Working Capital for Retailers with Bad Credit
The retail industry has undergone many changes in the increasingly digital and mindful world. Many shops and businesses have experienced some of their most significant sales by embracing this trend adequately, yet mall perennials like Macy’s, Sears, Barns and Noble, and JC Penny to name a few have experienced notable setbacks. With new trends, legacy retailers are forced to look out for savvy merchants to leverage their physical stores in new and compelling ways as technology, and millennial demand continues to rattle virtually every facet of the shopping experience—in stores and online. Therefore, business women and men alike that are interested in entering into the retail industry can gain insight into how and why individual shops are thriving and why others are being left behind by observing the changes in both the markets and consumer demand.
As mentioned above, huge chains like Macy’s, Sears and The Limited were negatively affected by the progression of technology and the majority of the market demanding modern shopping approaches. Macy’s announced on Jan.4, 2017 that it will close 68 stores; Sears shut down an additional 150 unprofitable locations to curtail losses. And the biggest being The Limited, as they officially closed down all 250 stores nationwide and instead will continue operations online; big business is no exception to the changing times. However, what can be observed as to why technology is creating a setback for some stores, is the fact that we have got too much stuff, yet they keep pouring out more goods. We are also getting more websites and stores, but there isn’t enough demand. The fast-fashion and e-commerce are taking over, and traditional department stores are certainly magnifying the challenges as consumers continue to move towards off-price retailers resulting in shoppers getting fashion for a good value.
Though, traditional stores are not the only ones struggling or being forced to adjust. The executives, investors, and associates in the industry are all affected where retailers do business: the shopping malls. With millennials having a firm hold on shaping the market, there is an increase in mixed-up projects incorporating hospitality, residential and entertainment. Approaching business this way is allowing properties to appeal to far broader demographics than legacy shopping centers. Millennials that are entering the market are interested in looking for places of residence that are not only close to where they work but also close to sites that offer entertainment, thus approaching a business in retail this way could gain lasting consumers.
Jump-to the following sections:
- Asset Based Retail Loans
- Commercial Real Estate Collateral Loans
- Short-term Loans
- Equipment Leasing
- ACH Cash Advance
- MCA Split Funding
- MCA Lockbox
Technology in the retail industry shows how mobile commerce also continues to grow. More and more people are shopping and buying items from the comfort of their phones. A 2016 Adobe report showed a 54 percent year-on-year increase in visits just to retail sites from smartphones, and 34.5 percent of total e-commerce sales in 2017 are predicted to come from mobile shopping alone and is expected to surpass 50 percent of the sales by 2021. Plus, 60 percent of North American retailers have mobile websites and half of the remaining 40 percent say they will eventually put one in place reported by Boston Retail Partners. So what is so appealing about this approach to shopping? It is suggested that consumers may be embracing retailer apps because they appear to address the problems in-store shopping experience brings. Most responded with a desire to see more extensive inventory, saving time at the store, or just avoiding going to the store altogether. This is definitely an aspect of the shopping experience that retailers should be taking into consideration to prosper.
Still, 2017 represented the most critical year for one retail industry in particular: grocery. The food industry has undergone rapid change and is seeing an increase in fresh-thinking executives. They understand the new retail model must be built around the consumer, with the intuition for someone else to think about the way people want to acquire foods. Also, to create an environment that empowers the consumer and makes their lives healthier, more comfortable, and more enjoyable. The new leaders of our food industries are driven by a new set of corporate values reflected in the products produced. They have become about social conscience, health, and wellness, enhancing your nutrition, and life hacking. Each contributing to a profitable model. Hence, what other retailers have learned and taken away from food retail is the importance of retailers promoting product quality, transparency, and sustainability to flourish. Consumers are more interested and invested in where their money is going and what they are buying, meaning it is not enough anymore for retailers to sell high-quality products with no information available on them.
Finally, with the many changes that are happening in retail that be technology—offering online transactions, and in turn, convenience, or mindful merchandise, and the increase in mixed-up products, each is important in succeeding in the ever-changing retail industry.
What are the Financing Options for Retailers with Bad Credit?
With the way the economic environment for retail stores is changing, some retailers may have taken a hit to their credit in recent years. Once you end up with bad credit, it becomes nearly impossible to get approved for conventional financing through a bank, community lender or credit union. But just because you have bad credit doesn’t mean that there aren’t any lending options available because, in fact, there are. Below we’ll look at some of the loan options available for retail businesses with poor credit.
