Financing Options for Your Retail Business

March 30, 2020
Posted in: Uncategorized

Table of Contents

 

The retail industry is a large and diverse trade sector that encompasses a variety of business types. According to the U.S. Census Bureau, car dealers, boat dealers, automotive parts and accessory stores, furniture stores, electronics and appliance stores, hardware stores, outdoor power equipment stores, and so many more store types are included in the retail industry.  Any business that sells finished goods and/or services to consumers falls under the retail business industry.

For years, the retail industry was mostly comprised of large department stores and chains but with younger consumers now demanding a more inspiring and tailored experience, the attraction to small, local retail businesses has increased.  Consumers are expressing this through social media and word of mouth. The U.S. Department of Commerce has also reported that a steady increase in retail business sales has contributed to an increase in Gross Domestic Product (GDP). 

With the increase in retail business sales, come the focus on growing trends and the need for financing options. Whether you sell jewelry, clothing, office supplies, or electronics, there will be times in the life of your business when you’ll need to access an external funding source.  Just as retail businesses come in a variety of sizes and types, so do the financing options available to retail business owners. 

In this article, we’ll discuss the various financing needs of retail business owners and the most common financing options available to them.  Our aim is to provide you with enough information to find the option that best meets the needs of your business. 

 

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Retail Business Financing Needs

 
As a retail business owner, you could find yourself needing to access funding for any of the following situations:
 

Opening a New Location

When you consider all of the costs and work that go into opening a new retail location, it can be overwhelming. From marketing, hiring and training employees, to furnishing and stocking your new space, you’ll need to invest a considerable amount of capital as well as “sweat equity”.  Whether you’re opening your first physical store or expanding into a new location, financing can provide you with the money you need to accomplish your business goals.
 

Purchasing Inventory 

According to the U.S. Small Business Administration (SBA), inventory is one of the most important aspects of any retail business – especially since it usually represents a retail business owner’s most significant current asset. Inventory is the lifeblood of any retail business. Buying inventory in bulk can save you money since the items can be purchased at a discounted price. Even if you have a sizable business bank account, paying for inventory or store equipment upfront can put a strain on your cash flow. 

You’ll want to stock up on inventory ahead of holiday shopping or a seasonal sale. Small business loans can help you cover your supply needs and provide the flexibility you need to keep up with consumer demand. You normally wouldn’t see the return on the purchase of inventory for a few months so a loan, or another type of financing, can bridge the gap between the inventory purchase and the associated revenue.

In addition to making sure you have enough of the right type of inventory, you must make sure you’re on top of inventory management and inventory control. Advances in technology have thankfully made these functions much easier and the purchase of inventory management systems has resulted in reductions in missing inventory and inventory-purchasing errors.
 

Purchasing Equipment

Depending on the type of retail business you operate, the equipment you need to run that type of retail business will differ from that of other retail businesses. For example, an auto repair business won’t need the same type of equipment as a bakery. However, regardless of the retail business niche, all retail businesses need to invest in more technologically advanced equipment. If you own a clothing store, for instance, there are numerous state-of-the-art security systems that will reduce theft issues. By obtaining equipment financing you could also use the funds to outfit the owner’s office or the employee break room. The funds could also be used to expand your product-based retail business into offering complementary services. There’s so much you could do with equipment financing. 

While a loan can provide you with financing to purchase the equipment outright, you may not want to be stuck with equipment that will be outdated in a couple of years. If your retail business needs new state-of-the-art equipment immediately, equipment leasing is another option to consider. Leasing will allow you to get the equipment you need for your business without the long-term commitment. This is another way to obtain equipment without having to pay full, upfront costs. 
 

