Article

Three Golden Rules for Growing eCommerce Retailers

August 26, 2022

Jump to a section
Share it!
Sign up for our newsletter
You're all signed up! Look out for the next edition of The Manual Weekly coming Wednesday am!
Oops! Something went wrong while submitting the form.
This is some text inside of a div block.

Inventory is the lifeblood of any eCommerce store. And without the proper capital in place to continually invest in merchandise, many retailers end up under water before they ever turn a profit. But one entrepreneur is on a mission to change their financial options. 

Meet Eric Youngstrom, founder and CEO of Onramp Funds — an innovative financing platform that gives eCommerce owners better financial backing. He’s on a mission to offer better cash backing to SMBs, and in this episode, he shares three golden rules for eCommerce retailers looking to grow sustainably: 

1. Don’t buy inventory on credit cards.

Before Eric founded Onramp Funds, he noticed a common problem for eCommerce retailers. “We [had] customers with good order [quanitities], but they didn't have the cash in their credit card to ship that next order,” he explained. As a result, these retailers often ended up with chargebacks or refunded orders because they couldn't get items out the door.

The problem with credit cards is that when retailers sell through their first batch of inventory, they seldom have enough capital to repay the credit card loan. (It's still wise to have a business credit card for other expenses. Here are the best credit card options for SMBs.) That means when it’s time to reorder (long before they sell out of units), they have little cash on hand to reinvest in the next order. 

Eric realized this cycle was hard to break without crashing the business first, and he knew there had to be a better product for investing in inventory. So, he launched Onramp to provide retailers with low-fee lending that helps free up more working capital from the get-go.

“We've been trained to borrow as much money as possible, for as long as possible, at the lowest interest rate possible. That makes sense if you're buying a house or a warehouse. But it doesn't make sense if you're buying inventory.” – Eric Youngstrom, founder and CEO of Onramp Funds

2. Know your types of capital and when to use each one. 

Eric says there are three different types of capital in an eCommerce business. And retailers need to understand what they’re meant for and when to use each one:

Long-term capital is when you bring on investors who own equity in your business. This capital should be used for long-term goals and visions that require a partner to bring them to fruition.

Midterm capital is any loan you take on and plan to repay in the next several years. This capital is typically used for buying equipment or investing in a warehouse. 

Working capital turns over every 18 weeks from fulfilling orders and becomes cash on hand for the business. This capital is put back into the brand via inventory, salaries, or growth initiatives.

Once you understand the difference, ensure you only use the appropriate type of capital according to your goals. “Don't use long-term capital for short-term turnover because [it won’t be paid off] when you need more,” Eric explained. “And don't use short-term capital for long-term things because you have to pay it back way too fast.”

For example, you don’t want to use midterm capital to fund inventory purchases since the loan won’t be paid back when you need to buy more inventory. Instead, it’s much smarter to use working capital to fund these purchases since it's cash that’s already been accounted for.

“If [you] borrow today's inventory needs with a two-year [loan], what happens when you're sold out of inventory at the end of the quarter? You need more [when] you haven't finished paying back that first loan for inventory sold last quarter.”

3. Use working capital to pay back inventory as it sells.

According to Eric, the best way to pay off inventory purchases is to leverage working capital that can be put back into the business. And there’s one of two ways retailers can do this:

  1. Optimize inventory levels to meet actual demand, cut costs of goods sold, and improve profit margins. This frees up cash (typically spent on interest, fees, or unused inventory) to put toward your next inventory purchase. 
  2. Access capital from lenders (like Onramp) that offer low-fee lending. This provides funds to scale operations at a low cost, and you pay back on inventory as it sells. 

Either option helps retailers grow sustainably — by managing their inventory more efficiently and cost-effectively. This way, they put more money back into the business (AKA on inventory) instead of spending it on interest and fees.

For example, let’s say an online store sells iPhone cases for $25 each. It costs the retailer $5 per phone to purchase inventory, and they expect to sell 1,000 units per quarter. So they borrow $5,000 to buy the 1,000 units and get a few sales across the finish line every day.  

“You're going to be sold out [by the end of the quarter],” Eric explained. “And if you need a month [lead time], you’ll need to order the next 1,000 units at day 60.” But retailers often don’t have enough capital on hand, so they pull out another $5,000 to place the next purchase order. 

This slippery slope means retailers can never catch up. But when they pay off their inventory with each sale, they free up cash flow to put back into the business. “[With] working capital finance, you pay $5 down every time you sell a unit,” Eric explained. “So, by the time the [quarter] is over, [you’ve] paid off the full line as you've sold it.”  

And since your money is no longer tied up in loans, you can improve profit margins, boost revenue, and reduce your financing exposure on the back-end. 

“[Improving] the turnover cycle unlocks profit in [your] business that can flow back into [your] bank account. [You] decide [whether] it all goes to salary or part of [it] goes into growing the business.”

Running a successful eCommerce business is all about managing your inventory. And when you constantly need more funds to purchase merchandise, it’s hard to actually turn a profit. But if you follow these three golden principles, you can pay off inventory faster, reduce expenses and costs, and ultimately improve cash flow and revenue.

Share it!
Sign up for our newsletter
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Author
Follow me!

