All the signs indicate a looming global recession in 2023, which will bring along a significant decline in consumer spending and less economic activity. In a recent CNN interview, the owner of the world’s largest eCommerce marketplace, Jeff Bezos, warned businesses and consumers to postpone big purchases and hold on to their money. According to Bezos, postponing big purchases and large capital expenditures is the best way to keep some "dry powder" in case the economic downturn is prolonged.
In the eCommerce realm, business owners should focus on conserving cash and relying on their partners and technology to stretch their dollars. This way, they can maintain growth while surviving tough economic times.
But does that mean you shouldn't take eCommerce loans? Not necessarily.
The key is to focus on borrowing and spending only what you need to avoid putting your eCommerce business in financial jeopardy. This article delves deeper into the benefits of borrowing and spending only what you need to keep your eCommerce business financially healthy.
How Does a Recession Impact Ecommerce Businesses?
Before we dive into the benefits of prudent borrowing and spending for eCommerce businesses, let's look at the recession's impact on online stores. Explaining the impacts will help you understand why you shouldn't take unnecessary risks during uncertain times by overspending.
Decreased Consumer Spending
During a recession, consumers spend less to save money and protect themselves from economic uncertainty. They delay big purchases, such as cars and houses, focus more on basics and household items, and cut down on luxury goods.
Even when purchasing the basics, they become more price-sensitive and look for cheaper alternatives. This results in a shift from high-end to low-cost items and an overall decrease in consumer spending. This shift affects eCommerce businesses, as they have to adjust their revenue expectations accordingly.
Increased Prices by Suppliers
Ecommerce businesses are reliant on suppliers for the products they sell. When a recession hits, suppliers tend to increase their prices to compensate for inflation. The impact is that, as an eCommerce retailer, you also have to increase your prices to maintain your profit margins.
The price can sometimes be tricky, as increasing prices could lead to customers going elsewhere in search of cheaper alternatives. Therefore, the high prices mean decreased sales and a lower return on investment.
Increased Competition in the Online Marketplace
When a recession hits, eCommerce businesses tend to increase their marketing efforts and seek more opportunities to drive sales. This often leads to increased competition in the online marketplace as everybody is vying for the same customer base.
When many brands are competing for the same audience, the cost of advertising in areas like social media and PPC increases. The high marketing costs could further reduce the profits of your eCommerce business.
Difficulty Borrowing Money
During a recession, lenders become more cautious and tend to increase their borrowing requirements. This means it becomes increasingly harder for small businesses to get loans and access the funds they need to keep their business running.
Should You Borrow During Recessionary Times?
No matter the economic conditions, you will probably need extra money to keep your business going. Whether to cover operating costs or purchase inventory, you need the right eCommerce financing options to ensure your business’s success during recessionary times.
Your biggest dilemma might be taking an eCommerce business loan or giving up equity. It might seem tempting to give up equity, as you won’t have to repay any funds. However, you are also giving away a part of your business.
On the other hand, taking an eCommerce loan keeps your business in your own hands. The ROI of investing the borrowed funds in your eCommerce store might be higher than the interest you'll pay on the loan.
Borrowing also allows you to access additional resources. For example, borrowing will give you working capital to manage your daily operations, such as customer refunds. You also get money to cover your business taxes.
With eCommerce financing, you will have enough cash to cover inventory costs and meet the high demands during times like the holiday season. More importantly, a loan reduces your personal risk since you don’t have to spend your savings to cover business expenses.
So, when deciding whether to borrow or not during recessionary times, the answer isn’t simple. Before deciding, you must carefully assess your business's financial needs and weigh the risks and rewards of taking a loan.
The Benefits of Borrowing and Spending Only What You Need
While taking out an eCommerce loan in recessionary times provides several benefits, such as helping you stay afloat, you should only borrow what you need. More importantly, you should avoid spending your cash on unnecessary things.
Staying disciplined in spending your borrowed funds will help you reap the following benefits:
Positive Cashflows
Borrowing and spending responsibly ensures you have enough cash to prevent interruptions in operational activities. For instance, when you don't spend on things that don't add value to your business, you will have the cash you need to cover your bills and other expenses. You can maintain positive cash flows and reduce your financial stress when you borrow only what you need and pay it back on time.
Increasing the Chances of Survival
In connection with the point above, cash flow problems are the main reason why 82% of small businesses fail. By staying disciplined and only spending what is necessary, you can prevent cash flow issues and increase your chances of survival.
You can easily manage your expenses and resources while creating a budget that fits your cash flow constraints. Staying disciplined will ensure your business has enough funds to cover essential costs without overspending.
Disciplined spending also helps you increase your chance of success since you focus your resources on areas that matter most and avoid wasteful spending.
