Nowhere else in the last few years has there been as unexpected and unprecedented growth as there has been in the e-commerce industry, which was significantly influenced by the COVID-19 crisis. Consumer behaviour has changed due to the pandemic, lockdown measures, and uncertain economic times, driving more people to shop online rather than in person.
As more people lost trust in traditional commerce, they became more attracted to the convenience of online shopping. In economies where e-commerce already plays a significant role, the share of online spending increased more between January 2018 and September 2021, according to a study by the International Monetary Fund. The pandemic accelerated the shift away from physical stores to online shopping by up to five years, according to IBM’s US Retail Index.
A Visa study found that 31 per cent of Singaporeans made their first-ever online purchases during the pandemic, purchasing items from websites or mobile applications. 52 per cent of those surveyed said they shop less frequently in physical stores, compared to 74 per cent of Singaporean consumers who shop more frequently online.
However, the effects are reversing as the world gradually recovers from the pandemic’s aftermath, despite predictions that the digital and e-commerce industries will continue to grow quickly.
Challenges affecting the growth of the e-commerce industry
As we gradually leave behind lockdowns and other restrictions, the transition from the digital economy to a more mature e-commerce landscape will begin. Retailers should be cautious and watch what they expect as more and more shoppers are turning away from online shopping and returning to traditional commerce.
While retailers can expect growth in sales, they should watch for overgrowth, as well as overestimation. Some companies, like Shopify, over-delivered on the anticipated growth in e-commerce, causing the company to have too many employees.
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Fast-paced industries like e-commerce are fuelled by advertising and marketing efforts, which require significant capital for larger businesses. The fast-paced nature of these industries also demands constant vigilance from retailers, as digital marketing is becoming more competitive than ever.
In 2021, the e-commerce industry was predicted to account for 21 per cent of global retail sales by the end of this year, a small increase of about 10 per cent from five years ago.
Access to funding to maintain growth momentum in a fiercely competitive market or enter a new market is the biggest pain point for businesses. In fact, according to CBInsights, running out of funds accounts for 38 per cent of startup failures.
E-commerce businesses will probably need to access additional funding as a result of the global slowdown in the industry to expand or, in some cases, maintain their current level of revenue. But for many businesses, this is where the issue lies.
The gradual decline of traditional funding
Traditional funding methods are the most common way for businesses to raise money; in fact, this practice has become standard in the business world. Various traditional funding options exist, including bank loans, venture capital, and angel investors.
Of the numerous traditional funding options, bank loans are probably the most preferred because they enable borrowers to raise capital at typically low-interest rates without giving up company ownership.
However, getting a bank loan is more difficult than one might imagine. Banks and other financial institutions typically analyse the borrower’s risk before approving a loan. The amount of the loan itself varies based on factors such as how much income a business generates, its record of profitable operations, the level of risk involved in its operations, and its capacity to repay debt.
In other words, a business is more likely to receive a loan if its asset value is higher. This is done primarily to safeguard the banks so that, in the event of a default, the bank can recoup its losses by selling the borrower’s assets.
However, the biggest flaw is that these digital businesses, like e-commerce businesses, typically don’t have many assets. The risk and return of these high-volume businesses, which may have high revenues but low-profit margins, are difficult for banks to assess.
In addition to not having eligible assets to pledge as collateral for loans, bank loans are usually time-consuming to apply for, and loan repayments in fixed instalments can put pressure on their companies’ cash flow, both of which are things businesses will want to avoid during this time of financial uncertainty.
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Bank loans can provide businesses with considerable amounts of capital at low-interest rates without the need to sell ownership, but because of rigid repayment terms, they aren’t as accessible to every business. This suggests that acquiring funding will become a bigger challenge for e-commerce businesses because these businesses are labelled as high-risk.
A fresh approach
Running a business has become a little bit simpler thanks to the development of new technologies over the past few years. The advancements in financial technology have made it possible for businesses to expand beyond the limits imposed by traditional funding methods, changing the way business is conducted and attracting a new breed of investors.
Alternative revenue-based finance companies, such as Jenfi, are now better positioned to meet the funding needs of these companies. They assess risk for digital businesses and also control how their funding is used.
This ensures the entire amount can only be used for growth on digital platforms such as Google, Facebook, Instagram, LinkedIn, and other digital platforms. By doing so, there is a controlled use of funds and the ability to funnel the funds into growth solutions.
Companies who choose alternative revenue-based solutions such as Jenfi benefit from more flexible target repayment plans than fixed instalment repayment plans. Jenfi’s application procedure is entirely online, and companies have secured funding in as little as 24 hours in rare circumstances. This type of alternative funding is far better than traditional financing, which might take months.
Charting the future for the e-commerce industry
By 2025, it was predicted that the e-commerce industry would expand at a rate of 16.23 per cent, with a market value of US$11.45 billion. While it’s clear that e-commerce businesses are prepared for future growth, it will come with its own set of challenges. As the industry experiences a global slowdown, traditional funding methods are inadequate to support the expansion of e-commerce businesses.
To tackle the challenges that lie ahead, companies in the e-commerce industry should begin utilising alternative modes of funding to optimise their growth. Alternative funding can play a significant role in the growth of the e-commerce industry. It could give these businesses the tools they need to deal with the challenging effects of a slowing global economy.
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