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Updated Apr 15, 2024

Financing Your Retail Store

Learn more about retail financing and how to choose the right lender for your needs.

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Julie Thompson, Senior Writer & Expert on Business Operations
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Finding capital is one of the most intimidating aspects of starting a new business, but there are a variety of funding options available. You can apply for a loan through a bank or the U.S. Small Business Administration, or consider alternative financing options such as inventory financing. 

Before you start applying for small business loans, it’s a good idea to learn more about retail financing and how it works. Doing your homework will ensure you’re prepared and understand exactly how much money it’ll take to open your retail store. 

What is retail inventory financing?

Retail inventory financing provides a business owner with capital to purchase inventory. A business uses existing inventory or the products purchased with retail inventory financing capital to secure a short-term loan or a line of credit.

Editor’s note: Looking for a loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

When seeking inventory financing, you will generally have two options: inventory loans and inventory lines of credit.

  • Inventory loan: This is a traditional term loan in which you receive a lump sum and pay it back with interest over an agreed amount of time. This type of loan is better for a large purchase you make once a year or every few years.
  • Inventory line of credit: If you’re not sure how much financing you need, an inventory line of credit may be a good choice. A line of credit allows you to borrow money as needed and pay back only what you have borrowed. Once you pay back what you owe, you can borrow up to the maximum approved amount again.

Unlike with loans, you do not have to reapply for credit each time you need funding.

Did You Know?Did you know
When you apply for an inventory financing loan, most lenders will offer you only a percentage of the inventory’s value, usually 20 percent to 80 percent, to account for the inventory’s value depreciation. Such practices protect the lender if you default on the loan and the lender has to liquidate the inventory to recover losses.

Who uses retail inventory financing?

Inventory financing is beneficial for retail, manufacturing, wholesale and seasonal businesses. All of these sectors rely on physical products to turn a profit and can have unpredictable sales depending on the time of year, demand and increase of SKUs.

You can use inventory financing in the following ways:

  • Stockpiling inventory for your busy season
  • Purchasing additional products to meet an uptick in demand (marketing campaign, sale, partnership, etc.)
  • Launching a new product or products
  • Updating old stock
  • Maintaining a consistent cash flow

What are the benefits of retail business loans?

Retail business loans help keep your inventory consistent and deepen the B2C relationship. It can also help your company in the following ways:

  • Less financial risk: You use current or future inventory as collateral, not business or personal assets, to secure the loan or line of credit.
  • Meeting customer demand: You’ll always have inventory on hand, even if your products are in high demand.
  • No credit check: Have an imperfect credit score or no score at all? Lenders can use inventory as collateral so they don’t need to take a deep dive into your credit history.
  • Quick approval, less paperwork: The inventory financing loan process is often faster than traditional loans, with most approvals occurring in less than two weeks.
TipBottom line
Even if you have been denied a small business loan, you may still qualify for an inventory financing loan. However, you must prove to the lender that the extra inventory you are requesting is in high demand. Before applying, gather the necessary reports, such as balance sheets, profit and loss statements, bank statements, inventory management, sales forecasts, and tax returns.

Additional financing options for opening a retail store

If you are interested in securing funding outside of retail inventory loans, there are several options to choose from. From using your business credit to providing personal collateral, thoroughly research your options before committing to a long-term business loan.

SBA loans

This is the best option for most entrepreneurs starting a business from scratch. You may qualify for several types of loans, but there are some restrictions. You can easily apply for one at your local bank branch, and there are a few qualifiers that may help you in some circumstances.

7(a) loan

The requirements for eligibility for this common business loan are easy to meet. You must demonstrate an effort to use alternative funding resources before seeking this loan, and you cannot have any outstanding debts to the U.S. government. Certain types of businesses are exempt and cannot receive assistance, such as life insurance businesses, casinos, private clubs that require membership and religious businesses.

You can expect a decision on your loan application within 36 hours. The smaller your loan, the more interest you may have to pay (but you may be able to negotiate this with your lender). A lender may require you to put up collateral, such as your home, if you borrow more than $25,000. A 7(a) small business loan can get you up to $350,000 if you qualify.

Microloan

If your business doesn’t need more than $50,000 in capital, you can apply for an SBA microloan. According to the SBA, the average microloan is $13,000, which makes it a good choice for those starting a home-based business that doesn’t require a lot of startup cash.

