Like other businesses, many small retail businesses rely on borrowed capital to purchase inventory, buy fixtures, expand, or bridge seasonal cash flow gaps. Financing retail businesses like restaurants, grocers, and other merchants can be challenging depending on the nature of the particular business. For example, some lenders exclude restaurants and other retail establishments deemed as particularly “risky” industries. As a result, merchant cash advance providers have become the default source of capital for many of these business owners.

Fortunately, there are other potentially less expensive options to a merchant cash advance for shopkeepers and restaurant owners with healthy businesses—even for those with a less-than-perfect personal credit profile. Here are four keys to make the most out of the financing options available for retail business owners:

Understand Your Current Credit Profile

Do you know what your business credit profile looks like and your current personal credit score? Blemishes on your credit profile won’t necessarily exclude you from financing for retail businesses, but a weak credit profile will probably limit your options. A healthy retail business with an impeccable credit profile and several years in business will have several options—maybe even at the bank, while a borrower with bad credit and a short track record will have few (if any) choices.

Many business owners find themselves somewhere in-between and will have financing options to choose from. Understanding your current credit position is a good first step when looking for financing. And, if you have a less-than-perfect profile, there are things you can start doing today to help you make improvements.

Loan Purpose Should be in the Front Seat

Once you know where you stand, the next question you should ask yourself is, “What is my loan purpose? Why am I looking for a loan?” Some of the options available today are better suited for particular use case scenarios. Once you’ve determined your loan purpose, it will make the search for financing easier. For example, some common loan purposes might include:

  1. Purchasing inventory: Purchasing inventory is a common use of borrowed capital. This is also a good use for a short-term loan or a line of credit. Depending upon how quickly your inventory turns, it might not make sense to use a long-term loan to pay for inventory over several years that will be sold in a month or two. Of course, the payments on a short-term loan will likely be higher than a long-term loan—but the total amount of interest paid will probably be less. Depending on the loan and your current situation, you can determine which type of loan makes the most sense for purchasing inventory.
  2. Buying fixtures and equipment: Whether you’re purchasing new display counters, a new pizza oven, display racks, or new restaurant booths, depending on the cost and your current situation, you can determine whether a long-term loan or a short-term loan makes the most sense. Buying fixtures and equipment could be a very different loan decision than purchasing inventory and could better match longer-term financing.
  3. A marketing initiative: Some businesses borrow to launch a new marketing initiative. Depending on the expense, the projected ROI, and the nature of the campaign a business owner can choose the best loan term and type of financing. This is another loan purpose that could be a good use of a line of credit or short-term loan.
  4. Expansion project: It’s not uncommon for a restaurant or a retail merchant to need extra capital to either expand or add an additional location. This is another potential use case for a longer-term loan, but a short-term loan isn’t out of the question either. Many restaurants, for example, that are contemplating the addition of an outdoor dining area often leverage short-term financing or a line of credit to pay for that type of project. The nature of the project, the expense, existing cash flows, and the long-term value of the project will help you determine the best type of financing to meet your expansion needs.
  5. A cash flow need to bridge a slow season: Many business owners will borrow to pay business expenses over a seasonal slump or to overcome some other short-term cash flow hiccup. A line of credit is typically well suited for this type of business need, while a short-term loan may also be a good option. This strategy only works if the business has enough cash flow to make the periodic payments during the slow season.

Loan purpose will help you determine the type of financing for retail businesses you should be looking for. It will also help you determine how much borrowed capital you actually need.

Identify How Much Money You Really Need

There are always costs associated with borrowing. Your loan purpose will help you determine how much capital you really need to borrow. And, knowing what you need also gives you credibility with your lender. No lender really wants to hear, “As much as I can get,” when they ask about the amount of capital you’re looking for.

A wise borrower’s requested loan amount matches his or her loan purpose. For example, if adding an outdoor eating area is going to cost $10,000 to build out, the business owner probably shouldn’t ask for $20,000 or more. They understand the increased expense associated with borrowing more than what they really need could burden their business with too much debt and negatively impact the ROI of the project—regardless of their particular lender.

Determine a Plan Should Something Not Go as Planned

Retail businesses often borrow money to increase revenues regardless of whether they are purchasing inventory or funding an expansion project. If things don’t work out as planned, your lender will want to know that you will still able to make the periodic loan payments. What’s more, knowing that will also give you peace of mind.

Make Sure You Understand All the Loan Terms

In addition to the interest rate, make sure you understand the total cost of capital (including any fees), the frequency of the periodic payments, and the payment amount. Many lenders, including online lenders, are going to more-frequent-than-monthly periodic payments so in addition to the traditional monthly payment schedule, a loan could include weekly or daily payments (usually auto-debited from your business bank account). You should also make sure you understand when your first payment will be due. For example, if you have a weekly or daily payment frequency, don’t assume your first payment will be next month—it will likely be the next business day (if a daily debit) or the following week (if payments are made weekly).

OnDeck is a Good Fit for Financing Retail Businesses

Financing can be a valuable tool to help retail merchants’ fuel growth, fund expansion, or meet everyday expenses. The key to maximizing the value of borrowed capital is understanding your current credit situation, identifying a specific loan purpose, knowing how much capital you need, understanding the potential ROI, and having a plan should something go wrong.

Many lenders shy away from financing retail businesses like restaurants. An OnDeck business loan or line of credit could be a great fit for your business. Click HERE if you’d like to learn more about a business loan from OnDeck.

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