Merchant Loan Options for Retail Businesses

“Your business is humming right along, you’ve got good flow, sales are up. Then the perfect storm occurs: the POS system dies on you, you need a replacement, your landlord presents you with a space renovation that includes expanding your space if you renew your lease within the month, meanwhile the supplier throws the deal of the century: 40% off if you place your order by the end of the week.”

“Any one of these would stretch your budget. All three? Only with outside funds.” Of these three, you are going to need the money, in order to take advantage of the opportunity before it’s lost or before a problem becomes an emergency.”

“Welcome to the world of retail, where cash flow timing rarely cooperates with opportunity,” as one source puts it. Here’s a real-world look at merchant loan choices actually suited to life in retail, and how to select which one works best for what you need at exactly the right time.

Traditional Merchant Cash Advances: Speed King

• The traditional merchant cash advance has been a retail favorite for speed. You apply on Monday, qualify on Wednesday, and your money comes on Friday. If you are a merchant who processes credit card transactions all day, MCAs are a natural fit for you.
• Great for short-term purposes, prepping for a peak period, acquiring necessary equipment, doing repairs which would otherwise shut down sales, and even advertising promotions. The repayment is received in the form of a percentage of your daily sales using your card, which is in line with your cash flow dynamics, considering your card business.
• Rates are higher than traditional loans; however, when the inventory agreement expires Friday or the system goes down and sales decline, speed pays the premium. Standard rates are thought to be 1.15 to 1.40 factor rates with 10-20% daily reserve rebates from credit receipts.

Business Lines of Credit: the flexibility option

• “Lines of Credit” are not technically loans to merchants, though they sure seem like it at retail. Once you’re approved, you borrow what you want within your approved limit and pay for only what you borrow. Very good for seasonal businesses with predictable fluctuations.
• Approval tends to take longer at first, two to three weeks, after that you have instantaneous approval. Take advantage of this during off-peak times to prepare for peak times or make opportunities during slower times with instantaneous approval.
• Rates will be 8-18% APR, cheaper than MCAs, although credit quality will need to be better. The major advantage is flexibility. Draw $10,000 this month, repay, and then draw $25,000 in the next month if needed.

Invoice Factoring: When Cash Is Tied Up

"If you sell to businesses on an invoice basis, factoring gives you access to immediate funds for future sales." "You sell $50,000 of your outstanding accounts and take in $40,000 to $45,000."

It's appropriate for B2B retail transactions such as the supply of other retail stores or business orders of the company. Think of this not as borrowing against future revenues but rather accelerating payments on existing revenues.

Equipment Financing: for large retail investment purchases

When you need hard goods, such as new POS, fridges, display fixtures, and security systems, equipment loans may provide even more favorable terms than general merchant cash flow loans. The merchandise secures the equipment loan, making both the approval process and rates of interest more favorable.

Advantage: it provides collateral, which reduces risk and results in better terms. Disadvantage: it is exclusive to equipment, not inventory.

Inventory Financing: Designed for Seasonal Stocking

• There are some lenders who specialize in inventory financing for retailers. This is a loan you take out based upon the inventory you are purchasing, and the inventory serves as collateral for the loan. This is very useful for seasonal businesses that need to stock up before a seasonal boost in demand.
• For instance, a toy store raises funds of $80,000 to finance Christmas items and repays the same through the higher revenues generated by Christmas sales. The increase in revenues is used to finance the funding that was previously carried out.

However, rates may vary, and when possible, inventory financing tends to be better than a general MCA because inventory is a tangible collateral. 

Deciding on Which Option

With all it is dependent on your need for funding, the amount, and your objective. Urgent need for cash this week for an immediate business venture? MCA. Do you want some flexibility for working capital? Line of credit. Do you have solid B2B accounts receiving your cash? Factoring is for you. Major equipment buy? Equipment financing. Building inventory for a seasonal peak? Inventory financing, if available. Intelligent retailers employ an array of financing tools rather than just one: MCAs for quick expansion needs, lines of credit for strategic expansion, equipment loans for major purchases, and factoring to manage cash flow. 

The Bottom Line

Retail success can be as much about when funds appear as it is about how much you have. When the right merchant funding appears at the right time, it capitalizes on possibilities while avoiding problems by providing growth not possible by solely using funds in house. Understand your choices, apply the right tools at the right time, and unlock a competitive advantage that converts a source of stress and anxiety into a powerful force that moves your enterprise forward at just the right time. Your retail company needs capital as nimble as the market in which you compete. Now you have the playbook.