A microloan could also be a good solution for business owners who are already in business and need an influx of working capital for salaries, inventory, equipment or repairs. You can expect interest rates to hover between 8 percent and 13 percent, but rates will vary based on your lender and credit. The benefit of these loans is that nonprofits often offer them, so you may be able to easily secure a loan with an organization that aligns with your business type.

Real estate loan (CDC/504)

Most business owners start with leased property, but if you need to purchase land or an existing building and you don’t have the necessary funds, you may qualify for a 504 loan. This money is specifically for property, so you cannot use the funds as working capital or for repaying other debts.

If you’re looking for a high-dollar loan, you may need to meet specific criteria to qualify. For example, if your business will create jobs, you could receive up to $65,000 per job created, up to $5 million.

Personal loans

Those who have good credit (a credit score above 650) could qualify for a personal loan to help fund a startup. You’re not likely to borrow all the money you need since many personal loans are capped at $50,000. Although most businesses need at least $30,000 to launch, a franchise may require more capital or assets totaling a lot more. For example, if you want to open a McDonald’s location, you must have at least $750,000 in liquid assets.

Interest rates on personal loans vary greatly, and they typically fall in line with how good your credit is. The better your credit is, the lower the interest rate; rates are between 5 percent and 20 percent.

FYIDid you know
While getting quick approval for a personal loan may be tempting, this step could significantly affect your future financial business decisions. For example, choosing a personal loan robs your business of building its own credit history, which can make it more difficult to secure larger amounts of money as your business grows.

Alternative lending

One of the latest financing options is what’s often called an alternative loan. If your credit score is lower than 600, it may be difficult to get the funding you need to start your business. Banks will probably consider you a high risk, and you’re more likely to be turned down or get a much smaller loan than what you need.

The obvious benefit of an alternative loan is that you can get the money you need – in some cases, up to $1 million. Another advantage is that many financial lenders don’t require you to put up collateral. Many of these alternative lenders lend only to business owners who are already operating and generate a certain amount of revenue each month.

An unsecured small business loan from an alternative lender usually has short repayment terms, origination fees and high interest rates (though most are fixed). Read the fine print of any alternative loan carefully. This type of loan has often been compared to a payday loan for businesses.

Fundraising

Crowdfunding is a popular way for many artists and entrepreneurs to get the money they need, and it’s a viable option for small businesses needing working capital or startup cash. One of the keys to securing money from small investors is to ask for the proper total amount. If your projections are too high, that can scare off potential investors, and you may not reach your goal amount. Some crowdfunding sites require that you reach your goal to receive the cash.

The other trick with crowdfunding is to provide enticing rewards. For example, if you’re producing a $100 dress and you need capital to get the dresses produced and shipped, you can offer different tiers of rewards. Those who donate $100 could receive the dress, plus a free skirt or handbag that you’ve also designed. Alternatively, you could offer a percentage off future purchases.

Home equity loan

Homeowners have an advantage that others don’t: equity. This could be your ticket to borrowing a large sum of money to help you launch a new business. As long as you have at least 20 percent equity in your home and good credit, you may be able to borrow 80 percent of your home’s equity.

Interest rates are generally lower with these types of loans (between 3 percent and 8 percent), but you risk losing your house if you default on payments and can’t repay the loan. It’s a risky choice, but it may make sense for you, especially if you own more than one house.

Retirement account rollover

Consider this option only if you have at least $50,000 saved in a retirement account, such as an IRA or a 401(k) (Roth IRAs are not eligible). You can borrow 100 percent of your savings (if you need that much money), and you’re not required to pay early withdrawal taxes or penalties. The most significant benefit here is that you won’t have to sink deep into debt to get the capital you need, nor will you pay interest on borrowed money, and your credit won’t be affected.

This is a tricky option, though, because if your business fails, you could be throwing away all the money you’ve saved for retirement. Success means you can refill your retirement account. 

Family and friends

Speaking of tricky things, asking for money from family or friends could be a complicated matter. Some people say you should never mix business with family. If things go south with your business and you can’t pay back a loan, you could permanently damage your relationships.

If you have family or friends who are willing to contribute to your business venture, craft a legally binding contract. It’s important that family and friends understand that they are investors, so if the business goes bad, their money may be gone forever. 

A loan provides a different alternative for families and friends, and you can set one up using an app that lets your lender set the interest rate and repayment terms. Then you pay through the app, and it deposits funds directly into the lender’s account or bank.

Credit cards

Putting business expenses on credit cards is often a necessity, and it can be beneficial or risky, depending on the circumstances. Today, many credit cards offer reward programs that allow you to earn cash back or points as you make charges to your card. The points you earn could help pay for plane tickets to a convention or a car rental, or you can convert them to cash that you can use on everyday items you’d buy for your business anyway.

