emerged. There is no clear winner and it depends on both your scaling plans, competitive environment, seasonality - and most of all: your appetite for risk in scaling. As an entrepreneur, you already have an above-average risk tolerance, but taking on financing (depending on the financing option) can mean significant financial risk as interest or fees may be due regardless of the success of your products. 

What should you consider when finding the best funding solution for your business?

It’s not about getting the largest financing

Every financing comes with a cost. Even if the direct cost is zero there are risks associated with every type of financing. Taking on more financing means that you are increasing this cost. So have a plan on how to spend it before signing up for a large credit. Most providers will also make it easy to add follow-on financing rounds such that you can double down as you realize further success. 

Carefully Check Your Financial Situation

Before you start looking for a suitable funding provider, you should carefully examine your financial situation. Monthly sales, profits, ongoing fixed costs, estimated variable costs, financial reserves and so on. Only when you understand your financial situation, will you be able to determine which financing options suit your situation and which repayment terms are feasible for you.

Compare your options

Once you learn about your potential funding eligibility in Xapix and compare the various providers, you will hopefully have quite a few options. The vast majority of providers don’t do a hard credit score pull, so there’s limited risk for you to run through the application process with multiple providers. We suggest testing out a few before you commit to a specific partner - also keep in mind that our calculator is only reflecting a high level estimate based on publicly available information, you will only get the specific rates with the provider. 

There’s more than revenue-based financing

Revenue-based financing is popular indeed and you will see the majority of financing products in this category. Nonetheless the funding landscape is broader, compare the various options. 

What are the various funding options available to Sellers?

Here’s a quick high level overview of the various financing options available to Amazon-first merchants: 

  1. Revenue-based Financing

An initial advance of growth capital is provided to a seller based on their sales history. Financing can either be based on a fixed fee or weekly/monthly interest. The capital is returned steadily as a % of sales (on a daily/weekly/bi-weekly basis in line with the marketplace payouts). Funds are often tied to a targeted use for inventory, marketing, or sales.

Pro: Flexible financing for sellers that meet the minimum monthly revenue requirement

Con: The % cost of the financing will come directly out of the seller's net margin, volatile businesses need to take into account how much revenue they can really share at a given time (usually between 5-25% consistently)

  1. Asset-based Financing

A credit line against inventory is provided - in a number of cases inventory is taken as a security. A critical metric for you to be aware of is the time it takes to turn inventory into sales as this may impact your repayment schedule.

Pro: Pro: Options for sellers with more limited operations, favorable interest rates for sellers with high inventory turnover

Con: Complexity around inventory as security (e.g. requirements around an own warehouse or to use a dedicated warehouse), reliance on the success of sales of the product

  1. Merchant Cash Advance

As a response to the delayed payout rates of marketplaces (Amazon's standard settlement period is 14 days), these providers offer an immediate payout on realized sales. The lender gets paid with the regular marketplace payout cycle.

Pro: Easy process to advance revenue payouts through tie-in to platforms; less risky due to direct relation to realized sales

Con: No large capital advances (e.g. in times of stock buildup where 4+ weeks of advances may be required)

  1. Long-term Loan

A more traditional long term loan facility yet focused on eCommerce merchants. While a few of the specialized providers are offering loans in this category, your banking provider will also have more standardized options that are less eCommerce specific. 

Pro: Lower interest rates possible through longer term planning

Con: Requires long term planning horizon that will deliver reliable sales to service the monthly interest

  1. Profit-sharing Financing

In contrast to revenue-share financing, this model is based on a profit share based on the net profits realized by the merchant.

Pro: Fully shared risk with the entrepreneur to maximize profits (all other forms reduce the net profit margin), overall lower risk financing for growing businesses

Con: Cost of capital is impossible to determine upfront due to link to net profit, requires a strong profit-generating history (hence focused on more established brands)

  1. Short term credit

A business credit card with a short-term credit line for merchants.

Pro: Easy process and tie in with a usual payment method.

Con: Personal security (credit score pull)

  1. Amazon-lending

US sellers can also leverage Amazon’s built in lending capabilities More information about this here. Both Amazon and select third party lenders provide various loan products. 

Pro: Direct integration with Seller Central

Con: Amazon-tie in capital payments

  1. Grants

Small business grants - heavily varying by state and country. While often bureaucratic and time consuming to apply to, many grants don’t come with too many strings attached. Amazon's Product for Tomorrow program also supports a few select brands through grants.

Pro: Low cost of capital (often not repayment necessary)

Con: Very limited availability / very specialized grant programs, bureaucratic process

  1. Equity-based financing 

Traditional equity financing through angel investors, venture capital, PE firms, or different brand houses that have a stronger focus on equity partnership. 

Pro: Can also bring in expertise in operating and scaling the brand

Con: You trade off a share of your company 

It takes money to make money – and that money doesn’t necessarily have to be your money. When choosing a funding provider, make sure that you meet the lender’s borrowing conditions and are comfortable with the repayment terms.

As a seller, it makes sense to use a funding service that is specialized in eCommerce businesses because they can best understand your needs.

To find out how much funding you may be eligible for and to compare the 20 products, sign up here and hit “get funding” on the Seller Momentum page.