Retail Business Loans: Costs, Terms & Requirements

Retailers often get financing to grow their business or to purchase inventory and ramp up for busy times of the year. Retail business loans come in various forms, such as a short-term business loan that can be used to cover expenses in preparation for the busy season, or a Small Business Administration (SBA) loan to buy real estate and expand.

Best Retail Business Loans

How We Determined the Best Retail Business Loans

Typically, retailers have thin margins and seasonal revenues. When it comes time to fund inventory to prepare for your busy season or to replenish your levels before they run out, you haven’t yet received cash from your customers. This is the biggest cash flow need for retailers, and it’s the first thing we considered when determining the best retail small business loans.

Retailers are a unique business for financing because needs can vary greatly from one retailer to the next. The products you sell, and the time of year, will determine which retail business loan is right for you. For example, if you’re looking to fund small inventory amounts or prepare for the unexpected, then a business line of credit may be the right choice. However, if you need commercial real estate for a new location, an SBA loan may be the right fit.

Short-term Retail Business Loans

Short-term loans offer lump-sum financing that will enable you to spend a large chunk of money all at once to help prepare for your busy season and replenish your business inventory. Short-term retail business loans can be for amounts up to $500,000 with one- to three-year terms but carry an expensive annual percentage rate (APR) of 10% to 100%.

Short-term retail business loans are the best fit for many retailers looking for capital to fund known and forecasted inventory purchases. As a retailer, you should be able to predict how much inventory you must prepare for the fourth quarter demand. A short-term loan can help you prep for that busy time.

Short-Term Retail Business Loan Costs

• Expected APR: 10% to 100%; can be as low as 9.99% for prime borrowers
• Prepayment penalty: None
• Origination fee: 0% to 5%

Short-term Retail Business Loan Terms

• Loan amount: Up to $500,000
• Repayment term: Three to 36 months
• Repayment cycle: Weekly
• Time to funding: One to three days

Short-term Retail Business Loan Qualifications

• Personal credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Business Line of Credit for Retail Funding

A business LOC is a preapproved amount of money you can draw down repeatedly until you reach the maximum borrowing amount. You’ll only pay interest on the amount you’re borrowing, and you won’t have to reapply every time you need additional capital.

A business line of credit is great for retailers needing quick access to capital. For example, your seasonal headcount might vary based on your daily sales, and you may need quick access to capital to hire more employees than you expected once your busy season begins.

Business Line of Credit Costs

• Expected APR: 10% to 75%; can be as low as 13.99% for prime borrowers
• Prepayment penalty: None

Business Line of Credit Terms

• Loan amount: Up to $100,000
• Repayment term: Up to 12 months
• Repayment cycle: Weekly or monthly
• Time to funding: One to three days

Small Business Line of Credit Qualifications

• Personal credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Equipment Financing for Retailers

Equipment financing comes in the form of a loan or lease and is used to purchase large equipment with a long useful life. The equipment itself serves as collateral for these retail business loans, which helps lenders offer low interest rates and makes it easier for you to qualify for larger loan amounts.

The retailers that will find this loan most beneficial are grocers or hybrid stores with large display cases, freezer cases, or equipment for prepared foods. This can also be helpful if you’re a large box retailer needing to replace equipment in your backroom like a forklift or loader. The only downside is that you can’t use the funds for other working capital needs.

Equipment Financing Costs

• Interest rates: 6% to 9%
• Fees: Varies by lender, but there is typically an origination fee

Equipment Financing Terms

• Financing amount: $10,000 to $500,000; up to 95% of equipment costs
• Repayment term: Two to seven years, based on the expected useful life of the equipment
• Payment frequency: Monthly
• Funding speed: Two to five business days

Equipment Financing Qualifications

• Credit score: At least 600
• Collateral: Equipment being financed
• Down payment: At least 5%
• Other requirements: No bankruptcies, foreclosures, or repossessions on your credit report

Business Credit Cards for Retailers

Business credit cards are small credit lines you can use repeatedly while earning rewards. You can get approved for as much as $100,000, but most retailers generally are approved for no more than $30,000. Some cards offer 0% interest on all purchases for the first seven to 18 months, which can help you make a critical purchase.

Business credit cards can be a good fit for any retailer because these cards can be used for many short-term working capital needs. These cards also offer rewards you can take advantage of like cash back or points you can spend on merchandise or travel. You can often take advantage of these rewards by using your card to pay for routine monthly expenses you’d be paying for anyway.

Business Credit Card Costs

• Interest rate: 15% to 29%; some have 0% introductory offers
• Annual fee: Up to $350

Business Credit Card Terms

• Loan amounts: Up to $100,000 but typically less than $30,000 for most businesses
• Repayment terms: 30 days interest-free
• Time to funding: Instantly to two weeks―the time to receive your card
• Initial rewards: Introductory APR of 0% for seven to 18 months, and a cash bonus or points bonus if you spend a certain amount within the first two to six months
• Ongoing rewards: Cashback or rewards points

Business Credit Card Qualifications

Lenders also consider your annual revenue during the application process, but typically there isn’t any requirement you must meet to get approved. Your annual revenue will have a direct impact on the amount of funding your business receives. You’ll also want to have a credit score of at least 680 to qualify for the best offers and rewards.

