If you’re looking to start an e-commerce business through Amazon or another online marketplace, you should avoid credit cards until you have predictable orders and cash flow
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Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com. Her book, “The Million-Dollar, One-Person Business,” was released in 2018. She writes “Your Business Credit,” a weekly column about small business and credit, for CreditCards.com.
How should I fund orders for my e-commerce business that I have through Amazon?
Until you have established a sales history and proven your business concept, you should use cash flow to fund future orders and avoid debt that you may not be able to repay.
Dear Your Business Credit,
I started an e-commerce store that sells on Amazon, as well as its own free-standing website, a few months ago. How can I grow it quickly and cost-effectively? Should I use my business credit card to purchase inventory, or is it better to pay for inventory from cash flow? I paid $5,000 for the first batch of inventory with my savings. I’m starting this business on the side and have a salary coming in from my main job. – Jason
Congratulations on starting your store. Running an e-commerce store on a giant platform like Amazon can be a great way to reach a large customer base and scale your business quickly. Most small businesses don’t have the brand recognition to reach a market the size of Amazon’s on their own, especially during the early years.
Use credit cards as a last resort
It’s usually not a good idea to go into debt during the early months you are operating a business, when you are still gathering evidence on whether your business model is working. Most business credit cards require a personal guarantee. That means even if the business ends up closing, you will generally owe whatever you have borrowed on your card.
If you do decide to use a credit card, see if you qualify for a 0 percent APR credit card with zero interest for an introductory period of 12-15 months or more. Continue to make the minimum payments to preserve your credit score and plan ahead to be able to pay off the full balance before the 0 percent offer expires. A card with zero interest for an introductory period should be a last resort, though, because at this early stage you can’t predict your cash flow a year from now.
Offload time-consuming tasks
To grow your business quickly and get to the point at which you have a more predictable cash flow, you will need to focus on high-value activities that help you scale up, such as marketing, and minimize the time you spend on more menial tasks, such as shipping your products.
For Amazon stores that opt to buy their own inventory, using Fulfillment by Amazon can help you make the most of your time. You have to send your products to Amazon’s warehouses, packed up and ready for Amazon to ship to your customers, and Amazon sends the orders to customers.
When I have interviewed Amazon sellers who use it, they have told me the cost is just slightly higher than it would be to handle the shipping themselves and that the service saves them considerable time.
Tip: Using the Fulfillment by Amazon service can save you time, and it costs only slightly more than shipping products yourself.
Ways to extend your cash flow
In your situation, I’d also suggest looking into drop shipping to extend your cash flow.
Drop shippers keep merchandise in their warehouses and send it to your customers for you, in exchange for a fee, eliminating the need for you to own inventory and do the work of packing it up and sending it to customers.
One way you can work with drop shippers is by prepaying for orders. If an order comes in through your website, you pay the drop shipper and the drop shipper sends it out to your customers. You can do this quickly by using your credit card, debit card, PayPal account and sometimes other methods to pay the drop shipper.
If you use a credit card, pay down the balance quickly. It will help you build good business credit.
To find a legitimate drop shipper in your industry, attend a trade show or ask your manufacturer for a list of distributors, and ask the distributors if they drop ship.
It’s possible to grow a very successful e-commerce business on a shoestring. I’ve reported on a number of Amazon sellers who got to $1 million in revenue in profitable businesses with no employees in my book “The Million-Dollar, One-Person Business” and other news pieces.
But to succeed with Amazon, you have to nail the financial aspects. Asking questions like yours is the first step.
See related: 7 things to know about business credit cards