Technology

Pretty much every industry in the world today is benefitting from technological advances and that includes the retail business industry. If you want to stay on top of the major technological implementations for retail business owners, here are some of the systems you should be investing in: 

     

  • Point of Sale Systems (POS):  Many advanced POS systems today provide retail business owners with the ability to efficiently collect payment from customers, track inventory, and notify the owner when a popular item needs to be reordered.  These systems can also be accessed via tablets, making it possible for cashiers to be mobile and ring customers out when there are extremely long lines. A POS system not only helps a retail business run more smoothly; it adds to the customer experience. There are systems that also collect real-time inventory and consumer data that can be used in marketing efforts. 
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  • Credit and Debit Card Processing Systems:  Due to the increase in data breaches within the retail industry, many consumers now carry credit and debit cards that contain a “chip”. To keep up with this trend, you need to implement a credit and debit card processing system that can effectively process these secure payments. This will increase customers’ confidence in your retail business. If you’re not able to do this, you’ll lose out on a lot of business because many consumers don’t carry cash and prefer to pay by credit or debit card. These processing systems can come with a hefty price tag, so consider financing to help cover the cost.
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  • Consumer Data:  There are a number of ways for brick and mortar (and of course online) retail stores to track consumer data such as consumer purchases and preferences. Your retail business can benefit from a system that allows you to track customer needs and wants digitally. The way in which the data is collected will vary from business to business, but it usually involves using data from credit card purchases or from consumers who use the retail business’ mobile app while in the store to see where they tend to hover.  
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  • Ecommerce:  Whether it’s for convenience or to get bargains, more and more retail shoppers are choosing to buy products online. To be ready for them, you need to invest in a user-friendly website that works in tandem with your brick and mortar retail storefront. A fully-functioning, professional website can cost in the thousands of dollars. 
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  • Online and Omnichannel Presence:  In addition to implementing a professional website, many retail businesses are realizing increased profits by creating mobile websites, retail mobile apps, and establishing an active social media presence. This affords businesses an opportunity to reach a large number of consumers while building a personal connection with their customers and potential customers. Investing in the growth of your online and omnichannel presence will yield long-term benefits.

 

Working Capital

As you work to grow your retail business, you will be faced with a number of costs. Your operational costs will include everything from payroll, to utilities, to advertising. Financing can help should you find yourself short of the cash needed to cover these expenses. 

 

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Hiring New Employees

In addition to inventory, payroll costs are another vital aspect of any retail business. You can’t successfully run a physical retail storefront without employees. Without employees available to provide excellent customer service while ringing up purchases, your retail business will cease to exist. While it’s common for customers to have performed a considerable amount of online research before visiting your brick and mortar store, employees still have a role to play. Retail employees can add to your business’ profits by upselling and providing customers with a stellar consumer experience. There are financing options available to retail business owners who need help to cover staff payroll costs. The ace sales staff you’re able to hire can help you generate the revenue needed to repay what you borrow.
 

Pop-Up Storefronts

Pop-up shops are a new growing trend in the retail business industry. Many retail business owners are using clever websites to connect with their consumer base in new and exciting ways. They’re also using this method to sell more offline, build brand awareness, and test new products.  Pop-up shops offer a less expensive alternative to renting for some retail business owners. If this trend appeals to you, consider some of the financing options below to fund a test run of a pop-up storefront. You’ll be in good company with popular brands like Target.
 

Seasonal Peaks

Most businesses have seasonal highs and lows. For a retail business, the highs are typically around popular holidays. Before your busy season is in full swing, there will be things you’ll need to invest in to prepare your business for the rush.  A small business loan could give you the funds needed to sail through the season without missing a beat. Here are a few things you might spend it on:

  • Extra staff:  If you anticipate needing to hire more employees during your busy season and can’t afford to do so, a small business loan could come in handy.
  • More inventory:  If there’s a trendy item that you expect to sell like hotcakes, you definitely want to make sure you have enough inventory to meet the demand. This can be especially important for clothing and electronics retailers after Thanksgiving, or before back to school sales. Home improvement stores may need to stock up ahead of the summer season. To be fully stocked, you may need to seek out a small business loan ahead of your busy season.
  • Equipment:  If you want to upgrade your POS system to one that more effectively processes credit cards and other forms of payment, financing can help. Your new system could minimize the need for cash handling and reduce line delays.

