Can Inventory Protection Save Holiday eCommerce Margins?

For many retailers, especially those focused on eCommerce, the next several weeks are crucial. The holiday shopping season, stretching from Black Friday and beyond, can account for a significant amount — even a majority — of an eCommerce firm’s top line.

Increasingly, it looks like a bumpy holiday season for firms with supply chains that include Chinese vendors. That’s because the ongoing uncertainty over tariffs between the U.S. and China adds both cost and complexity to operations, boosting the prices paid for inventory and denting margins.

Clearbanc, which provides growth capital for online brands, said on Wednesday (Nov. 13) that it has launched its Inventory Protection Program to help U.S. firms navigate the uncertainties tied to the U.S./China trade dispute. The company noted that, during the fourth quarter, shoppers will spend as much as $136 billion (up an estimated 13 percent year on year), with 50 percent coming over the Black Friday/Cyber Monday weekend.

In an interview with PYMNTS, Michele Romanow, co-founder and president of Clearbanc, said that many of the online brands in Clearbanc’s portfolio of small businesses rely on Chinese suppliers, and stock up on inventory ahead of anticipated demand. U.S.-based firms strive to ensure that they have inventory on hand ahead of Black Friday and Christmas.

She noted that one of the most difficult challenges of running an eCommerce company is that these founders must buy inventory, and assume the risks tied to that inventory before it is sold. Many Chinese suppliers, she added, are demanding 100 percent upfront payments for that inventory, when terms had once been more favorable for U.S. firms, requiring 20 percent of the cost paid upfront and the remainder on delivery.

“The reality is that many small business owners are feeling the pinch of this already,” Romanow told PYMNTS, noting that the demands by vendors for upfront payments translate into significant capital costs.

The uncertainty continues. In what is an increasingly fluid trade situation stretching back to July of last year, another round of tariffs on more than $150 billion of Chinese imports may take effect in mid-December, amounting to an import tax of about 15 percent. That deadline looms, even as the Trump administration has said it might roll back some of the tariffs already in place.

The December tariffs, should they materialize, would impact cell phones, laptops, toys and clothing — in other words, staples of the holiday season.

 

Inventory Protection

In terms of the mechanics of the Inventory Protection Program, founders at the helm of these eCommerce firms can receive funding from between $10,000 and $10 million, without giving up equity in their respective companies, to acquire inventory from Chinese markets. The firms then pay Clearbanc a portion of their revenues each month until the funding is paid back, with the addition of a charge, typically between 6 percent and 12 percent.

The monthly revenue is paid net of any tariff charges. At the end of the year, according to Clearbanc, each firm receives a check for the total amount paid in tariffs during the year.

The end result is that companies can still source their products from current supply chains without sacrificing margins.

Romanow told PYMNTS that the inventory-focused solution — which should not be thought of as loan, but rather a revenue-sharing agreement/investment — is rooted in Clearbanc’s 20-Min Term Sheet offering. Through that product, Clearbanc invests between $10,000 and $10 million in eCommerce firms, using algorithms to analyze data, such as revenue and inventory levels, and decide how much capital to advance.

The data collected from more than 2,000 online firms — spanning more than $1 billion of eCommerce spend — is more predictive than other underwriting models, which have traditionally relied on founders’ FICO scores.

She said that under the inventory protection solution, payments to Clearbanc come on either a daily or weekly basis, depending on the customer.

“There is no compounding interest, there are no personal guarantees required of the founder” and there is no dilution of founders’ equity as the capital is extended, Romanow told PYMNTS.

When asked about a possible near-term roadmap, she said Clearbanc will look at the data after the holiday season to see where it might extend the inventory protection solution.