In recent years, there has been a significant shift in how businesses reach customers. For a long time, manufacturers have largely relied on middlemen to get their products to consumers. However, today they can market their products online and set up distribution channels to deliver products directly to consumers. Footwear, fashion, beauty, food and home goods industries are all shifting towards DTC business model as a means of reaching their customers and establishing relationships directly.
As more consumers turn to direct-to-consumer brands, it’s more important than ever to tighten up your operations and look for ways to grow more.
The primary challenge businesses face when launching or running their own brand is funding. High-growth DTC brands have a few options to better finance their everyday operations.
Personal Saving is still the number one method of financing at early-stages. It’s common for startups to tap into their personal (or a family member’s) savings to get the cash they need. While it can be a daunting task, however, the capital required for starting a DTC brand tends to be small. It is better to source a small amount of inventory at slightly higher cost, launch in eCommerce marketplaces and test for the demand without incurring too much of cost upfront. Once there is traction in the market, then you can probably take a low-interest loan from friends and family to scale. The old startup tradition says that your first equity round is to ‘friends and family’. It is better to have a low-interest loan from a close friend or relative than to use all your personal savings.
One of the quickest ways to access funds is credit cards. Most businesses turn to credit cards to pay for general expenses and some inventory purchases. A business credit card though might only get you so far. You can quickly outgrow your credit limit, especially with how often you need to buy inventory. This can lead to maxed out cards, which can still put a strain on purchasing along with your personal and/or business credit.
Working Capital loans
Getting bank loans for early-stage businesses is difficult. Most startups either do not have a long history of revenue or collateral to guarantee for the loans. Startups founders also may not have a credit history which makes it difficult for banks to qualify them. This is where new age lending companies like LendingCart.com ,and UdaanCapital.com are filling in the gap in India. Businesses can get as much as INR 10 lakh loans within minutes and without significant collateral. By using these platforms and building a good repayment history, the DTC companies can build their book and qualify for larger loans with banks at an attractive rate.
Most banks see early-stage businesses as too risky to lend. So if you’re scaling your DTC brand, traditional financing may not be an option.
However, once you have some credit history built up with tax and transaction records, Banks have loans for MSME/ SMB businesses. For e.g. SBI in India, offers business loans at an excellent rate with and without collaterals.
There are also many government schemes for supporting Small businesses. SBA loans are widely used in the US. In Europe, you have European Union funding grants and loans. Both are designed to support small and startup businesses, with friendly conditions and relatively low interest rates. The process of applying and getting one of these loans, however, is incredibly time-consuming. A large amount of paperwork is required, including business plans, revenue forecasts, and feasibility studies.
Venture capital is the most obvious choice for funding a new, small-scale DTC brand. VC funding lets you scale, develop more or better products, increase production, etc. Plus, they usually help with expertise. The main focus of the funding is to finance inventory and influence consumer trends in newer ways. The funding provided is more than enough to cover operational costs as well as production and marketing. Venture Capital firms invest in DTC brands and help establish their digital business. Other Venture Capital firms that invest in DTC brands are Forerunner Ventures, Collaborative Fund, Obvious Ventures, 3one4 Capital, Chiratae Ventures, Accel Partners, DSG Partners.
Of late though, the VC and DTC picture-perfect relationship is starting to erode. Look no further than the underwhelming exits of Casper and Outdoor Voices. VC’s are realizing that sole focus on scale doesn’t turn every brand into a long-term success. In fact, VCs may cause some brands to grow but DTC brands are rethinking their fundraising approach.
Revenue Based Funding
As venture capital funding dries up due to Covid, many startups have found themselves looking for alternative financing opportunities that don’t involve raising equity. Revenue-based funding (RBF) is relatively new but is getting popular among new startups and DTC brands, a type of revenue or profit-share investment structure that gained attraction in the last several years.
Unlike equity financing, revenue-based financing is a sum that’s repaid over time based on incoming revenue. Founders receive money from an investor to spend on marketing or inventory, and with every sale they make, they repay a percentage of that loan. There are several platforms that provide this kind of funding. Shopify provides tailored offers to its merchants via Shopify Capital. Here are a few more RBF leading firms: Clearbanc, Decathlon Capital, Kapitus, Bigfoot Capital, GetVantage.
Crowdfunding is a way of raising funds for a project or a business venture from several people who contribute small amounts of money.
This is an easy way for startups or brands to build the financial backing needed to start generating revenue for their business. They are a marketing tool as well as a funding one. Gaining approval from a crowdsourcing platform to start the campaign is also an easy process. But, crowdfunding sites charge considerable fees, between 5 and 10%, and the remainder is technically considered revenue.
With crowdfunding, you are not borrowing a huge amount of money from a single investor. Rather small sums of money from multiple investors, which minimizes the overall risk.
Kickstarter and Indiegogo are no longer only for funding personal projects or raising awareness campaigns. DTC brands find their tribe there.
The DTC landscape is set to explode with 70%+ YoY growth as consumers love getting high quality products at fair prices and interacting with brands directly.
Cash flow is a significant problem for high-growth brands. It’s important to know your finance options to ensure you’re not stuck waiting on funds to move your business forward. Choose the option to finance your DTC brand that best suits your business goals and focus on cash flows to sustainably grow your business.