To be prepared for your busy season, planning is essential. Evaluate your retail business’ anticipated needs and your available resources to determine if you’ll need financing to get through the season. 
 

Miscellaneous Needs

As a retail business owner, there may be other opportunities that you want to take advantage of. Maybe you’ve considered establishing an online version of your physical store or you want to launch a robust marketing campaign. Financing can help with any of these.  

 

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Types of Financing

 
Most retail business owners in need of financing would prefer a conventional bank loan because they’re the most sound funding option available to most small businesses. However, traditional bank loans have requirements that make it difficult for some small businesses to qualify and the application process can take weeks or even months. If you have the patience and you’re able to qualify, it will be worth the wait. 

If you need immediate funding or don’t qualify for a conventional bank loan, there are many options available to you. In the “financing marketplace”, you’ll find everything from secured lines of credit to merchant cash advances. 

When it comes to business financing, there are two categories that all financing falls under:  (1) debt financing; and (2) equity financing. Before you seek funding to grow your business, you need to know which of the two financing types will work best for your business and the pros and cons of each. 

 

Debt Financing

 
Debt financing involves borrowing a fixed sum from a lender which is typically paid back with interest. 
 

Types of Debt Financing

Debt financing comes in many forms and is available from a variety of lenders.

     

  • Term loans:  A term loan is a lump sum you borrow from a bank or alternative lender. You receive the funds upfront then repay it along with interest in fixed amounts over a set period of time (term). Many borrowers favor term loans because of their flexibility, low interest rates, predictable repayment schedule, and fast approval process. Term loans vary in amount and repayment periods can range from months to years.  

 
Ideal for:  Established businesses, businesses making long-term investments for growth, and businesses seeking a predictable repayment schedule 

     

  • Secured lines of credit:  A secured line of credit is a revolving credit line that can be secured with a variety of collateral options including real estate. The funds can be used to purchase inventory, equipment, or to cover day-to-day operating expenses. Lines of credit are available from banks or other financial institutions. Although it may be harder to acquire this type of financing, it typically has lower interest rates which you only pay on the amount of the credit line you actually used. You’re able to borrow only what you need within any given period. 

 
Ideal for:  Newer businesses lacking a financial history or a proven track record, businesses rebuilding their credit, and businesses wanting to supplement cash flow

     

  • Credit cards: With credit cards, business owners can access a limited line of credit and repay the balance with interest after a set grace period has elapsed. Credit cards can be obtained from banks, credit unions, savings and loans, and other financial institutions.

 
Ideal for:  Businesses that don’t require large loans and business owners who want to earn rewards on their purchases

     

  • Merchant cash advance:  One of the fastest funding options available, a merchant cash advance is a loan product that’s tailored to businesses that receive the bulk of their revenue via credit card transactions. As a business owner, you receive the loan funds upfront. To repay the loan, the lender takes a fixed percentage of your daily credit or debit card sales.

 
Ideal for:  Businesses that have a large number of credit and debit card transactions, businesses with a flawed credit history, and businesses that lack collateral

     

  • Inventory financing:  This type of financing is generally intended for short-term inventory needs. The purchased inventory itself is used as collateral to secure the loan. With this type of loan, a shorter repayment period is assumed. 

 
Ideal for:  Businesses that experience seasonal fluctuations (such as a retail business), businesses that are able to repay a loan quickly, businesses that may not qualify for conventional term loans or other financing 

     

  • Equipment financing:  Similar to inventory financing, the purchased equipment acts as the collateral in an equipment financing arrangement. 

