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Becoming one of the biggest names in an industry doesn’t simply happen overnight. The direct-to-consumer model relies heavily on marketing to get the word out about what brands have to offer, and what they stand for.
Success in this area unlocks the next hurdle: once more and more people flock to your online store and put in their orders, the question arises: do we have enough cash on hand to…
Regardless of which stage your company is in, more often than not external capital is needed to keep up momentum when cash issues arise.
Traditional lenders often deem the D2C business model as too risky and are hesitant to lend to emerging direct-to-consumer brands. Non-traditional lenders offer financing options at slightly higher rates, but not all loans are created equal. From merchant cash advances, to peer-to-peer, to asset-based lending, there are plenty of options. Decisions must be made with a full understanding of the financing options available, and with your brand’s interests and strategy in mind.
We sat down with our friends at Assembled Brands to break down four financing options for emerging brands to fuel their growth.
Crowdfunding is exactly what it sounds like: You receive money from a group of people that usually get something in return for their contribution. This could be a sample of your product, “merch,” or a piece of the pie: a little bit of your company’s equity. This type of financing is usually geared towards newer brands that have yet to get the word out before launching a product.
It is fairly easy to set up a crowdfunding campaign with very few requirements to get started. Within a few hours your campaign can already be live and receiving its first contributions. Getting your product seen on the platform and drawing attention to your brand can give your business the momentum it needs to attract an early and loyal customer base and grow from there.
If your crowdfunding campaign fails and you don’t meet your monetary goal, you walk away empty-handed. This also usually means that your business plan was not well thought-out and most investors won’t want to take a risk on your product. Most crowdfunding platforms also only offer you one chance per product, which means you can not list the same product again after the campaign is over.
A merchant cash advance is a good option for small businesses and gives you fast access to funds based on your sales. You receive a sum of cash in exchange for a percentage of future sales. MCA lenders typically take a percentage of future credit card sales in addition to interest.
Your business is getting a cash infusion quickly which can be great if you have a project that needs to be completed fast. You don’t need collateral to obtain an MCA like you would with a loan and the process is fairly simple, as not a lot of paperwork goes into it.
The amount you receive is based on your past credit card sales and how much your business needs. Paying back the amount borrowed also might add more stress to your business if you’ve had a slower month but still need to make those high payments.
Venture capital is another way of funding businesses that typically skews toward up-and-coming, innovative (and often tech) businesses. The key factor here is potential: the company in question must show enough promise and growth potential that a VC investor is willing to take the leap to invest in them with belief in significant return.
Investors are willing to invest in smaller and newer companies if they show enough growth potential. This type of financing can provide young brands with a source of experienced consultation and guidance to assist with key business decisions. Many brands that have taken advantage of venture capital are now household brands in their respective industries.
The biggest drawback to partnering with a venture capital firm is similar to partnering with a private equity firm - giving up control. Even though the ownership threshold is lower with venture capital firms (less than 50%), this still means that the firm will likely want to be involved in the business and making decisions that impact the future of the company.
Like the name already suggests, this type of funding requires you to show that you have assets to lend against. Rather than taking a percentage of ownership, lenders secure loans with collateral, or assets that you already possess. These assets can be inventory, equipment, purchase orders and/or accounts receivable.
Asset-based loans allow you to keep full ownership of your company, whereas other loans require you to give up equity in return for the money. These loans are fairly easy to obtain which makes for a great solution for emerging brands with cash flow issues.
Keep in mind that there is usually specific criteria for the required collateral in order to obtain a loan. Since the loan is secured by some of your assets, you risk losing them if you default. Also, if your brand does not have tangible assets at all, then this type of loan is most likely not a great fit for your business.
While funding designed particularly for emerging e-commerce brands can relieve some of the stress digitally-native brands face as they scale, it can be overwhelming to consider all the options and select what's right for your business. Partnering with an experienced lender and advisor can help Brands navigate the path to successful financing.
As an example, e-commerce funding from Assembled Brands gives consumer goods brands the necessary capital to launch new products, increase their marketing spend, upgrade their ordering and inventory systems, and more. Partnering with an experienced lender can make or break your business. In addition to capital, industry insights and business development facilitate better business decision-making and fuel growth.
Depending on the growth stage of your business, one or more financing options can help your brand keep up momentum when cash is tight, so you can continue to focus on your business with growth in mind.
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