5 Funding Options to Scale Your DTC Brand
Updated on June 1, 2022
Having a good product used to be enough to guarantee you had a successful ecommerce store. Nowadays, the demands on the modern ecommerce entrepreneur are much greater.
For DTC ecommerce brands, you’ll need to scale your marketing efforts and streamline logistics too if you want to turn your brand into a household name, such as Warby Parker or SmileDirectClub.
This means you’ll need an injection of capital.
If you’ve captured your target audience’s attention, your brand could be catapulted into its growth phase. Not having the funds to keep up with that growth would be like hitting a brick wall.
We’d hate for that to happen to you since we know that ecommerce businesses have the potential to grow into huge assets that buyers are willing to pay top dollar for. Take this $11.8 million business, for example!
To reach that stage, you’ll need to secure enough funding to scale your business, whether that means increasing the amount of inventory you hold or expanding your marketing campaigns. By the end of this article, you’ll know what your funding options are and have an idea of which one is best for your business.
Let’s explore what your financing options are to raise capital for your DTC brand.
Credit Cards
Since the average business credit card limit is $56,100, you might have thought about using your business credit card or applying for one to start loading operational expenses to fuel growth.
However, it’s not recommended for long-term investment. You can outrun your credit limit when you place regular inventory orders on your credit card.
As a stopgap, a business credit card can tide you over until you secure funding with more favorable interest rates and repayment terms.
Working Capital Loans
These types of business loans specifically help brands cover their operational needs. The caveat is that you’re limited in what you can spend. Working capital loans are intended for short-term expenses instead of long-term investments.
If recent analytics show rapid growth, it could be worth applying for a loan. You don’t need to spend the loan all at once, which allows you to apply it to the business’s needs, such as financing inventory or hiring new staff to handle customer service.
Amazon and Shopify sellers can secure working capital loans specific to these platforms that can be more favorable than bank loans.
Amazon Lending
Amazon Lending is available to small business owners selling on Amazon by invitation only.
If you’re invited, you can secure funds between $1,000 and $750,000. Terms are up to 12 months and interest rates vary between 6% and 16%, as reported by sellers. Amazon takes a fixed percentage of gross sales from the seller’s Amazon account.
Some business owners might prefer this option because there are fewer fees.
Keep in mind that you can only use the loan to increase your inventory or improve the products you are selling on Amazon.
Shopify Capital
Shopify Capital offers a hassle-free way of getting funding from Shopify with a unique repayment structure that’s based on your sales. You can borrow up to $1 million, but you need to be invited to the scheme by Shopify.
As Pagefly explains, if you borrow $1,000, you’ll need to front a $100 borrow fee and then put 10% of your sales toward repaying the loan until it’s paid off.
A Shopify Capital loan can be a more expensive option than a typical bank loan, but you can access capital quicker, which can be really helpful if you’re running into cash flow management issues.
Bank Loans
Many entrepreneurs who’ve grown their own startups advise that a bank loan can help get a business off the ground. However, getting a loan approved depends on a lender’s credit score and a business’s financial performance.
If you recently started your DTC brand, you might not be able to secure a bank loan due to the limited history of financial performance. You also have no collateral to offer that the banks acknowledge if you can’t repay the loan.
An alternative is taking out a Home Equity Line of Credit (HELOC). Also known as a second mortgage, HELOC loans use real estate as collateral. The interest rates are very low, which could make this option a good choice if you own property.
Revenue-Based Funding
Revenue-based funding is when a portion of your revenue or profits to the investor to pay off the principal. Instead of paying off the loan in fixed monthly payments, you’ll have flexibility based on how your online store is performing.
This type of funding has become increasingly popular for online businesses because repayment is in proportion to sales. A bad month for revenue won’t be too bad since the amount owed won’t be as high as a fixed repayment rate. Interest rates tend to be much lower over the long term, also making this a good option if you’re looking for a flexible loan.
We go into more detail about the different loan structures and options for Amazon Sellers with Don Henig, so make sure you check this episode of The Opportunity podcast.
Equity Financing
In exchange for a share of ownership in your company, you could raise large amounts of capital. Equity financing is like selling shares of your company to investors, and plenty of investors will want a piece of fast-growing DTC brands. You can secure equity financing from venture capital firms, crowdfunding platforms, and even your friends and family.