Similar Blog Posts

No items found.
Article

Three Golden Rules for Growing eCommerce Retailers

August 26, 2022

Jump to a section
Share it!
Sign up for our newsletter
You're all signed up! Look out for the next edition of The Manual Weekly coming Wednesday am!
Oops! Something went wrong while submitting the form.

Inventory is the lifeblood of any eCommerce store. And without the proper capital in place to continually invest in merchandise, many retailers end up under water before they ever turn a profit. But one entrepreneur is on a mission to change their financial options. 

Meet Eric Youngstrom, founder and CEO of Onramp Funds — an innovative financing platform that gives eCommerce owners better financial backing. He’s on a mission to offer better cash backing to SMBs, and in this episode, he shares three golden rules for eCommerce retailers looking to grow sustainably: 

1. Don’t buy inventory on credit cards.

Before Eric founded Onramp Funds, he noticed a common problem for eCommerce retailers. “We [had] customers with good order [quanitities], but they didn't have the cash in their credit card to ship that next order,” he explained. As a result, these retailers often ended up with chargebacks or refunded orders because they couldn't get items out the door.

The problem with credit cards is that when retailers sell through their first batch of inventory, they seldom have enough capital to repay the credit card loan. (It's still wise to have a business credit card for other expenses. Here are the best credit card options for SMBs.) That means when it’s time to reorder (long before they sell out of units), they have little cash on hand to reinvest in the next order. 

Eric realized this cycle was hard to break without crashing the business first, and he knew there had to be a better product for investing in inventory. So, he launched Onramp to provide retailers with low-fee lending that helps free up more working capital from the get-go.

“We've been trained to borrow as much money as possible, for as long as possible, at the lowest interest rate possible. That makes sense if you're buying a house or a warehouse. But it doesn't make sense if you're buying inventory.” – Eric Youngstrom, founder and CEO of Onramp Funds

2. Know your types of capital and when to use each one. 

Eric says there are three different types of capital in an eCommerce business. And retailers need to understand what they’re meant for and when to use each one:

Long-term capital is when you bring on investors who own equity in your business. This capital should be used for long-term goals and visions that require a partner to bring them to fruition.

Midterm capital is any loan you take on and plan to repay in the next several years. This capital is typically used for buying equipment or investing in a warehouse. 

Working capital turns over every 18 weeks from fulfilling orders and becomes cash on hand for the business. This capital is put back into the brand via inventory, salaries, or growth initiatives.

Once you understand the difference, ensure you only use the appropriate type of capital according to your goals. “Don't use long-term capital for short-term turnover because [it won’t be paid off] when you need more,” Eric explained. “And don't use short-term capital for long-term things because you have to pay it back way too fast.”

For example, you don’t want to use midterm capital to fund inventory purchases since the loan won’t be paid back when you need to buy more inventory. Instead, it’s much smarter to use working capital to fund these purchases since it's cash that’s already been accounted for.

“If [you] borrow today's inventory needs with a two-year [loan], what happens when you're sold out of inventory at the end of the quarter? You need more [when] you haven't finished paying back that first loan for inventory sold last quarter.”

3. Use working capital to pay back inventory as it sells.

According to Eric, the best way to pay off inventory purchases is to leverage working capital that can be put back into the business. And there’s one of two ways retailers can do this:

  1. Optimize inventory levels to meet actual demand, cut costs of goods sold, and improve profit margins. This frees up cash (typically spent on interest, fees, or unused inventory) to put toward your next inventory purchase. 
  2. Access capital from lenders (like Onramp) that offer low-fee lending. This provides funds to scale operations at a low cost, and you pay back on inventory as it sells. 

Either option helps retailers grow sustainably — by managing their inventory more efficiently and cost-effectively. This way, they put more money back into the business (AKA on inventory) instead of spending it on interest and fees.

For example, let’s say an online store sells iPhone cases for $25 each. It costs the retailer $5 per phone to purchase inventory, and they expect to sell 1,000 units per quarter. So they borrow $5,000 to buy the 1,000 units and get a few sales across the finish line every day.  

“You're going to be sold out [by the end of the quarter],” Eric explained. “And if you need a month [lead time], you’ll need to order the next 1,000 units at day 60.” But retailers often don’t have enough capital on hand, so they pull out another $5,000 to place the next purchase order. 

This slippery slope means retailers can never catch up. But when they pay off their inventory with each sale, they free up cash flow to put back into the business. “[With] working capital finance, you pay $5 down every time you sell a unit,” Eric explained. “So, by the time the [quarter] is over, [you’ve] paid off the full line as you've sold it.”  

And since your money is no longer tied up in loans, you can improve profit margins, boost revenue, and reduce your financing exposure on the back-end. 

“[Improving] the turnover cycle unlocks profit in [your] business that can flow back into [your] bank account. [You] decide [whether] it all goes to salary or part of [it] goes into growing the business.”

Running a successful eCommerce business is all about managing your inventory. And when you constantly need more funds to purchase merchandise, it’s hard to actually turn a profit. But if you follow these three golden principles, you can pay off inventory faster, reduce expenses and costs, and ultimately improve cash flow and revenue.

Author
Follow me!
Article

Three Golden Rules for Growing eCommerce Retailers

August 26, 2022

S
E

Organize the chaos
of your small business

No items found.
No items found.