Cash Management and Working Capital Tips for eCommerce Brands feeling a cash crunch in Q4

Posted October 1, 2023

Some quick cash management tips for those feeling the Q4 purchasing crunch. With rising interest rates, supply chain disruptions, and increased inventory requirements, doing business today is challenging. Specifically for folks feeling the cash crunch, but don’t have great financing options to turn to. Managing cash flow and working capital is vital for any business’s financial health and viability. Optimizing these areas can profoundly influence an organization’s overall success and growth.

Leaders should regularly assess cash positions, forecast needs, and make strategic adjustments to capital allocation so their organizations thrive. Having enough operating capital on hand for online stores is crucial to a company’s ability to cover current expenses, just like a brick-and-mortar store.

Whether you’ve been impacted by seasonality or need a boost to spend on payroll, inventory, and marketing, there are working capital solutions to help you stay afloat or grow your business.

With several available traditional loan and alternative lending options, ways to access e-commerce working capital loans have become more abundant, allowing businesses to endure tough times, prosper, and scale.

Working capital represents available cash flow for covering operating expenses like payroll, inventory, and overhead at a given time. It serves as a temporary bridge when outflows exceed inflows, enabling continuity until additional revenues resume. In essence, working capital measures a company’s liquidity cushion for meeting current and unforeseen near-term costs while funding operations.

For e-commerce stores and brands in particular, working capital provides vital cash flow to pay employees, vendors, marketing, inventory, and other expenses that often hit before sales income materializes. Without sufficient working capital reserves, merchants risk falling behind on obligations, curtailing growth plans, or even insolvency. Monitoring working capital ensures e-commerce businesses can cover recurring short-term costs, manage seasonal swings, and weather unexpected contingencies.

Traditional Lenders have Strict Requirements Sometimes

According to an article United Capital Source stating that traditional lenders, such as banks, aren’t always an option for e-commerce stores, despite the global e-commerce industry’s rocketing growth. In reality, only about 13.5% of small businesses meet the criteria for a traditional bank loan, and the majority of those are brick-and-mortar stores. Most banking institutions stick with who they know because e-commerce is still a relatively new industry. However when searching on Google for “working capital management for eCommerce brands” a number of online lenders and banks such as JP Morgan, BofA, Kickfurther and 8Fig are running offers and ads for eCommerce working capital funding. Credit cards, lines of credit, AR factoring/financing and other strategies are all worthwhile funding options that can get businesses the cash they need when AR lags behind.

I came across a post on X, formerly Twitter COO of an eCommerce company named David Rukec, who offered some advice on using credit cards and lines of credit to manage working capital for eCommerce companies during Q4.

Credit card limits

if you are going to have to pay down a card mid-month during spending peaks, go get more credit ASAP. Ramp, highbeam, ampla. All offer 1.5% cash back, non-personally-guaranteed cards. You can apply to all 3 or play them off one another for increased limits.

Meta small business loans

If you absolutely cannot expand your credit card limits to meet your spending needs, go get terms with Meta. Meta has a small business lending platform, that can help you discover collateral-free business loans.

The effective interest rate (EIR) is still dramatically better than other sources for the small biz.

Line of credit (not fixed fee)

Highbeam, Ampla, and Sellersfunding all offer true lines of credit for an APR, not a fixed fee like a merchant cash advance (MCA). I know Highbeam and Ampla are in the ballpark of your monthly average revenue for the last 6 months in line size. That’s pretty generous without personal guarantees.

Just in time inventory

Manufacturers hate small orders. They dislike generous payment terms. They’re reasonably open to a blanket PO, then ship me the goods and invoice me as I need them. Especially things like boxes or packaging. JIT inventory increases turnover and reduces holding costs.

Credit cards with vendors

If you do have room on your cards, you should have at least a 1.5-2% cash-back card. Agree to pay a 2% fee in exchange for putting your goods on a card rather than cash (provided you can’t get better terms with them). A 0.5% fee for 30-40 days is a great EIR for a small brand.

Merchant cash advance (MCA)

if you absolutely have to do it, make sure you negotiate a minimum payback period. That can greatly affect the EIR of the loan. If you’re using MCA money and aren’t sure you’re going to sell out of the inventory, then buy less. Which leads me to.

Amazon Lending

Offering a 12-month term, 14% APR, credit limit at 1.6x my average monthly sales for L6M. Worse than the credit cards and LOC I mentioned earlier, but better than MCA loans.

Buy less inventory

You need enough inventory so it’s possible for your contribution margin (CM) to cover your operating expenses (OpEx) and turn a decent profit. But, over-ordering can kill a business. Under-ordering is rarely a death blow. When you under-order, you can increase the price or the MER or both and just enjoy a higher CM. All things considered, if I’m tight on cash I’d rather have 20% too little inventory to meet the full demand than 20% too much.

Plan to rebuild stock post-Q4

Most businesses build up inventory prior to Q4 (net working capital increases), and then they sell off a lot or all of that inventory in Q4 (net working capital greatly decreases). Late Q4 into Q1, don’t forget to plan to return to normal levels of inventory and leave cash available for that climb back up the NWC hill.

Working Capital Management Tips for eCommerce Stores

Irrespectively, eCommerce businesses can effectively solve their operations and maintenance capital-related problems by implementing sound working capital management strategies.

Here are some suggestions for online stores that can help with working capital:

Modernize your technology and business model
Manage inventory carefully
Offer discounts to sell stagnant inventory
Improve your terms with vendors
Utilize credit card grace periods to increase cash flow without paying interest.
Choose an appropriate financing option.