Maintaining Optimum Inventory
In eCommerce, nothing is as crucial as maintaining optimum inventory. When you focus on buying only what you need, you reduce your risk of overbuying and having excess inventory that can be difficult to move during a recession.
There are costs associated with having excess inventory, including storage costs, disposal costs, and markdown costs. Responsible spending will help you reduce such costs and maintain the right inventory levels for your business.
You also don't want to hit customers with "out of stock" messages. Responsible borrowing will ensure you have the cash you need to stay well-stocked during times of high demand, thus boosting your business’s success.
Achieving Targets Easily
When you borrow only what you need and spend it wisely, you can achieve your goals more quickly. You can match the targets to a realistically achievable budget, and you'll know that every dollar is working to benefit your business.
For instance, suppose one of your targets is to acquire a certain number of customers within a specific period. You can allocate a budget and stick to the mission until you succeed.
With responsible spending, it will be easier to achieve this target because there is little risk of diverting your resources to other areas. In case of a mismatch between targets and budget, you'll be able to adjust in time without risking your business’s success.
Improving Efficiency
When you borrow only the right amount for your Shopify; or Amazon store, you'll ensure you spend your money most efficiently. You can use the cash to pay for inventory, marketing campaigns, or any other costs related to running your business.
If the eCommerce loan is for marketing during a recession, you will hardly deviate from this plan if you're spending responsibly. Even better, you'll be more determined to identify the best way to hit your marketing goal cost-efficiently.
Moreover, you avoid wasting time and resources on managing extra funds that are not necessary for operations. Consequently, this results in improved resource management and cost savings since you can allocate your funds only where they are needed.
Improving Negotiation Skills
Your negotiation skills will also improve when you plan to borrow only what you need and spend it responsibly. You can negotiate the best deals with your suppliers and partners since you know exactly how much money you have. You won’t have to worry about finding extra funding to cover costs that come up unexpectedly, so you can focus on getting the best terms for any deal.
These negotiations become easier by maintaining a good relationship with vendors and service providers to earn their trust in borrowing. This will also help you access improved payment terms, discounts for bulk purchases, better shipping rates, and other advantages that come with using the same vendors.
Accelerating Wealth Creation
Financial discipline and smart spending will help you achieve your wealth goals faster. You'll be able to identify the best investments suitable for your business and allocate funds only to those areas.
When you're borrowing responsibly, you won't have debt looming over your head and hindering growth. With a clear path to success, you can bring down the costs of operations and increase your chances of making profits.
Tips to Ensure You Borrow and Spend Responsibly
Borrowing and spending responsibly is easier done than said. After all, when in an eCommerce business, it's easy to be carried away by the "keeping up with the Joneses" attitude and take on more debt than you can handle. You could be tempted to introduce new products just because your competitors have them, even if it doesn't make sense from a business perspective.
To ensure you borrow and spend responsibly, here are some tips:
Borrow only when necessary: Before taking any loan, it's essential to ask yourself if you really need the money. Do you have the sufficient cash flow to cover your everyday operations?
Is there a longer-term goal that you are trying to meet? Answering these questions beforehand will help you decide if a loan is vital.
Invest in research and data: Before spending money on something, you must ensure it is worth it. Investing in market research and data gathering can help determine if a particular strategy is viable.
Set clear goals: You should know exactly what you're borrowing for and set measurable targets. When you know why you're borrowing an eCommerce business loan, you'll be able to structure your spending accordingly. You will avoid falling prey to unnecessary expenses.
Develop a budget: Once you’ve determined your target, you can create a budget and stick to it. This way, you won’t be overspending on your Shopify; store or Amazon store operations and will stay within the limits of what is necessary for running your business.
Track progress: Progress tracking also helps ensure responsible borrowing and spending. You'll be able to check where your money is going and whether it's helping you reach your goals. Tracking will help you make informed decisions about investing or cutting back in certain areas to get the maximum benefit from every dollar spent.
Get advice from experts: There's no shame in asking for help when borrowing or spending. Seek guidance from financial advisors or venture capitalists who have experience dealing with similar situations and get expert opinions on the best way to borrow, spend, and manage funds. They will provide valuable insights to help you make more informed decisions and reduce risk.
Onramp Funding Will Keep Your Business Afloat
Borrowing and spending responsibly is essential for eCommerce businesses, especially during an economic downturn. When you are using borrowed funds or your own money, you should try to conserve your cash. The goal is to ensure you have a reserve to help your business grow even with strained cash flow.
Do you need an eCommerce loan to power your business through the recession? Onramp will provide the cash solutions you need to fulfill your business needs. We provide loans for Shopify; stores, loans for Amazon stores, and several other platforms.
Schedule a call today and see how Onramp can help you grow your business during these uncertain times.
