After careful consideration and planning, you've decided to quit your 9-to-5 job and be your own boss. If that means working on Main Street and opening your own retail business, then you have a lot of preparation ahead. Once you've created a business plan and decided whether or not you're going to go into business with a partner, you'll be ready to look for financing to get your store up and running.
Finding capital can be one of the most intimidating parts of starting a new business. It's important to remember that you are not alone. There are many avenues available to you to get the money you need. You'll most likely need to take out a small business loan for all or part of your financing, so include the principal and interest you'll be paying down with each payment in your business plan.
You have several options when it comes to financing. Whether you start with the U.S. Small Business Administration's (SBA) small loans or inventory financing or you dive headfirst into fundraising, it's entirely up to you. Financing can be largely dependent on your credit score, years in business and how intriguing your store concept is. Our guide on financing a retail store will help you navigate the financial realm so you can decide which route is best for you and your soon-to-be business.
Before you jump into the process of selecting which type of financing you want to pursue, you will need to first make sure you've correctly calculated all of the costs associated with your business. It's important to double- and triple-check costs to make sure you haven't left anything out – and then add 10% to 20% more to the total as a buffer.
Costs to consider when 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.)
Startup costs for a brick-and-mortar store in the U.S. can vary widely. From a few thousand dollars to over a hundred thousand, costs can fluctuate based on location, industry and business plan. Need a worksheet to track expenses? Try using the SBA's startup cost worksheet to get started.
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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.
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 consistently need a funding source, a line of credit allows you to borrow money as needed and pay back only what you have borrowed. The advantage of an inventory line of credit is that once you pay back what you borrowed, you automatically have access (as long as your account is in good standing) to borrow the maximum approved amount again.
Unlike with loans, you do not have to reapply for credit each time you need funding.
Who uses retail inventory financing?
Inventory financing is beneficial for businesses that are in retail, manufacturing, wholesale and seasonal. 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?
The bottom line is that 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.
Additional options for retail business loans
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% and 13%, 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; a personal loan will net you about $20,000 to $50,000. Although most businesses need about $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% and 20%.
Bad- or no-credit options
One of the latest financing options is what's often called an alternative loan, which is an alternative to a bank loans. If your credit score is lower than 600, it may be difficult to get the funding you need to start your business. Banks will likely 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 financiers 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. You've likely heard of TINSTAAFL, or "there is no such thing as a free lunch." A thank-you note isn't going to inspire many to help you reach your goal. If you're producing a $100 dress, for example, and you need capital to get the dresses produced and shipped, you can offer different tiers of rewards. For example, 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% equity in your home and good credit, you may be able to borrow 80% of your home's equity.
Interest rates are generally lower with these types of loans (between 3% and 8%), 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% 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, though, 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, holiday dinners may be awkward.
The best thing you can do if you have family or friends who are willing to contribute to your business venture is to craft a legally binding contract. It's important that your family and friends keep in mind that they are acting as investors, so if the business goes bad, their money may be gone forever; that's the risk they take by investing. A loan is a little different, though, 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 introductory rates of 0% APR for the first three months (or year that you have the account open), that will convert to an interest rate of 10% to 24%, some of the highest rates out there. The good news is that you pay interest only on the credit you use, so if you can pay your balance off each month, you'll be in the clear, and you'll be contributing to pushing your credit score higher. [Read related article: How to Use a No-Interest Credit Card to Fund Your Business]
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 line on retail store financing
However you find the funds to start your business, it's essential to choose the method that works 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 (fixed can be better than variable if you're not sure which way the economy is headed) 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.
Amy Nichol Smith contributed to the writing and research in this article.