Although many credit cards also offer an introductory rate of 0 percent APR for the first three months (or year that you have the account open), that will convert to an interest rate of 10 percent to 24 percent, some of the highest rates out there. The good news is that you pay interest only on what you actually spend, so this could be a good option if you can pay your balance in full each month. 

Angel investors

This may be the most difficult way to raise money for your business. Angel investors are few and far between, and they’re extremely discriminating with their funds. Research angel investors within your industry; they are typically in the tech and science industries.

An angel investor is usually a successful businessperson looking to help someone like them succeed too. They may also be interested in having a say in what happens with your business, so this may mean giving up some autonomy. A private investor is looking to make money off your success, so it’s not a loan per se. It’s like they’re buying shares of stock in your business and they expect a return on their investment.

Bottom LineBottom line
There are many types of small business loans available for your retail store. Weigh the pros and cons and see which one matches your business needs, industry and personal situation best.

Best business loan providers for retail stores

Loan terms can vary significantly from lender to lender, so it’s important to compare several different quotes. Here are some of the best small business lenders to consider:

  • Biz2Credit: Biz2Credit is a lending marketplace, so you’ll submit an application once and receive quotes from lenders that match your criteria. However, after you’ve selected a lender, you’ll work with that company – Biz2Credit won’t originate or fund the loan. You could qualify for a term loan up to $500,000 and receive loan terms between 12 and 36 months. Read more in our Biz2Credit review.
  • Fundbox: Fundbox specializes in offering working capital loans to small businesses. You could qualify for a small business line of credit up to $150,000. The application process is quick, and if you’re approved, you could receive the funds as soon as the next business day. Discover the details in our Fundbox review.
  • SBG Funding: SBG Funding offers a variety of financing options, including term loans, lines of credit, equipment financing, SBA loans and invoice financing. The application and decision-making process is quick, and the company offers flexible repayment options. However, you’ll need at least $350,000 in annual revenue to qualify for a loan. See our SBG Funding review.
  • Fora Financial: Fora Financial offers business loans ranging from $5,000 to $1.5 million. When you apply, the company does a soft pull on your credit, so it won’t hurt your credit score. And once you’ve paid off at least 60 percent of the loan, you’ll have the option to increase the amount you borrowed. Find out more about loans with our Fora Financial review.

Costs to consider when opening a retail store 

Startup costs for a brick-and-mortar store in the U.S. can vary widely, depending on factors like location and industry. Here are some expenses to consider before opening a retail store:

  • Lease or rent (six months’ worth)
  • Security deposits
  • Licensing and permits
  • Insurance
  • Location improvement costs
  • Equipment
  • Utilities (electricity, internet, phone, water, etc.)
  • Inventory
  • IT costs (website, hosting, design costs, etc.)
  • Lawyer fees
  • Accountant fees
  • Marketing and advertising
  • Market research
  • Employee wages
  • Miscellaneous (office supplies, cash for operations, etc.)

Weigh your retail financing options 

However you find the funds to start your business, it’s essential to choose the method that is best for you. A loan may work well for you if you have an excellent credit score and equity in your home, but those who are starting with nothing may be better off setting up a fundraising platform online.

If you choose a loan, look for low interest rates and flexible repayment terms. Be sure you know what you’re getting yourself into – especially if your business doesn’t succeed. Always have a backup plan if you’re offering up your house or nest egg as collateral. Bankruptcy can get you out of a sticky situation, but it can take years to rebuild credit before you’re able to qualify for a loan again.

Jamie Johnson and Amy Nichol Smith contributed to this article.

author image
Julie Thompson, Senior Writer & Expert on Business Operations
With nearly two decades of experience under her belt, Julie Thompson is a seasoned B2B professional dedicated to enhancing business performance through strategic sales, marketing and operational initiatives. Her extensive portfolio boasts achievements in crafting brand standards, devising innovative marketing strategies, driving successful email campaigns and orchestrating impactful media outreach. Thompson's proficiency extends to Salesforce administration, database management and lead generation, reflecting her versatile skill set and hands-on approach to business enhancement. Through easily digestible guides, she demystifies complex topics such as SaaS technology, finance trends, HR practices and effective marketing and branding strategies. Moreover, Thompson's commitment to fostering global entrepreneurship is evident through her contributions to Kiva, an organization dedicated to supporting small businesses in underserved communities worldwide.
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