Asset Based Financing
Asset based financing for retail stores is the perfect option for retailers with bad credit who are unable to get approved for conventional business financing. Usual assets used as collateral for asset based loans are commonly commercial real estate, investment real estate and even personal real estate. While inventory can be used for bad credit asset based working capital loans, it is rare for a lender to allow the use of retail inventory to be used as collateral.
| Rates | 10-25% |
|---|---|
| Terms | 1-3 years |
| Funding Amounts | $50,000-$5,000,000 |
| Collateral | Required |
| Fees | Medium costs |
Commercial Real Estate Collateral Loans
For retailers that have bad credit but have commercial real estate with equity they’d like to tap into, an option could be to refinance your commercial real estate into a new mortgage or hard money loan. But leveraging up to 90% of the real estate’s loan-to-value, a retail store owner can access much needed working capital for their retail store to help with operations and other uses.
| Rates | 5-15% |
|---|---|
| Terms | 1-25 years |
| Funding Amounts | $250,000-$50,000,000 |
| Collateral | Required |
| Fees | Medium costs |
Short-Term Business Loans
Banks will always require good to great credit to get approved for retail store financing. But another way to access affordable term loans is to try obtaining a short-term alternative business loan. But keep in mind that a bad credit alternative term lender may require collateral and will usually need to see the company show profitability for two years straight.
| Rates | 8-25% |
|---|---|
| Terms | 3-5 years |
| Funding Amounts | $50,000-$500,000 |
| Collateral | May be Required |
| Fees | Medium costs |
Equipment Leasing
As good credit is usually needed to get a business loan, the same can be true when it comes to retailers who are looking to lease their business equipment. That doesn’t mean that you must have good credit to get approved for retail equipment leasing, as there are plenty of lenders that offer bad credit equipment leasing for retail stores.
| Rates | 8-20% |
|---|---|
| Terms | 1-10 years |
| Funding Amounts | $10,000-$5,000,000 |
| Collateral | Required |
| Fees | Medium costs |
Retail Merchant Cash Advance
This is the most common type of retail cash advance used by retailers seeking fast working capital when they have bad credit. A retail ACH advance isn’t a small business loan at all. Rather, an ACH advance is the sale of the retail store’s future receivables to a funding company that will pay for the receivables upfront at a discount. This means that a funding company will project your revenue for the next 3-24 months, and then forward you a percentage of that revenue to use as you please. To collect repayment, the funding company will take a set amount each business day from the retail store’s bank account until the agreed upon payback amount is complete.
| Factor rates | 1.10 – 1.50 |
|---|---|
| Terms | 1-24 months |
| Funding Amounts | $5,000-$2,000,000 |
| Collateral | Not required |
| Fees | Low to High costs |
MCA Split Funding Advance
A MCA split funding advance is like an ACH advance in that it also is a business-to-business sale of the retail store’s future receivables. The difference between the two types of cash advances is the way that each is repaid. While an ACH retail advance is repaid by taking a set amount from the retail store’s bank account each day, and sending it the funding company via Automated Clearing House (ACH), a MCA advance is repaid completely differently. With MCA split funding, the retail store will repay the funding company by splitting each day’s merchant credit card sales with the funding company until the advance is repaid.
| Factor rates | 1.10 – 1.50 |
|---|---|
| Terms | 3-18 months |
| Funding Amounts | $10,000-$500,000 |
| Collateral | Not required |
| Fees | Low to High costs |
MCA Lockbox
A lockbox merchant cash advance for retailers is a common way for a funding company to structure a split funding advance for a business that is considered high risk. Rather than splitting each day’s merchant processing batches through usual processes, a funding company will setup a separate bank account that they have access to, and the merchant agrees to have their merchant batches deposited directly into the new bank account. After the funding company takes their agreed upon amount, the money is then transferred over to the retail storefront’s main operating bank account.
| Factor rates | 1.10 – 1.50 |
|---|---|
| Terms | 3-12 months |
| Funding Amounts | $5,000-$2500,000 |
| Collateral | Not required |
| Fees | Low to High costs |
Summary
Just because you’re a retailer with bad credit, doesn’t mean that you are out-of-options to fund your small business. In fact, as you see above, there are quite a few options for a small business or retailer with bad credit to obtain financing. But you need to do you research as bad credit business lenders tend to have very high rates, and short terms. Securing a business loan that is structured incorrectly can put lots of strain on your company’s cash-flow. If you are looking for a loan, have bad credit, and need help understanding your options, please reach-out to one of our retail loan specialists, and they’ll help you secure the right loan for your company.
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