Maximizing the Value of Financing For Retail Businesses

Like other businesses, many small retail businesses rely on borrowed capital to purchase inventory, buy fixtures, expand, or bridge seasonal cash flow gaps. Restaurants, grocers, and other merchants sometimes face challenges when looking for financing depending on the nature of their 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.

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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 finding a small business loan, but may impact where you’ll find success. A healthy retail business with an impeccable credit profile and several years in business may find success with the local bank, while a borrower with bad credit and a short track record likely won’t.

Many business owners find themselves somewhere in-between and will have multiple financing options. 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?” Some of the options available today are better suited for particular loan purposes. Once you’ve determined your loan purpose, it will make the search for financing easier. For example, some common loan purposes might include:

  • Purchasing inventory: The right answer will require an honest evaluation of your current situation. Does your business currently have the cash flow to repay a loan? A lender wants to know that your business is not only capable of supporting the debt, but that you’ll make regular and timely payments. A healthy business and a business with a strong credit profile will be in a better position to approach a lender and find success.
  • 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.
  • A marketing initiative: 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.
  • 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.
  • Legal records: 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.
  • Loan purpose will help you determine the type of financing 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 money. 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 borrowers’ 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. 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 are still able to make the periodic loan payments. What’s more, knowing that will also give you peace of mind.

    OnDeck is a Good Fit for 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.

    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 small retail businesses and 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.