Avoid Equity Dilution: Smarter Solutions for Funding Inventory and Marketing

Raising investment capital is a remarkable achievement for any eCommerce entrepreneur. With increased funds and seasoned investors backing you, the potential for growth is substantial. However, a critical challenge when raising equity investment is ensuring that the funds are allocated effectively within your business. Using equity funding to address working capital needs is not the optimal strategy. Here’s why.

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Equity Funding for Inventory Dilutes Ownership for Short-term Gains

Equity financing involves raising capital by selling ownership stakes in your company. This approach is designed to support the long-term future of your business. The funds from equity financing should be invested in areas that will drive sustainable growth.

When eCommerce companies use their equity to fund working capital needs, such as inventory, they miss out on opportunities for long-term growth. This practice quickly dilutes ownership, and the short-term gains from product sales aren’t enough to justify the long-term costs.

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The Mismatch Between Equity Financing and Working Capital

Equity investments are intended to help you make strategic, long-term decisions for your company's health. They are not meant to focus solely on immediate profits or short-term customer satisfaction. Instead, they should be directed towards secure, long-term investments that will help you outperform your competition in the future.

In contrast, spending on inventory and marketing is aimed at generating immediate returns. Investing in these areas today is intended to yield results tomorrow, not years down the line. For instance, placing a purchase order (PO) may provide enough stock to meet demand for several months, but the cash will soon run out, especially with rising costs like the 89% increase in Asia-U.S. shipping rates since 2022 (source). You'll soon need to raise more capital.

If you continually sell ownership shares and use that cash for working capital, you limit your future growth potential. Repeating this cycle too often can deplete your shares, resulting in a loss of controlling interest. Ultimately, your company's future will no longer be under your control.

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Pairing Short-term Working Capital Solutions with Equity Funding

Working capital financing solutions are designed to efficiently fund aspects of your business like marketing and inventory, where gains are realised quickly. Unlike equity financing, working capital financing is non-dilutive. You don't need to give up ownership shares to secure it, allowing you to retain control of your company while accessing immediate capital.

When placing a PO for raw materials and products, explore flexible working capital solutions like revenue-based financing that are tailored to your company's specific working capital cycle. This approach helps manage long lead times, high shipping costs, strict supplier payment terms, and other inventory challenges.

For example, if you need to place a £150,000 PO for inventory with a four-month lead time and your supplier requires upfront payment, a working capital solution can finance the purchase order. This enables you to get your inventory shipped and repay the financing as you sell your product.

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Deploying Equity and Working Capital Financing in Tandem

Using equity and working capital financing together extends your runway for making secure, long-term decisions. Working capital covers your immediate overheads, giving you more time before you need to raise another round of equity.

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Combining Equity Funding with Working Capital Finance

Effectively integrating equity funding with working capital finance enables businesses to address both immediate operational needs and long-term growth strategies.

Equity funding should be allocated to long-term investments such as product development, market expansion, and technology upgrades. These investments drive sustainable growth and build a strong foundation for future success.

Working capital finance, on the other hand, is suited for day-to-day financial needs like inventory management, marketing campaigns, and operational expenses. Non-dilutive options like revenue-based financing provide the flexibility to repay as you earn, aligning repayment with your cash flow.

By combining these funding types, businesses can maintain liquidity, reduce equity dilution, and ensure financial stability. For instance, use equity funding to develop a new product line while leveraging working capital finance for inventory and marketing. This approach ensures innovation and growth without compromising daily operations.

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"Invest equity into sustainable future growth, not short-term inventory and marketing. This strategy ensures your business thrives in the long run without diluting your ownership."

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Invest Equity into Long-term Revenue Growth

To maximise the value from your company’s equity round, invest that funding into sustainable future growth. Long-term growth doesn’t mean selling your current stock. Instead, allocate equity to initiatives like launching new product lines in two years or expanding into new markets.

Key Areas for High ROI from Equity Spend:

• Hiring: Use equity financing to recruit key personnel or build new departments. Although the returns may not be immediate, building a strong team will benefit your company in the long run.
• Research and Development (R&D): Invest in R&D to develop new product features and gain a competitive market edge. For example, Apple spent several years developing the latest iPhone models. Your equity can fund similar initiatives that position you as a market leader.

Choose Revenue-based Financing to Grow Faster

Working capital financing helps break the inefficient cycle of burning equity and diluting ownership. Revenue-based financing, in particular, offers flexibility, speed, and efficiency. It provides upfront funding for inventory and marketing, enabling you to make sound long-term decisions with your equity. You repay based on a percentage of your sales, reducing strain during slower business periods and accelerating growth.

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CapRelease helps eCommerce businesses grow through flexible funding options and a deep understanding of your unique challenges and goals. Our revenue-based financing options provide eCommerce founders with direct insights into their business, helping them make better decisions to enhance growth and profitability.

Apply now for the funding you need to optimise your working capital cycle with CapRelease. It takes just minutes to apply and days to get funding tailored to your company’s needs.

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