Venture Capital
Venture capital (VC) is a type of private equity firm that offers capital in exchange for a share of a company. These firms usually invest in fast-growing brands with a high ceiling for potential.
VC has become a popular choice for DTC brands. Away Luggage secured $50 million in venture capital two years after it started so it could develop another bag, while beauty brand Glossier recently raised $80 million to scale their online and offline channels.
In exchange for this much money, expect VCs to ask for up to 30% ownership of your business. Whether you raise the money for inventory financing or invest in developing a better online store, you could raise millions to sustain growth in the coming years. The challenge with this type of business funding is actually securing it.
There isn’t a tried-and-true formula to get VCs to look your way. With so many new companies cropping up, you’ll need to reach out to as many VCs as possible and do your best to stand out in the application process.
If you’re successful and have VC backing your brand, you’ll have the freedom to expand your business through new product launches or better marketing campaigns.
Family and friends
Depending on the amount of funding you need, borrowing from your close friends and family can be a great way to secure an interest-free loan. Asking for a small business loan from people in your inner circle can also be an opportunity to get feedback on your ideas for growing your business.
While some people can leverage this type of loan, keep in mind that there’s a risk of damaging a relationship if both parties have different expectations around repayment.
It’s recommended to draft up contracts just as you would when applying for a normal loan program. Include details such as the exact loan amount, whether it’s a term loan, and what is the expected payment schedule. It can feel uncomfortable but if there are any misunderstandings or disagreements in the future, all parties can refer to the contract.
Offering an equity share isn’t a must, but you should offer it if you’re planning to use this option.
Crowdfunding
What used to fund pet projects is now one of the best ways to raise capital. You have plenty of crowdfunding platforms to choose from, the most popular being Kickstarter, GoFundMe, Indiegogo, and Patreon.
Opening up to the public can be a great way to test the market. Hitting your revenue goal way ahead of time can give you a good indication of how much demand there is for a new product.
You can also use crowdfunding to generate as much feedback as possible from potential customers and paid subscribers. Reaching out to people who leave enthusiastic comments on your crowdfunding listing page is a good place for customer research. Knowing your target audience is the first step to owning the customer journey and will set you up for success.
Not only is crowdfunding a great option for you to gather feedback from early adopters, but there is also a lower stock-related risk since you only need to fulfill preorders.
Keep in mind that with crowdfunding you’re exposing your idea to the competition. If word gets out and your idea goes viral due to social media shares, competitors may launch a similar product or use blackhat tactics to tear down your product launch.
Stimulate Growth by Securing the Right Funding
There are many options to raise capital to grow your DTC brand. Take time to see which one will help you meet your business needs. Researching what e-commerce financing is available to you will help you avoid taking out the wrong loan or mistiming when you secure funding.
Many entrepreneurs make the mistake of accepting the first offer for a loan without understanding what lenders need from you to make it worthwhile for them.
For example, if a loan has a 16% interest rate, you might need to increase your product prices just to make repayments on time. Customers then stop buying from you because of the sudden price hike. All that momentum goes down the drain.
Now, you’re fighting for survival instead of thriving.
How do you know what’s best to do with those funds or even if it’s the right time to expand? Copying a bigger brand’s strategy to prepare for growth probably won’t work since both brands are at different stages. Rushing into growth could be as harmful to your DTC brand as not preparing enough.
A simpler way to stay successful is preparing an exit strategy.
Prepare for Success by Preparing to Sell
Preparing to sell gives you the framework to build a strong brand. Step into an investor’s shoes and ask yourself, “Would I buy this brand?” Each time you answer this question, you’ll see how you can optimize your business to make it more attractive to potential buyers.
Even if you don’t sell, your operations will become tighter, and your profit margins will be much higher than if you played it by ear.
When the time comes where you lose interest or feel you’ve taken the business as far as you can go, you’re in a prime position to list the business for sale. You could raise a significant amount of money from the sale that opens up new opportunities to explore the market as well as take some chips off the table.
Speak with one of our business analysts to start preparing your exit strategy. Even if you don’t commit to the sale, you’ll be in great shape to take advantage of selling when you’re ready.
