Starting an e-commerce business is said to be easier than starting a business with physical premises.
While it’s understandable to think this, it’s not always true. E-commerce businesses may not have a physical building that customers can visit. They may not have stores in cities all over the world. But that doesn’t mean it’s easy to start an e-commerce business.
Financial issues tend to play a huge role in whether a business is successful or not. This is no different for e-commerce businesses either.
It’s been suggested that around half of all startup businesses won’t survive longer than 5 years. Lack of finances seems to be a particularly common reason as to why they don’t make it.
The funding world isn’t necessarily designed to suit e-commerce businesses. With limited physical assets to borrow against, funding can be very difficult to get.
There also seems to be an air of confusion about why an e-commerce business would need funding in the first place as “aren’t they just a website?”
E-commerce businesses need funding, just like bricks and mortar businesses need funding. There are multiple reasons why and, without it, many e-commerce businesses will struggle to survive long term.
Inventory
A large portion of the money made by e-commerce businesses will come from the selling of products.
This puts a lot of pressure on them as they have to be able to hold enough stock so they are able to sell it in large enough quantities to make a profit that can sustain the business.
To sell products, a business has to have access to them. Holding stock means buying it from wholesalers or manufacturers.
If you’re running an e-commerce business that’s relatively small, it’s unlikely you’ll be offered credit, so you’ll have to pay for stock upfront.
This can be expensive. If you’re looking to do a lot of sales, you’ll need a lot of stock which raises the cost even more.
While it’s possible to sell a product online without having immediate access to stock, it does complicate and slow things down.
Let’s say an e-commerce business is selling a stroller. They can’t afford to buy stock upfront so they buy it as customer orders are placed.
A customer places an order through the business’s website for one of the strollers. The business owner then orders the stroller from the wholesaler. The wholesaler gives an estimated delivery time (to the business) of 3 to 5 working days.
The e-commerce business uses a courier that can deliver items in 1 to 2 working days. This results in a total wait time for the customer of up to 7 working days before their stroller arrives.
This may not seem like a big thing, but when you consider the fact that customers can order from larger companies or physically visit a bricks and mortar retailer, they could get the stroller much quicker if they purchased it elsewhere.
An even longer wait might be necessary if the wholesaler has a minimum order level for their products. This could result in the e-commerce business having to wait for multiple orders to be received before they can actually buy the stock to send out to their customers.
If a customer cancels the order during the wait time, the business is left out of pocket and in a potentially uncomfortable financial situation.
Getting funding for an e-commerce business can allow them to hold the stock they need to have the best chance of being successful.
Once the business starts making sales, cash flow will improve, and buying stock will be more manageable.
Funding for inventory can be a huge help for e-commerce businesses.
Systems And Operational Costs
Despite not always having physical premises, e-commerce businesses can have quite a few overheads that can quickly add up to a decent sum of money.
Website hosting can be expensive if you want to ensure reliability – this is something not everyone looking to start an e-commerce business understands.
Another big expense can be the e-commerce platform being used. There are cheap options out there but these tend to have limits on functionality, user experience, and reliability.
To get the best e-commerce system for a business and its customers, costs can get pretty high.
Unless you can do it all yourself, designing, building, maintaining, and further developing a website and e-commerce system can be pricey. It’s likely an e-commerce business will need help from specialists in these areas.
These don’t come cheap so trying to get a suitable system up and running in the first place can be a huge obstacle to overcome.
Even established e-commerce businesses can have issues with system costs. If an online business has been doing relatively well, the owner may decide they want to expand in the hope of moving the business to an even higher performing level.
To do this, they need a completely new e-commerce system to be implemented in their business. Their current system works fine but it has been close to the limit of its effectiveness with the growing number of orders coming in.
Basic e-commerce platforms can cost as little as a few dollars per month. However, if you’re looking to sell a lot more than this (like this example business is), you’ll need quite an intuitive and sophisticated platform.
When shopping around for a new platform, the business owner gets quotes that are all for several thousands of dollars. Even once created and installed, ongoing costs for this type of system can run into hundreds or even thousands of dollars per month.
This is clearly a substantial amount of money that not many small businesses will have available to spend. That’s why funding can be so important for e-commerce businesses.
Even a profitable e-commerce business will likely struggle to expand in a noticeable way without some kind of financial assistance.
If funding isn’t available, the business will either have to stay running at its current level, or the owner might decide to close it down as progress will come to a halt.
