Cash flow can be a serious challenge for ecommerce small and medium businesses (SMBs). The Federal Reserve Bank’s Small Business Survey reports that almost half of small businesses encountered difficulties paying operating expenses or dealing with uneven cash flows.

Given ecommerce SMB operating models, this isn’t surprising. Some SMBs, like those in high fashion retail, need to refresh inventory frequently. Many costs must be paid long before revenue comes in, such as orders from suppliers, marketing costs, shipping and customs fees, employee salaries, and more.

R.J. Ancona, VP and GM B2B Product at American Express, observed that “[Small businesses] are trying to manage all the different increased cost elements, as well as the uncertainty of the future economic outlook. They are really relying on optimizing their cash flow to drive as much efficiency as they can.”

As a result, many SMBs need some kind of external financing. The FedSurvey reported that in 2022, 40% of SMBs applied for a business loan, cash advance, or line of credit, almost twice as many as the 21% who did so in 2021. But business loans aren’t always a good option for ecommerce SMBs.

The debt burden from traditional loans can stress small business owners. Banks are typically reluctant to lend to SMBs, particularly those in ecommerce as their lack of familiarity with the vertical causes them to overstate the risks. Ecommerce SMBs also rarely have a long enough history to meet loan requirements and often have poor credit scores, so they don’t usually receive favorable rates.

These factors leave SMBs to seek financing from other sources, or other types of funding, such as equity-based and revenue-based financing.

What is equity-based and revenue-based financing?

Equity-based financing and revenue-based financing are two of the most common alternative funding options. One significant advantage of these funding options is that you don’t have the worry of fixed monthly or weekly repayments that could outweigh your income.

With equity-based financing, SMB owners receive money in exchange for minority shares in the business, and shareholders receive a proportionate share of the profits. Revenue-based financing requires repayments as a percentage of the amount of revenue you take in.

It can be hard to decide which is the best option for your ecommerce business. Each SMB owner needs to weigh up issues such as operating model and cash flow expectations. That said, here are some things to consider.

1. Funding flexibility

The amount you need to borrow and how easily you can make repayments should be the first things to think about. Revenue-based funding can be easily scaled up if needed, as long as you haven’t reached your borrowing limit. Equity-based financing, on the other hand, delivers a single lump sum. If you need to borrow more, you’ll have to sell another batch of shares.

At the same time, repayments are more flexible with revenue-based funding, because you only have to pay a percentage of your income. During slower periods, repayments adjust accordingly, which can be beneficial for businesses with seasonal or fluctuating revenue patterns. But equity-based funding means you must pay a fixed return, regardless of business performance.

2. Short-term financial performance

The speed with which you expect to repay your loan makes a difference, too. For example, if you’re borrowing money to buy more inventory before the winter shopping season and you can confidently predict high sales, you’ll probably have enough income to pay off revenue-based borrowing by the end of the sales period.

But if you need funds for longer-term business plans and don’t expect to repay them in full soon, revenue-based financing could prove a long-term burden. Selling equity can be a better way to access the money you need without the pressure to repay it quickly, giving you less stress.

You’ll also qualify more easily for revenue-based financing if you have strong and consistent cash flow in the short term. Equity financing may be more suitable for early-stage businesses with limited immediate profitability, because investors care more about the potential than immediate financial performance.

3. Long-term planning

You’ll tend to make different choices depending on your long-term plans for your business. When selling equity, you give up some measure of control over the company. If you’re just looking to build up a business to the point where you can sell it, this might not be a problem, but if you have a specific long-term vision for your company, you might regret the move.

With equity-based financing, it’s also hard to predict how much you’ll pay each month in repayments, which can make it difficult to plan ahead. Revenue-based financing, however, doesn’t require you to sacrifice any control, and you’ll know what percentage of revenue you’ll need to pay each month.

Alternative ecommerce SMB financing options

As you weigh up the relative merits of equity and revenue-based financing, bear in mind that there are other options, as well. For example, tech-based ecommerce platforms offer funding designed specifically for ecommerce SMBs. 8fig is one such alternative that offers approval times just as fast as equity-based and revenue-based financing.

With 8fig, ecommerce businesses receive continuous incremental cash injections that are aligned with your supply chain needs. 8fig connects with your business tools to draw data about your cash flow and inject funds on an as-needed basis, without requiring you to give up equity or base loan amounts on revenues.

Other approaches include:

BNPL (Buy Now Pay Later) options like Hokodo, which allow customers to pay for goods in installments, but Hokodo pays you the full price on purchase. This removes barriers to cash flow for online sellers, while making purchases more attractive for consumers.

Small business grants from government or non-profit organizations can have the most favorable rates, but they are often hard to qualify for and usually involve small sums.

Asset-based lending such as Myos, which uses valuable assets as collateral for a loan. However, ecommerce SMBs don’t usually have valuable assets to qualify for such funding, and asset-based lending isn’t a great choice for long-term financing.

Crowdfunding can be similar to equity investing, because you offer a share in your business to each lender. But with crowdfunding, you receive funds from many people, so nobody holds enough shares to be able to interfere with your decisions. There’s also revenue-based crowdfunding, in which you offer a percentage of your profits in exchange for the “crowd’s” funds.

P2P lenders such as Lending Club are growing rapidly. These platforms connect an individual who wants to support an ecommerce business with an SMB owner who needs a loan. It’s similar to classic debt financing, but terms are often more favorable than in bank loans.

The right funding can power your business success

Choosing the right financing model for your business can be the difference between smooth growth and frustrating restrictions. The right funding model depends on many considerations, but when you find the best option for you, it will power your ability to scale.