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How to choose a retail business loan for your store

July 31, 2023 | Published by Faire

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Retail business loan

The following content is informational only and not an exhaustive list of retail business loan options for a new business. The right retail business loan will depend on your specific needs and financial situation. When making financial decisions, we encourage you to consult a financial advisor or other qualified professionals. 

You have a strong business plan, and you’ve done your due diligence. Now you just need a retail business loan to bring your vision to life. 

Figuring out the best way to secure a retail business loan is often one of the biggest challenges entrepreneurs face. Thankfully, there are various retail business loans available for owners to use when starting a new retail business. We’ve broken down a few different approaches to financing your retail store. 

Calculate how much funding you need

Before you explore your retail-store financing options, you’ll need to calculate just how much funding you need. Your financial needs will vary depending on a number of factors, and it helps to write a business plan early on to break down your costs. 

The main factors to consider when calculating funding are:

For a more detailed example of start-up costs for a new business, take a look at the Small Business Administration’s start-up cost worksheet

To get a clearer picture of your funding needs, it’s also helpful to calculate your burn rate. Your burn rate is a measure of how quickly you’re spending money. If you’re not sure how much revenue you’ll be making each month, calculate your burn rate simply by looking at your monthly expenses. 

New businesses often use this metric to determine their “runway,” or how long the business can operate before hitting zero dollars in the bank. To find your runway, subtract your burn rate from the total amount of money you have to start your business. When opening a new retail store, it’s typical to secure enough funding to last you between 12 and 18 months. 

Consider outside investors 

Outside investors can (and often do) include friends or family willing to contribute to your business venture. This can be an attractive option, as interest on a loan from someone you trust will be much lower than what a bank can offer. 

Though less common, some new retail-business owners also turn to crowdfunding platforms to finance their store. Whether the aid is coming from family or your community, make sure you clearly establish upfront how much stake each investor will have in your business.

Explore self-funding

You may be in the fortunate position of already having the capital you need to open your store. Before deciding to go it alone, there are a few things to consider. If you have other significant recurring expenses such as student loans, a mortgage, or other outstanding debt, you may want to seek outside funds. 

You’ll also want to think about how many employees you need and how much you plan to pay them. Keep in mind that you’ll want to pay yourself a salary eventually as well, and calculate how much that might be. 

Research different types of business loans for retail

If you don’t have outside investors and self-funding isn’t an option, then you’re in good company. Nearly 40% of small businesses apply for loans, with the average small-business loan amount being more than $600,000. Retail-business owners who opt for this route have different types of loans available to them. 

Small-business loans are the most common type of retail-store financing, and banks or credit unions offer a handful of funding options to help grow your business. If you have an existing relationship with a bank or credit union you trust, check to see what loans they offer. 

When taking out a loan, there are a few key factors you want to consider. First, look at the loan term requirements. Is this a short-term or long-term loan? When do you have to pay it back? What’s the interest on the loan? Next, think about how easy the application process is and how soon you’ll get your funds. Depending on your needs, you may want the money sooner rather than later. 

Navigating your loan options can feel overwhelming, but the good news is that you have options. Loans can typically be obtained through a bank, a credit union, or the Small Business Administration. Let’s delve into them.

1. Apply for a term loan

A term loan or a short-term loan is a lump sum of cash repaid (with interest) over a fixed period. You can use the funds for whatever you may need, and the term of the loan can vary from a few months to a year. 

Running a small business can be unpredictable, and there may be a situation when you have little cash on hand but need to make payroll for your employees or take care of an emergency repair. Short-term loans can fill in your cash-flow gap and keep your business afloat. As you might infer from the name, these loans have a repayment schedule of less than a year.

Depending on your credit score and your lender, you can get approved and funded as soon as the next day, which makes it a convenient fail-safe for unexpected expenses that need to be addressed immediately. Short-term loans are more accessible to those with poor credit and can be secured online for amounts as high as $250,000.

