With so many advancements in the online user experience, customers now expect the process of buying online to be as seamless as purchasing the same item in a store. In order to remain competitive, this means e-commerce businesses need to be able to provide an easy online experience, have product in stock and deliver quickly at the lowest possible cost.
In the world of e-commerce, it’s common for online stores to increase their inventory as they prepare for high-volume shopping seasons like Black Friday, Christmas and other peak periods of sales like Back-to-School. This type of approach is referred to as front-loading inventory. The increase in inventory helps businesses reduce their shipping delays and any other problems that might arise from not being able to quickly fulfill a customer order. Dropshipping is an alternative method if warehousing space and financing are major hurdles.
Ensuring you have access to enough inventory is critical throughout the year, but especially during peak sales periods. For many e-commerce businesses, a large bulk of their sales comes from particular events, such as Prime Day if they sell on Amazon’s platform, or Black Friday/Cyber Monday. Missing the opportunity to take full advantage of those prime selling days due to inventory shortages could be devastating to a business’s overall revenue.
In this article, I explain why front-loading inventory is important for e-commerce businesses and how to secure inventory financing to ensure you’re able to take on large inventory loads without breaking the bank.
Why front-loading inventory is a good practice for e-commerce businesses
When done properly, front-loading inventory helps e-commerce businesses stay ahead of the market demand. The trick is to be able to predict which products need to be stocked in excess.
Using sales tracking software and analyzing trends from previous years will help you forecast the appropriate amount of inventory you need on hand. You definitely don’t want to end up with a stock-pile of goods that you won’t be able to sell, or will need to discount in order to move.
Here are three reasons why front-loading inventory is important to your e-commerce business.
#1: It allows you to be prepared for busy seasons
Front-loading gives online stores the opportunity to ready themselves for high-traffic seasonality. For some online businesses, this might be around holiday seasons like Christmas, when consumers are gift-shopping. For e-commerce stores that sell seasonal products, busy seasons are those when their products are in demand and being consumed frequently. For example, garden products will sell more during the spring and summer months versus the winter.
By front-loading inventory, businesses ensure they have high-traffic products in stock and are able to keep up with customer demand. Additionally, paying for large quantities of inventory upfront prevents potential fluctuations in the cost of manufacturing.
#2: You’re able to overcome challenges caused by unstable political climates
For e-commerce businesses that source their products outside their resident country, the political climate in certain geographies can have a significant impact on the cost and availability of goods.
For example, the US-China negotiations in September of last year caused a 15% increase in the cost of Chinese products exported into the US. As a result, many Chinese manufacturers required payment upfront for goods instead of allowing credit purchasing. By front-loading inventory, businesses know what they are paying upfront and can avoid fluctuations caused by an increase in tariffs.
#3: You build better customer relationships
Have you ever visited an online retailer hoping to make a quick order, only to find that it will take weeks for the item to be delivered? Shipping delays can be a significant deterrent for consumers – enough to turn them away from your site. Especially if they’re looking for a product that can be easily bought from another site, it’s a sure way to lose a potential sale. Likewise, any delays lead to a poor customer experience, discourage consumers from purchasing from your business again and negative customer reviews.
Four ways to access inventory financing
Easy access to digital platforms and audiences has enabled the proliferation of e-commerce businesses. However, smaller businesses usually don’t have the same financial resources as established companies. By securing inventory financing, small businesses can prepare themselves for increases in demand, whether that’s due to seasonality or a big marketing campaign.
Here’s a look at four ways to secure inventory financing for your e-commerce business.
Websites like Kickstarter, GoFundMe and Indiegogo are great for gauging market demand and generating interest in your product, along with generating funds to finance your inventory. Many success stories have come from crowdfunding platforms with millions of dollars having been raised.
But there are also many stories of failure, where months of planning and effort resulted in zero funds. If you go this route, making sure you do your research on best practices when it comes to launching a successful campaign.
Debt financing occurs when you raise money for capital expenditures, i.e. purchasing inventory. This is done by selling debt to individuals and/or institutional investors, who then become your creditors. With this approach, you owe them back the principal plus interest on the debt.
A major advantage of this type of financing is that you maintain ownership of your business while making your repayments. On the other hand, a major disadvantage is that you still have to make those payments even if your business fails, and you might face a high-interest rate depending on your history with the banks, business credit rating and personal credit history.
Equity financing is when you raise capital through the sale of shares. By selling shares, you sell ownership of your company in return for cash. Most businesses use a combination of debt and equity financing, but there is a distinct advantage of equity financing over debt financing. The former carries no repayment obligation and provides extra working capital that can be used towards purchasing inventory. However, in exchange, you’ll have to share your profits and consult with your new partners any time you make decisions affecting the business.
The biggest issue with equity financing is it isn’t as accessible for all businesses as other forms of funding. For example, e-commerce brands with fewer hard assets and a shorter business history might get overlooked by VCs, who typically require a lot more collateral .
Not to be confused with profit sharing, revenue-sharing is a method of raising capital in which investors receive a percentage of your company’s ongoing gross revenues to pay back the money they invested plus a fee.
Companies like Clearbanc offer revenue-sharing solutions as a way to facilitate the continual growth of e-commerce businesses. With this type of financing, you’re able to take out an advance and make repayments as you generate revenue from your product sales. If you’re trying to prepare for an upcoming high-traffic sale season, this is a great option for helping you front-load your inventory to meet customer demand.
Summing it all up
Front-loading inventory is an effective inventory management method for e-commerce businesses looking to prepare for busy seasons. Businesses that front-load also take advantage of current prices and avoid challenges of potentially unstable political climates. Additionally, they’re able to build stronger, more trusting customer relationships because it’s trusted that stock will be available and consistently delivered on time.
Securing enough financing in order to build your inventory is key. Crowdfunding, debt financing, equity financing and revenue sharing are all great options available to you. With a solid understanding of market demand for your product, achievable sales projections and cost structure, you increase your likelihood of securing inventory financing and ensuring you set yourself up for success as you head into your next busy season.