Shipping Costs
Customers expect fast, reliable, and cheap (preferably free) shipping on their orders.
For small to medium e-commerce businesses, this can be quite a challenge to achieve. Couriers aren’t always that affordable and the ones that are, don’t always meet the expectations customers have of them.
A seemingly simple way of increasing customer satisfaction and sales is to offer free delivery on orders placed.
The downside to this is that the shipping costs still need to be met. If the customer isn’t paying them, then the business will have to foot the bill.
There are ways around this, such as increasing the price of your products slightly to offset shipping costs. You could also put a minimum order value before free delivery is offered. However, none of these things make enough of a difference if your shipping costs are high.
High-level couriers have high prices. Whether they charge you per package shipped or a monthly fee, if you want a consistently reliable courier to deliver your orders to customers, you’ll have to pay the price.
Trying to set up a working relationship with couriers can be the difference between an e-commerce business succeeding or failing.
If the financial resources aren’t there to be spent though, the chances are, a cheaper alternative will have to be used which can be extremely detrimental to a business.
If an e-commerce business can be successful enough, it can very quickly begin to meet shipping costs through the money made from sales.
The problem is getting to the point where enough money is being made without working with a decent courier. Funding can help e-commerce businesses work with reliable couriers which can significantly help the growth of the business.
Without the funding to pay for a suitable shipping service, e-commerce businesses will very likely struggle to keep their customers satisfied enough to generate good sales figures.
Storage
It’s already been made very clear about the importance of e-commerce businesses holding suitable levels of stock.
A good inventory needs to be stored securely though – which is yet another cost e-commerce businesses need to cover.
Spending a whole load of money on inventory only to have nowhere to store it is something that must be avoided. It’s also worth thinking about that it’s not just the space you need to store your stock, it has to be safe and secure to prevent any loss or damage too.
This means that warehouse space, storage units, small buildings, or shipping containers will very likely need to be paid for.
The amount of storage space each e-commerce business needs will be dependent on the products they sell. Some kind of storage space will be needed though regardless of what is being sold.
Storage space tends to come at a bit of a premium. Even basic storage units can cost close to $1000 a year, and that wouldn’t get you much space at all.
Bigger products will need more space so warehousing or building rental can very quickly prove to be too much for e-commerce businesses to handle.
Some business owners may want to keep their inventory on-site where they can keep a personal eye on it at all times. As a lot of e-commerce businesses don’t have physical premises, the cost of buying, building, or renting a suitable location can be very high.
Funding for storage solutions can allow an e-commerce business to increase their inventory, to expand their range of products on offer, and it can also allow them to continue to manage their packing and shipping procedures, without relying on external warehousing companies to do the work on their behalf.
Marketing
Any business that wants to be successful must make itself visible to as many potential customers as possible.
A well-thought-out and strategic marketing plan is needed to do this effectively.
E-commerce businesses can be harder to promote than bricks and mortar businesses. One of the main reasons for this is that they aren’t a physical place for customers to visit.
There’s no trade generated from people walking past, there are no signs pointing in the direction of where the business is located.
Marketing for e-commerce businesses is usually based on SEO (search engine optimization), social media marketing, and paid ads.
All of these things can come at a price. SEO is something that some business owners could do themselves. It’s not as easy as some people might think though so it could be that external help is required.
Social media marketing is also able to be implemented by the business owner themselves, without having to pay for assistance. However, like with SEO, it can be challenging to do this as effectively as possible.
Paid ads can help get your business in front of people who are very likely to be looking for something you’re selling. This is clearly a huge benefit as it not only drives traffic to your site, but it actually drives traffic that is likely to convert into a sale to your site.
As good as this sounds, it’s not the cheapest thing to do so it can be out of reach for a lot of e-commerce businesses.
There are marketing agencies out there that can do all aspects of online marketing for e-commerce businesses. They can analyze, review, and improve the SEO of your website. They can look after your social media accounts and post content that is more likely to attract customers to your business. They can create, manage, and edit any paid ads in order to get the most out of them.
These agencies aren’t cheap and they can have a big impact on the financial situation of e-commerce businesses.
It’s clearly important to market a business effectively. Without proper marketing, customers won’t be able to find your website, and without customers, your business will quickly suffer and potentially fail.
The problem with marketing is that its cost can be too great resulting in the business ending up in a bad situation anyway.
Funding that can be used to effectively market e-commerce businesses can help them to attract more customers, to grow, and to be much more successful.
