Working capital isn’t always a key consideration when starting an ecommerce brand. Brick and mortar stores can require $50,000 or more in capital before opening the doors. On the other hand, commerce merchants can set up shop via a Shopify store, Amazon seller account, or even by starting with a Facebook marketplace brand. Starting an ecommerce store is sometimes even a “side hustle” before it finds a market and sees real demand!

Startup costs notwithstanding, working capital is often a challenge for brands. Although some models of retail ecommerce may have greater capital investment requirements than others, investors may be surprised at how much working capital matters for merchants selling goods online. 

What Is Working Capital in Ecommerce?

Even without a physical storefront, ecommerce brands must manage short-term assets like cash, accounts receivable, inventory, and equipment, as well as short-term liabilities such as accounts payable, loan payments, and payroll. The difference between these assets and liabilities is known as working capital.

Working capital serves as a key indicator of a company’s financial health, offering insight into whether a business can meet its upcoming financial obligations. Because calculating working capital is straightforward and provides a clear picture of a business’s financial stability, it is often used to assess risk—such as determining if the business will remain operational over the next year. For ecommerce brands, positive working capital is essential for covering daily expenses, driving growth initiatives, and staying solvent during challenging times.

Moreover, working capital is not just for maintaining operations; it can also fuel business growth. Ecommerce brands must cover costs such as inventory, advertising, and wages, even without a physical store. Investing in these areas helps businesses scale operations and achieve growth—precisely the outcomes that investors seek to support.

Why Is Working Capital Essential for Ecommerce Growth?

Ecommerce brands have costs such as inventory, wages, operating costs, or shipping fees to pay if they want to survive! To thrive, ecommerce merchants often need access to additional capital to support expansion into larger warehouses, add more shipping areas, create new products, and advertise. These expenses may be slightly different from a physical store, but are no less important.

Consider a physical store selling beauty supplies, like lipstick or hair dye. The store is located in a busy strip mall and well positioned in the suburbs. Sandwiched between a carwash and a prescription pharmacy, the store sees plenty of foot traffic due to its location. Customers come in to walk around, check out the goods, and often make a purchase. While the owner pays a premium to rent the storefront, they spend very little on marketing and rely on word of mouth and a flyer encouraging pharmacy guests to stop by. 

Now consider the same beauty supply store online. Although the merchant doesn’t have the same level of up-front cost as the brick and mortar location, the store still finds a steady stream of guests stopping by. It sells some goods through Amazon, and others via PayPal on its Shopify. By investing in online advertising, employing a marketing team to send email promotions, and purchasing inventory with peak seasons in mind, the online beauty store has a wide selection of goods and a large number of customers. 

Working capital is not just about covering immediate expenses; it’s also a powerful tool for growth. Ecommerce brands, much like their brick-and-mortar counterparts, need to invest in inventory, advertising, and wages to scale their operations. These expenses are vital for driving sales and expanding market reach.

Ecommerce brands typically allocate capital to:

• Inventory: To keep up with demand, ecommerce brands must consistently stock their virtual shelves. This often means purchasing inventory in bulk or ahead of peak seasons.
• Marketing and Advertising: Unlike physical stores that rely on foot traffic, ecommerce brands must invest heavily in digital marketing to drive traffic to their websites.
• Operating Costs: From website maintenance to software subscriptions, operating an ecommerce store requires ongoing financial investment.
• Shipping and Fulfillment: Efficient shipping and fulfillment processes are crucial for customer satisfaction, necessitating further investment in logistics.

Why Do Ecommerce Brands Need Working Capital for Expansion?

Both examples of retail stores above can demonstrate a need for working capital: the physical store might need more cash to expand the storefront and start stocking extra products, for example, and the online store may want to order additional inventory but needs the cash to advertise. 

In both situations, an unexpected cost, an inventory shortage, or just a strong drive for greater growth can prompt the business to seek working capital – and in turn, both businesses can generate a return from the cash that business to business funding can provide.

Working capital is not just about covering immediate expenses; it’s also a powerful tool for growth. Ecommerce brands, much like their brick-and-mortar counterparts, need to invest in inventory, advertising, and wages to scale their operations. These expenses are vital for driving sales and expanding market reach. Growth often requires additional capital. For example:

• Expanding Inventory: To meet increasing demand, ecommerce brands may need to purchase more inventory, which requires working capital.
• Marketing and Customer Acquisition: Growing an online presence demands continuous investment in digital marketing and customer acquisition strategies.
• Operational Enhancements: As businesses scale, they may need to invest in technology, hire additional staff, or expand their fulfillment capabilities.

In all these scenarios, having access to sufficient working capital is essential. It allows ecommerce brands to seize growth opportunities, navigate unexpected challenges, and maintain financial stability.

Author Bio

Audrianna Frey, Demand Generation Specialist, Clearco 

Audrianna is an experienced marketer with a diverse background in digital marketing, content creation, social media, and brand management. She specializes in developing and executing comprehensive marketing strategies that drive top-of-funnel growth.