Entrepreneurs often view online e-commerce stores as relatively easy ways to reach customers and build a profitable business. In actuality, online retailers face fierce competition and tend to be put into a difficult financial position by their very business model.
Due to the way they’re set up, these kinds of businesses often suffer from expensive inefficiencies. Because of these, much larger mass retailers like Amazon or Alibaba can offer the same products at far lower rates. To compete, smaller competitors need to find ways to reduce costs and to improve the consistency of their services. By using trade finance, they can become more efficient, reliable, and competitive, and gain the critical edge they need to compete against much larger online retailers.
Businesses need to control product costs
Online businesses often sell products that they don’t actually stock themselves. Instead, they forward purchase orders to their suppliers, who drop ship the order to the end customer. In theory, this reduces the amount of work that the business needs to do themselves. Their role is simply to advertise products online and to process incoming orders. Unfortunately, this makes it virtually impossible for them to price those products competitively down the line.
Online businesses often lack the benefit of economies of scale
Businesses who rely on their suppliers to make hundreds or thousands of small drop shipments to their customers end up paying for that convenience. Individual small shipments are extremely inefficient and costly and prevent the business from repackaging or adding value in any way to justify that additional cost. If suppliers or customers are located in other countries, import paperwork could drive costs up even more, and introduce potential bureaucratic hurdles.
Large brick and mortar retailers have long benefited from economies of scale, purchasing large quantities of stock at reduced bulk prices before reselling them. E-commerce businesses, on the other hand, fail to do this because they simply can’t afford to purchase, stockpile, and process large quantities of products, particularly if they’re still relatively small. Worse, they can’t drive growth effectively, because any competitive pricing would erode profit margins too much to fund those efforts.
Businesses can’t afford to lose control over customer interactions
Not only is ordering and having individual products drop-shipped expensive, putting that responsibility on a supplier also means giving up control of critical customer interactions. It’s easy to dismiss the importance of positive engagement with customers after a sale has already been made, but ensuring the proper delivery of the product is a fundamental responsibility of a retail business.
If orders are lost, or shipments are delivered late, the business faces bad reviews, public accusations of fraud, and potentially disastrous bad press. The supplier who is actually to blame, on the other hand, is protected by the presence of the retailer.
Businesses need control over all customer-facing interactions to protect their reputations. The only way to do that is to package and ship products to customers themselves. Here, however, the issue comes right back to cash flow. Startups, small businesses, and even larger online businesses often simply don’t have the funds available to make large up-front investments.
How trade finance makes growth possible
Online businesses that want to be able to grow need to be able to purchase stock much more inexpensively in bulk, and manage shipment to their customers on their own. Traditional trade finance can bring down bulk import costs to an extent, but it still requires businesses to pay a significant, often prohibitively large deposit on their own.
The reason for this is that this kind of financing is secured against the stock that business is purchasing. The funds can only be released once the stock is in hand to act as security. To manage this, many online retailers are turning to Fifo Capital’s more modern trade finance facility as a solution. Fifo Capital gets around the problem by letting businesses secure the facility with other assets so that deposits can also be financed. This means that businesses can finance the entire order process so that their size or current working capital becomes a non-issue.
Once the stock arrives, businesses can repackage it, process it to add value, or simply ship it on to their customers. Businesses only need to pay off their initial investment up to 90 days later, after the stock is sold.
Because they placed their own bulk orders, businesses not only have more direct control over their products and customer interactions, they can also save significantly on supply costs. This gives them the chance to price their products more competitively, while often also generating a more significant profit margin that allows them to better invest in themselves for the future.