 
Ideal for:  Businesses that want to acquire expensive equipment and businesses that need a longer period of time (5+ years) to repay the loan

     

  • Small Business Administration (SBA) loans:  The SBA is a government agency that offers several types of loans to small business owners and entrepreneurs. The SBA doesn’t directly lend funds but instead acts as the guarantor of last resort for a portion of the loan in the event of borrower default. SBA loans are made through banks, credit unions, and other financial institutions that partner with the SBA. For borrowers that meet the SBA’s stringent qualifications, they offer relatively generous borrowing limits and low interest rates. 

The SBA’s guarantee gives business owners access to funds at lower rates and better terms than they might otherwise be able to obtain. Retail businesses that may have been turned down for a traditional bank loan may now be able to qualify with the SBA’s backing. The two most common SBA loans are the SBA 7(a) and the SBA 504.
 
Ideal for:  Smaller businesses with limited credit histories, businesses that require longer repayment periods, and businesses that don’t have immediate financing needs (the SBA application process can be lengthy) 

 

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Pros & Cons of Debt Financing

 
To determine if debt financing is right for your retail business, consider that there are many small business types that benefit from this form of financing. Businesses in traditional sectors like retail, hospitality, and manufacturing are good candidates for obtaining needed funds through this option.
To qualify for loans and other debt financing options, these companies must often show sufficient operating history with proven profitability. Before seeking debt financing, you need to feel strongly that you’ll be able to generate enough revenue to repay the debt. Lenders will typically require collateral or a personal guarantee, favorable credit scores, a business plan, tax returns, and financial statements.
 

Pros of Debt Financing

 

  • Most business types and sizes in traditional sectors can use this financing option.
  • You get to retain full ownership of your business and don’t have to share profits with investors.
  • You know exactly when and how much you need to repay.
  • There is a range of options to choose from (different loan types, credit cards, lines of credit, etc.).
  • Interest paid on the debt is a deductible expense on your company’s tax return. 
  • Interest rates on loans are usually lower than the rate of return you’d pay with equity financing.

 

Cons of Debt Financing

 

  • Requires repayment of both principal and interest whether business is boom or bust.
  • Debt is an expense and expenses prevent you from reinvesting your revenue in the business.
  • If you default, you could lose the assets (or personal guarantee) you pledged as collateral. 
  • Lenders may limit how you can spend the money or whether you can apply for financing with other lenders. 

  

Equity Financing

  
Unlike the debt financing options above, equity financing is not a loan. It involves the sale of a percentage of your business to an investor in exchange for capital. With this type of financing, you’re not responsible for repaying debt. By providing you with capital, the investor purchases a stake in your company and expects to realize a return on that investment through a percentage of your future profits. 
  

Types of Equity Financing

 
Equity financing is typically obtained from one of three sources:

  • Small investors (friends and family): When small private investors like friends and family members invest in your business, it’s typically on a small scale. In return, they’re given a stake in your business proportionate to the amount of money invested. 
  • Angel investors: Angel investors are also generally private individuals or associations who want to see small businesses succeed and have the net worth and income to help make it happen.  These investors have typically realized success in their own business ventures and want to see their money work for them. It’s not uncommon for angel investors to put 10s to 100s of thousands of dollars into a company. In return, they’ll often want a sizable percent of ownership.

It’s important that the terms of the investment and role of the investor are clear. There should be no confusion about the investor’s role in controlling the company’s growth and direction.  Your agreement should detail how their investment will be used and when they can expect repayment or a return on the investment.

  • Venture capital firms:  Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from wealthy investors, investment banks, and other financial institutions. It can take the form of technical or managerial expertise as well as financial backing. 

Venture capital firms typically invest in businesses that involve more risk than a traditional bank or lender is willing to take on. Because the investments are risky, the firms often charge a higher interest rate to the businesses they are investing in. The businesses might not otherwise receive the needed funding so they’re generally agreeable to the interest rate. 
 
