Your boutique has been in business for a few years, but you’ve hit a cash-flow snag. Items may be flying off the shelves, but to purchase new, in-demand inventory, you need significant upfront cash.
“Most small retailers have most of their cash flow tied up in inventory, and for many, this can be as much as 75% to 90% of their total business assets,” says Christie Burris, director of communications for theNorth Carolina Retail Merchants Association. Burris says retailers experience cash-flow management issues more than other types of small businesses due to the cost of inventory. Additionally, small boutiques paying for inventory with cash often can’t afford to buy in bulk.
Inventory financing is one way to preserve working capital, manage cash flow and access volume discounts. Dealstruck and Fundation, two online alternative lenders, have solutions suited to small boutiques. Both offer fast approval, quick funding and no fees for early repayment if your clothing or other inventory sells faster than expected. But their financing options for retailers are quite different. Take a closer look at which lender makes most sense for you:
For established boutiques or for online retailers: Fundation
Fundation offers a fixed-rate installment loan that could work for established retail boutiques that need to finance inventory such as apparel, accessories, paper goods and gift items. If you sell inventory sooner than expected, you can repay early and save on interest, says Fundation CEO Sam Graziano. Also, because it’s a working capital loan, you can use the funds for other business needs.
In the application process, you’ll provide bank statements and tax returns, and Fundation checks your personal and business credit reports. Although it doesn’t require a minimum personal credit score, the average for Fundation borrowers is 660 to 730. If you’re approved, the money can land in your account in a few days.
Fundation recently lowered its minimum loan amount to $20,000, which works well for small retailers, Graziano says. The cost of borrowing, or the annual percentage rate, ranges from 7.99% to 29.99%, which includes an origination fee that can vary. Small retailers typically receive a rate in the middle to higher end of the range because the ups and downs of the business are riskier for lenders, Graziano says.
Terms range from one to four years, but Graziano says short borrowing periods are better for small retailers. This means Fundation’s one-year term option is best for boutiques since it’s unlikely you’ll need more than a year to sell the inventory and repay the loan. Plus, there’s no penalty if you repay early.
When Fundation makes sense for you
Fundation is best for boutiques that want a repayment period longer than six months and have been in business for several years. The lender prefers retailers with at least four to five years in business, Graziano says, because the industry can be volatile and seasonal. Fundation has had a lot of success lending to Internet retailers. Although storefront boutiques aren’t rejected outright, he says, they’re less likely to be approved without a long track record.
Fundation also prefers established retailers with at least three full-time employees (though two part-timers could count as a full-timer, Graziano says).
But that’s not a hard-and-fast rule. “Ultimately, we look at everything in totality, from how long [the business] has been around to its historical credit footprint to top line,” Graziano says.
For newer boutiques with fast inventory turnover: Dealstruck
For businesses with inventory requirements, like boutiques, revolving capital with a short repayment term — or a line of credit — often makes the most sense, says Dealstruck Chief Strategy Officer Candace Klein.
Dealstruck offers an inventory-specific line of credit. If you’re approved, you send Dealstruck your inventory purchase order. Dealstruck then pays the supplier directly on your behalf. That’s because the lender services business owners who typically can’t secure bank financing, Klein says.
“We’re taking greater risks than banks, because these borrowers are typically newer, seasonal and don’t have assets banks can take as collateral,” she explains. “The way we protect ourselves is holding some control over the capital.”
Once Dealstruck pays your vendor, your first four weeks of payments are interest-only as you wait for your inventory to be delivered and stocked. This means lower payments the first month. Then, depending on your business and industry, you’re given 13 to 26 weeks to make weekly payments on the remaining amount.
“We try to set this up so they pay us back as their inventory turns,” Klein says. And you won’t be penalized if you repay earlier — you’ll just save on interest. Also, with an inventory line of credit, you only pay interest on what you draw from the revolving account.
As you repay your line of credit, you can borrow the capital again for your next inventory purchase. With a line of credit, “you’re not paying interest on a large amount of money for an entire year when you have small inventory needs that are intermittent and seasonal,” Klein says.
Interest rates for lines of credit tend to be in the mid- to high teens, Klein says. The inventory-based line of credit for business-to-consumer retailers ranges from $50,000 to $250,000. If you’re a business-to-business retailer, you can quality for lines up to $500,000, but this won’t apply to consumer-focused boutiques.
When Dealstruck makes sense for you
Dealstruck is good for newer boutiques because it requires you to be in business for only 12 months to qualify. Because the repayment terms are six months or less and the capital is revolving, Dealstruck also works for boutiques that have fast inventory turnover and need to purchase new apparel or other retail inventory again quickly.
Dealstruck prefers that retailers have at least $20,000 or more in monthly revenue and a personal credit score above 600, but the company will be flexible if cash flow is strong, Klein says.
Fundation combines the benefits of a bank loan with the ease and efficiency of an online lender. We offer conventional loans with competitive rates to businesses with varying credit profiles. Our technology allows us to deliver capital in as few as 3 business days through streamlining the collection and evaluation of customer information and conducting the majority of the lending process electronically. As a direct lender, we use our own capital to originate and hold the loans we make, so that we can focus on building relationships with our customers. Our dedicated customer relationship model enables us to understand each unique borrower’s business. This level of service, coupled with our best-in-class products, is why many of our customers come back to us repeatedly for more capital.