D2C or direct-to-consumer business involves the direct selling of products and services to customers without retail channels. In recent years, technological advancement has helped D2C businesses to grow and succeed significantly. The sector is thriving with a growth rate of 40%.
However, like all businesses, D2C too needs financing to carry out its business operations and fuel its growth. What are the various D2C financing options? Here are your various options, their advantages, and the risks to be considered.
D2C Financing Options
It refers to the process of starting a business from scratch with minimal external investment. It is an attempt to build a company using personal finances and the revenues earned by the business without getting outside capital. Entrepreneurs prefer this at the beginning stage as they do not know how to raise finances, plan business strategies, and promote products.
- Full ownership as there is no external funding
- No obligations and pressure of repayment
- Allows the entrepreneur to focus on the key aspects of the business like production and sales without worrying about external funding
- Full control of the business, strategies, and decision-making.
- The scope for growth is limited
- It may take a longer time to attain business goals
- Personal financial risks are high
- The image of the company may not be high among customers and suppliers.
Venture capital or VC is a type of financing provided by investors to start-up D2C companies that have the potential to grow and succeed in the long term. It is one type of pooled investment fund and is generally provided by financial institutions like Indifi, banks, and private investors. In exchange for the funding, investors usually receive equity ownership of the company. Although it is frequently provided in the early stages of the business, it can be provided in all stages of the evolution and growth of companies. VC need not be always in the form of money. It can be in the form of expert help and advice.
- Venture capital is provided by numerous sources and not a single source. So, the company can enjoy the benefits of substantial funding.
- Virtual capital funding often comes with technical support and other help from experienced entrepreneurs and experts with updated knowledge.
- No repayment is a big plus for VC.
- The scope for quick growth is high.
- Dilution of control and ownership
- High pressure to meet targets
- It can be a distraction and will not allow the entrepreneur to focus on important matters of business
Angel investors are similar to VC but the main difference is that the investors are not financial institutions or banks but individuals. Moreover, the investment they make is a one-time investment. They look for a higher return on money than that of the returns from a stock market investment. Moreover, their interests in the company go beyond the financial return. They show interest in mentoring inexperienced entrepreneurs and guiding them on how to utilize their skills to grow their businesses. Any individual who has money and interest in providing funds to entrepreneurs can be an angel investor and their investment may vary from 5 lakhs to 2 crores or more. They can be family members or friends of the D2C business entrepreneurs or just wealthy individuals or a group of angel investors.
- The risk is lower than taking a business loan
- The experience of angel investors will help the business to grow
- The terms are usually flexible.
- The decision-making process is quick.
- Ownership and control are diluted
- The expectations of angel investors are high and this can be stressful for the D2C business owners.
It is a financing model that provides funding to a company in exchange for a percentage of the company’s revenues. There is no fixed rate of interest on the money lent but the investors get a portion of the sales and revenue of the company. This amount is referred to as the ‘cap’. The amount repaid is also not fixed. It varies depending on the revenue of the company. When the revenue is high, the amount repaid is high and when the revenue is low, the amount repaid is also low. That is why it is called revenue-based financing.
- Flexibility of repayment
- There is no dilution of ownership.
- Support and guidance from investors are beneficial for the growth of the company.
- Long term commitment
- Higher costs when compared to traditional loans
- Information has to be shared with the investors
A Table on Financing Options for D2C
|Control of ownership, no obligations of repayment, flexibility in decision-making
|Limited capital, higher personal risk, risk of slower growth
|Guidance of investors, substantial funding, scope for fast growth
|Dilution of ownership, pressure from investors
|Lower risk, expertise from angel investors, flexible terms
|Dilution of ownership, high expectations from angel investors
|No dilution of ownership, flexible terms, support from investors
|Long-term commitment, higher costs, reporting and sharing information
Securing finances is not easy for D2C companies aiming for full growth. Every option has its advantages and disadvantages. To choose the best option, assess the needs and goals of the company and determine which will work best for you. The right financing can make a huge difference in the growth and success of the company. A good technology platform like Indifi can be of great help to make the right decision and get the right financing.
- When should you choose external financing instead of bootstrapping?
Companies with the potential for rapid growth and manufacturing companies that need heavy infrastructure should choose external financing.
- How do angel investors differ from venture capital investors?
Angel investors are individuals whereas venture capital investors are financial institutions, banks, etc.
- Which companies should go for revenue-based financing?
Start-up companies in the early stages, seasonal businesses, recurring revenue companies, and companies with positive cash flow should consider the option of revenue-based financing.