2. Apply for inventory financing

Inventory financing involves taking out a short-term loan in order to purchase inventory to sell and can be used only for items fitting this purpose. Since this is an asset-backed loan, the inventory you purchase serves as collateral to secure the loan. That means if you default on the loan, the lender can repossess your products in lieu of repayment. 

In addition to looking at your credit and the overall viability of your business, your lender will examine the type of inventory you’re purchasing before making a lending decision. The lender might have an inventory minimum you’re required to meet in order to qualify for a loan or they may want to examine your inventory turnover rate and your sales volume.

Similar to other loans we’ve described, your bank or credit union will give you the best terms for an inventory loan; however, those loans will be harder to get, often requiring strong credit scores and a healthy, established cash flow. 

3. Apply for Open with Faire

For new retail businesses that are struggling with cash flow, there’s also Open with Faire—a program for independent retailers. Open with Faire is a type of inventory financing that can help with cash flow problems by covering the cost of inventory upfront. 

With Open with Faire, you can apply for up $20,000 in new inventory for your store and pay 60 days later, with no added interest or fees. This is a great option if a large bulk of your expenses is buying products for your store. Plus, you can order inventory from any of the 100,000 brands that sell on Faire.

4. Apply for equipment financing 

If your biggest area of need is purchasing equipment for your retail space, then equipment financing is a great option to consider. You can use an equipment loan for any equipment that’s essential to the successful operation of your business. You don’t need to be in the market for heavy-duty machinery or an 18-wheeler transport truck to qualify for equipment financing; it could be something as simple as a new work laptop or a sewing machine. 

An equipment loan gives you the funds to purchase what you need immediately without paying for everything upfront. You’ll pay the remainder back (plus interest and fees) over a set period, and when it’s paid off, you’ll be the sole owner of the equipment. 

Business owners can get an equipment financing loan from a variety of online lenders, credit unions, and small-business lenders. Online business lenders have the advantage of a speedy application process, while credit unions might be able to get you more affordable terms on your loan. Regardless of which lender you go with, they’ll be looking for a strong credit history or strong and consistent sales from your business.

5. Apply for a business line-of-credit loan

A business line-of-credit loan provides flexibility as this loan works in the same way a credit card does. You’re given a credit limit, and you can borrow any amount within that limit whenever you need it. You’ll pay interest only on the money borrowed, and you can borrow as frequently as you like. 

This solution is ideal for those who have occasional cash-flow issues that don’t necessitate taking out a significant small-business loan. With a line of credit, you can borrow exactly what you need when you need it. Since it’s more similar to a credit card than a loan, you don’t receive one lump sum of cash like the other options we discuss. It instead has a revolving repayment term where you pay down whatever balance you accumulated each payment period.

You’ll get the best interest rates from a traditional lender like your bank, but keep in mind they’ll typically require several years of strong business standing or a high credit score.

6. Apply for a small-business loan through the SBA

Another popular route for retail-business funding is applying for a loan through the U.S. Small Business Administration (SBA). The SBA is a great resource for learning more about your holistic loan options and gathering information on the application process. 

The most common loan from the SBA is the 7(a) loan, which typically acts as a long-term loan. When you apply for a 7(a) loan, the SBA will pair you with a lender who will determine the specific amount and terms of the loan. If you’re having trouble securing a traditional business loan from a bank, this is a good alternative to explore.

There are several types of 7(a) loans, ranging from $250,000 to $5 million, and your lender will help you find the best option for your business. To learn more about the 7(a) loan, visit the SBA’s website

As you learn more about retail business loans, you’ll be able to determine which type of business loan is the best fit for your business and whether you should head to your bank, your credit union, or an online lender. There are multiple avenues for obtaining a retail business loan, but be sure to understand your business and your unique needs before taking on a loan.

Curious about Open with Faire? Apply for up to $20,000, with 60-day payment terms, to stock your new shop.

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