Ideal for:  Equity financing is a viable option for the business owner who is willing to relinquish a portion of his or her company. It’s also an option to consider for fledgling businesses that don’t have sufficient operating history to attain loans with lower interest rates. Businesses with a higher risk of success could also benefit from equity financing.
 

Pros & Cons of Equity Financing

 
Equity financing is often associated with high-risk technology and innovation startups that have the potential for a high return on investment. It’s also great for businesses in very cyclical industries that don’t have a steady cash flow. Venture capitalists, for example, typically seek to invest in companies with ambitious goals like market domination or reaching global markets. All equity financing investors, regardless of type, will carefully evaluate your business plan for a strong management team. They will also look for a proven need for your product or service, a clearly defined pricing and sales strategy, competitive analysis, and sound financial projections.
 

Pros of Equity Financing

  • For a new business without an earnings history, equity financing may be your best if not only option. 
  • Investors take on most of the risk since they only receive their return on investment if the business is successful. 
  • None of your revenue will be allocated to repaying loans if you don’t turn a profit. 

 

Cons of Equity Financing

  • You give up a percentage of your business in order to acquire the financing.
  • If allowed to make key decisions, investors may have control over the growth and direction of your company.
  • Securing an investment and reporting to investors on a regular basis can be time-consuming. This can hinder the successful management of your company.
  • Although investors usually don’t expect a return on their investment for 3-5 years, they often exit after 5-7 years.

 

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Peer-to-Peer Investors

 
Peer-to-peer investing can be considered debt financing in that it involves borrowing funds and paying it back with interest, but its sourcing method is innovative. With peer-to-peer (P2P) investing, borrowers source loans from a third-party company or platform that aggregates funds from groups of investors. These investors are usually other businesses (or successful individuals) that are looking to obtain new revenue streams by investing surplus cash. The third-party P2P company handles the organization of repayment and interest to the investors. The amount of interest to be paid to investors is determined by the amount of risk undertaken.

The P2P company’s main objective is helping the investors achieve good returns on their investments. If an investor sees that a business they invested in doesn’t appear to be on track to achieve the return hoped for, he or she can minimize risk by selling the loan to another investor. 

When considering P2P investors for your retail business, keep in mind that you present an opportunity for experienced investors to diversify their portfolios. To attract P2P investors to your funding request, you need to send a clear message that your business is primed to provide a high return on investment. 

Investors look for the following when deciding whether to invest in a company:

  • Good cash flow
  • Liquidity
  • Clear product analysis
  • Expense control
  • Metrics

Be prepared to prove your success in current business endeavors since P2P investments can be great for funding new projects that promise greater profitability. 

 

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Final Thoughts – Financing Options for Your Retail Business

 
It can take a lot of blood, sweat, and tears to run a successful retail business, but for many retail business owners, it’s a labor of love. Bringing a vision to life, providing a needed product or service, and offering an inspired shopping experience is enough reward to keep many retail business owners motivated during the tough times. Should your tough times be related to cash shortages, there are financing options available to help you keep your business afloat or on track to reach your business goals. Financing can also help you take advantage of opportunities that will take your retail business to the next level. 

Choosing the financing option that best meets your business needs involves carefully assessing those needs and your business goals as well as researching your options.  Will one of the many debt financing options work for you? Do you expect to earn enough revenue to repay the loan principal along with interest? Are you comfortable with the possibility of losing any collateral you may have to put up to secure the loan?

Or, is equity financing a better option for your business? Can you live with giving up a percentage of your business or relinquishing some of your decision-making power? Are you comfortable with the idea of having to regularly report to investors? That could happen with this funding option. Will this cramp your entrepreneurial style? 

Whichever financing option you choose, take the time to gather pertinent documents so that you’re able to present your business in the best light. This could mean the difference between approval and denial of your loan application. Presenting your business as a strong, healthy entity also puts you in a position to negotiate better loan terms and lower interest rates. It can also show investors that your business can offer them a high rate of return on their investment should they decide to work with you.  

 

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