Running a retail business is hard. Starting a retail business can be even harder. One of the biggest hurdles new retail businesses have to surmount is inventory financing.
After all, your store needs to be stocked in order to generate sales, and purchasing those items ahead of your grand opening will require some form of capital (in addition to the cash you’re holding for rent and payroll). That’s why retail businesses might turn to forms of inventory financing, like Open with Faire, to purchase the necessary products for their store.
Let’s dive into how inventory financing can make a difference in your retail business.
What is inventory financing?
Simply put, inventory financing is a short-term loan used to purchase products to sell in your store. It’s a critical tool for retail businesses when it comes to getting started, staying ahead of demand during a busy season, or expanding to an additional location.
Lenders will look closely at your credit history, your inventory turnover rate, and your sales volume before approving you for inventory financing.
Why do I need inventory financing to open my store?
It’s essential to have a thoughtful assortment of curated products the very first day you’re open. A fully stocked store builds credibility with your customers from the start.
Inventory can make up over 50% of your opening costs, and cash flow is often the most challenging problem that new business owners face. Inventory financing enables retailers to stock up, even without cash on hand.
What are the different types of inventory financing?
When it comes to inventory, there are different types of retail business loans that retailers can typically choose from. They can be obtained from your bank, your credit union, an online lender, or programs like Open with Faire.
The two most common forms of inventory financing are inventory loans and inventory lines of credit. They differ from typical business loans in that these funds can be used only toward purchasing inventory to sell. You’ll want to thoroughly research the different types of inventory financing to know which one is best for your business.
Inventory loans are a type of term loan where the borrower receives a fixed amount of money in a lump sum and pays it back with interest for a predetermined period of time. If a borrower defaults on an inventory loan, the lender takes possession of the inventory and sells it to settle the loan.
Since inventory loans usually involve larger amounts of money and have repayment terms that can last up to several years, they’re best for retailers who are making a significant, one-time inventory purchase.
Inventory line of credit
An inventory line of credit works similar to a credit card where a retailer is given a credit limit by a lender, and the retailer can borrow any amount anytime as long as it’s below that credit limit. You can use it as frequently or infrequently as you need, and you’ll pay interest only on the amount you borrow, not the credit limit amount.
Lines of credit for inventory are ideal for retailers who need periodic quick fixes to cash-flow issues that might arise. You can also access funds soon after being approved, usually as fast as the next day. Because of the flexibility, they work best for ongoing purchases, not significant one-time purchases.
Purchasing with payment terms is a bit like buying on credit or with financing. When you’re granted payment terms, it means you can make a purchase and then pay within a specified time window. Common examples are 15-, 30-, and 60-day payment terms, which are also called “net terms.” For example, if you see “net 30 terms” or “30-day payment terms,” that means you’ll have 30 days to pay your invoice. Net terms don’t carry interest fees unless you default.
Open with Faire
Open with Faire is an exclusive program for new retailers that offers up to $20,000 in inventory financing with 60-day payment terms, along with educational resources to help you open your store. Here’s how it works:
- Apply for terms. Let us know how much you’ll need to stock up for your opening, and we’ll issue you anywhere from $5,000 to $20,000 in net 60 payment terms.
- Purchase inventory using your terms. Buy from 100,000 high-quality brands on the Faire marketplace. You won’t pay anything on the day you place your orders, and brands will start working to fulfill your orders right away.
- Sell new products before you pay. Start selling through your new inventory and pay 60 days later.
It takes less than 10 minutes to apply, and you’ll receive a response in a few days.
What are the costs of inventory financing?
Any type of loan you take out for your business will have associated costs and fees you should be aware of when making a borrowing decision. Terms and conditions vary from lender to lender so be sure to read the fine print when researching so you aren’t surprised by additional costs. We list a few of the common ones to look out for below.
- Interest rates: These can vary wildly depending on your lender, your credit history, and the overall health of your business. But expect to pay anywhere from 3% to 20% in interest fees when you utilize inventory financing.
- Origination fees: This fee covers the cost of reviewing and approving your application. It can vary from lender to lender so be sure to shop around.
- Late fees: Borrowers can be subject to late fees if they fall behind on payments.
- Appraisal fees: Depending on the lender, you may be subject to periodic check-ins where they send a third party to audit the movement of inventory and monitor your turnover rate.
Open with Faire is interest-free, meaning you don’t pay interest on what you borrow as long as you pay back the amount within 60 days. Faire also doesn’t apply prepayment fees, meaning you won’t pay a penalty for paying off your loan before the payment term ends, nor will you be charged for not spending up to your loan limit.
What else should I know when starting my business?
We strive to be a partner to you as you open your new retail business, and our educational resources are designed to help guide you through this process. Look at our checklist with tips you need to know before opening a retail store, and be sure to read about additional ways to secure funding for your business.
Ready to get started? Read more about Open with Faire and learn how to apply for up to $20,000 to use toward buying products on Faire.