Every retailer encounters the need to raise funds at some point. Whether you’re looking to open your first (or 50th) shop, or you need to purchase additional inventory or equipment, the topic of business financing is very common in retail.
That’s why it pays to have knowledge of the different types of financing available to business owners. When you know your funding options, you’ll be able to make a more informed decision and select the best one for your business.
If you’re thinking of raising money for your business, here’s a roundup of funding options you should consider:
Use existing revenue or assets
If you already have an existing business that’s doing well, consider using your revenue to fund your expansion. Doing so will help you avoid the headaches that come with loans or outside investors (i.e. interest, equity, etc.)
However, one thing to keep in mind when using existing revenue is to make sure that you’re not diverting too much funds away from your current business.
One risk to financing with internally generated funds is that you will divert too much of your current profits into expanding the business. This can starve your business and create more trouble than if you financed with a more costly source or never tried to grow at all. Make sure you aren’t robbing Peter to pay Paul when you finance with retained earnings, and that your investments in inventories, marketing efforts, production staff and other outlays required for the existing business are maintained.
In other words, before putting your hard-earned revenue into your expansion, see to it that your current stores can still function smoothly without that extra cash. If you think the business will suffer, then you may want to reconsider expanding or find an alternative funding option. (See below.)
Obtain a loan or line of credit
If using your existing funds isn’t an option, you can try to finance your venture using loans or lines of credit. In this section, we’ll talk about the types of loans you can apply for, as well as your best sources of funding.
Let’s take a look at a few broad categories when it comes to loans. It’s best to understand these general loan concepts, as they will help you decide which loan types are suited for your needs:
Long-term vs. short-term loans
Loans can either be short-term or long-term. Short-term loans need to be paid in full at the end of the term (usually 12 months or fewer). They’re typically below $100,000 and are often used for small or short-term projects such as purchasing inventory, covering accounts payable, seasonal costs, etc.
As for long-term loans, repayment is due over a period of more than one year. And unlike its short-term counterpart which requires a full repayment, long-term loans are repaid on a monthly basis. Their interest rates tend to be lower than short-term loans as well. These loans are often utilized for long-term needs or big purchases, such as refinancing, acquisition, and more.
Unsecured vs. secured loans
Creditors naturally want to have some reassurance that they will get their money back and this is where the concepts of secured and unsecured loans come in.
Secured loans are ones that require collateral–meaning, an asset that the creditor can sell in case the loan isn’t repaid. Types of collateral can include real estates, cars, trucks and heavy equipment, furniture and fixtures, receivables, etc.
Unsecured loans on the other hand are credit-based. This means the lender is counting on your creditworthiness when they grant the loan. You won’t have to provide any assets as collateral, but if you default on your loan your credit could take a massive hit and the creditor could try to obtain a money judgment against you.
Lines of credit
Unlike the loan types above, which provide debtors with a lump sum, lines of credit work in a similar way as credit cards. The lender provides you with a maximum loan balance that you can draw from at any time, and you pay interest only on your outstanding balance.
How and where to obtain a loan
Now that you’re familiar with the types of loans that you can get, it’s time to discuss how and where to obtain them. Below are some of the common ways to apply for a loan:
Family and friends
A lot of entrepreneurs turn to their family and friends to finance their ventures—and for good reason. Often, borrowing money from people you know well will help you get the funds you need quickly, at lowers rates, and on more flexible terms.
However, obtaining loans from your friends and relatives can also complicate your relationship and could result in squabbles or unclear terms.
Banks and credit unions
You could also turn to banks and credit unions. These institutions may offer various loan options, and they often have very straightforward procedures when qualifying applicants. It’s important to note though that many of these financial institutions are very conservative so it can be difficult to qualify for their loans unless you have strong track record or valuable assets to secure the loans.
The good news is, things seem to be improving. In June 2015, approval rates at big banks and institutional lenders hit new highs. According to the Biz2Credit Small Business Lending IndexTM, big banks ($10 billion+ in assets) approved “22.19% of small business loan requests in June 2015, up from 21.9% in May, marking the eighth consecutive month that approval rates have increased for the largest banks.”
If you’re in the US but don’t qualify for a conventional bank loan, you can consider applying for a loan through the Small Business Administration (SBA). Note that these loans still come from banks, but the difference is SBA loans are backed by the government, so there’s less risk to the lender, and therefore it’s easier to get approved.
Click here to read more about SBA loans and get info on the types of loans you can apply for as well as how and where to obtain them.
Alternative loan options
If the above-mentioned loan sources aren’t possible, you could seek funding from non-traditional sources. Examples of these alternative lenders include Lending Club, which provides peer-to-peer lending services and PayPal Working Capital, which allows businesses to secure loans that they can repay using their PayPal sales.
This article on Business News Daily has a great section on alternative lenders, which provides an overview of several alternative lending sources you can check out.
Some retailers are turning to crowdfunding sites such as Kickstarter and Indiegogo to obtain the funds they need. Take for example, Travail Kitchen & Amusements, a restaurant in Minneapolis.
According to The New York Times, the company ran a successful Kickstarter campaign in which they sought $75,000 for a relocation and expansion. Not only did Travail meet their goal, but they were able to double that amount in 24 hours and eventually raised over $255,000 by the end of the campaign, enabling the business to successfully finance their goals.
However, it’s important to note that not all business crowdfunding campaigns have successful outcomes.
Lynette E. Krajewski, for instance, turned to Kickstarter to raise money for a bakery and pizza shop called Community Oven. And while Krajewski was able to raise over $8,000 through the campaign, The New York Times reported that she also received a lot of hate mail from people who accused her of “asking for handouts.”
Ultimately, Krajewski wasn’t able to meet her funding goal, so the campaign was unsuccessful. “We would not try a Kickstarter campaign again. It was very emotional,” she told The Times.
The success of a crowdfunding campaign often rests on the how engaged or connected patrons are to a business or project. If your retail store has a large, cult-like following and if you cater to millennials, then crowdfunding could be something you’d want to consider. But be prepared to receive a bit of backlash from people who aren’t on board with for-profit businesses using crowdfunding platforms.
Raising money is a daunting task, but hopefully the information above gave you a better idea of what your options are. Before jumping into a financing method though, be sure to do some digging into your own finances, as well as into the funding source that you’re considering, to ensure that it’s the right option for you.
Have you ever tried any of the funding options above? Tell us about your experience in the comments.
Image credit: Got Credit
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