Because retailers are usually thinking at least six months in advance, you’re probably in the thick of holiday shopping preparation right now—this is especially true if your competitors (and maybe even you) are ramping up for a Holiday promotion in September. In my business, my partner and I started making holiday purchasing decisions as soon as the summer season was over. Our business would typically see a surge that started in late September and carried us through the end of the year; so we didn’t want to get caught flat-footed without the right inventory once Thanksgiving hit and things really got crazy.
Purchasing inventory for the busy season or otherwise fueling seasonal holiday growth may require capital that might not be available from cash flow, which is why many retailers borrow to fuel their holiday business. If this is you, it’s important to evaluate your loan options so you can make the best choice for your business?
Look Into Your Crystal Ball
I know you don’t really have a crystal ball, but it is time to make some educated guesses about the capital you’ll need to have a good holiday season. We used to look at the year-over-year monthly numbers leading up to and following that busy season to see if there were any trends to help us make predictions about the coming season. We didn’t want to run short of the inventory we needed to do business, but neither did we want to have too much left on the shelves as the holiday business turned into our mid-winter slump, so we considered this is an important step to ramping up for the holidays.
You’ll also find that lenders appreciate a borrower who knows what they are looking for and what they plan to do with it. When your lender asks, “How much capital are you looking for?” and your answer is, “How much can I get?” not only is that the wrong answer, it may throw up a red flag or two making it more difficult for you to qualify for a loan. My suggestion is to borrow only what’s required to meet the need and no more. There are costs associated with borrowing that add up quickly and can negatively impact profitability if you borrow more than you really need.
Look in the Mirror
In other words, do you know what your credit profile looks like? Depending upon your personal credit score and your business credit profile, you could have fewer, or maybe more, options. For example, your local bank will want to see a business owner’s personal credit score in the 700s (although they will sometimes go as low as 680 for an otherwise very creditworthy business), the SBA will sometimes approve a business owner with a personal credit score of 650 or better, and many online lenders will work with a healthy business even if the business owner’s personal score goes a little lower than that.
The more you understand your credit profile, the easier it will be to determine where you’ll have the greatest odds of success and the more options you’ll have to help you pick the loan terms that make the most sense for your particular use case. In other words, in the same way most of us wouldn’t purchase a car with a 30-year auto loan, purchasing quick-turnaround inventory for the holidays might require a different type of financing than what you would use to purchase a new warehouse or finance the opening of a new retail location.
With that in mind, if you weren’t currently doing a regular review of your profile, I’d recommend you start doing so now. A monthly review isn’t too frequent.
Get Your Ducks in a Row
Once you’ve determined how much you need, where you’re likely to find success, and what looks like the best financing solution for your use case, you’ll likely save some time if you have the information you’ll need to apply at your fingertips.
Although most small business owners don’t take the entrepreneurial plunge because they’re business finance experts or particularly excited about the accounting process, there are a handful of metrics every business owner should know like the back of his or her hand. In a loan application, you’ll find it valuable to be able to speak to them and report on them to a greater or lesser degree depending upon the nature of the financing you’re seeking.
I once had a colleague tell me that if he could tell more about a business’ financial health by looking at the numbers than the business owner, he wouldn’t approve a loan application. Depending upon the lender, they might ask for different and specific information—so you should be prepared for what a lender will likely need before you make application.
For example, when you apply for an SBA loan you’ll likely need to have a detailed business plan in place along with pro forma revenue projections and detailed financial statements. The requirements for an online loan application might be as simple as two or three years of business tax returns and a few months of bank statements. Knowing in advance will help you streamline the application process and make it easier to find the right loan to help you ramp up for the holidays.
Even if you’re not considering financing to fuel your holiday growth, taking time now to look into the future, evaluate your credit profile, and make sure your financial house is in order is a good idea. It will help you manage your resources effectively and, should you decide to borrow, will make it easier for you to prepare for the loan application process.