SBA Loans for Retailers

An SBA loan is guaranteed by the SBA, and it carries long repayment terms with some of the lowest rates available to retailers. SBA business loans for retail stores are originated and serviced by approved lenders. There are many types of SBA loans, but the best one for both working capital and commercial real estate is the SBA 7(a) loan.

SBA loans are best for retailers wanting to purchase their own location or invest in an entire shopping center. Location is everything in the physical retail business, and owning your own locations can help you build brand equity and customer loyalty. Plus, this could be a great fit for a retail business looking to rent out as much as 49% of its commercial space.

SBA Loan Costs

• Interest rate: 8% to 11%
• Prepayment penalty: None
• Origination fee: 0.5% to 3.5%
• Loan packaging fee: $2,000 to $4,000
• SBA guarantee fee: 2% to 3.5%

SBA Loan Terms

• Loan amount: Up to $5 million
• Repayment terms: Up to 10 years; 25 years for real estate
• Repayment cycle: Monthly
• Time to funding: At least 30 to 90 days

SBA Loan Qualifications

• Minimum credit score: 680
• Collateral: Typically required
• Down payment: At least 10% to 20%
• Time in business: Any, from startups to mature businesses

Merchant Cash Advance for Retailers

An MCA is an advance that a lender provides against your debit card and credit card receipts in return for a percentage of those receipts. MCAs are expensive, with an APR that can be as high as 120% or more. In most cases, an MCA is considered a last resort option because of these costs.

MCAs can be a good fit for retailers needing flexibility in their repayments because you don’t owe a set amount each day or week. You’ll instead pay a percentage of your daily credit card receipts until it’s paid off, with terms as long as 18 months. Many retailers make their sales from debit and credit card receipts, so it can be a good way to get financing that doesn’t burden you during slow periods.

Merchant Cash Advance Costs

• Expected APR: 50% to 120%
• Factor rate: 1.1 to 1.5 times the loan amount
• Holdback percentage: 8% to 30%
• Prepayment penalty: None

Merchant Cash Advance Terms

• Loan amount: Up to $500,000
• Repayment term: Up to 18 months
• Repayment cycle: Daily, between 8% and 30% of daily credit and debit sales
• Time to funding: Two to five days

Merchant Cash Advance Qualifications

• Personal credit score: No minimum requirement to at least 500
• Credit card receivables history: At least two years
• Annual credit card sales: At least $50,000

Point-of-Sale Financing for Retailers

POS financing or merchant financing is like an MCA in that it’s a lump-sum payment based on the value of your credit and debit card sales. Unlike an MCA, POS financing is typically offered by online companies like Square or PayPal. However, repayments are still based on a percentage of your daily credit and debit card sales.

This type of retail funding is best for those who use Square or PayPal to accept payments and need lump-sum financing for their working capital needs. It’s a great option if you know how much you need but want the flexibility of variable repayment terms while you cycle from one season to the next.

POS Retailer Financing Costs

• Expected APR: 30% to 60%
• Factor rate: 1.1 to 1.5 times the loan amount
• Prepayment penalty: None

POS Retailer Financing Terms

• Loan amount: Up to $250,000
• Repayment term: Up to 18 months
• Repayment cycle: Daily
• Time to funding: One to three days

POS Retailer Financing Qualifications

• Personal credit score: No minimum requirement
• Annual POS sales: At least $10,000 per month

4 Tips to Improve Retail Funding Chances

When retailers are being evaluated for a potential loan, one of the most important things is your future cash flow projections. Retailers have thin margins, and the industry is seasonal, so a mistake or a dip in revenue can be disastrous for your ability to repay the loan. That’s why traditional lenders are so heavily focused on your cash flow during the application process.

1. Make Sure Your Revenue Is on the Rise

During the holiday season in 2018, retailers received $505.8 billion in revenue, with the industry growth of 2.1% per year during the last five years. If your revenue falters during your busy season, then you may not have enough capital to survive the rest of the year.

2. Improve Your Inventory Turns

The faster you can turn your inventory, the more your revenue will grow and the less cash you have tied up into inventory sitting on the shelf. The faster your inventory turns, the better your chances will be of getting a traditional loan like an SBA loan.

Being able to show a potential lender that you have a good handle on your financials and your inventory will go a long way to increase its confidence in your business and improve your chances of getting approved for a loan.

3. Choose the Right Time to Apply

The amount of annual business revenue your business generates is the second most important thing that will be considered during an alternative loan application process. To maximize your potential of getting approved, you should be strategic about when you apply. You should wait and apply when your revenue has been up for three to six consecutive months.

As a retailer, you can apply during or right after your busy season. While the lender will know you’re in the middle of your best financial quarter, it will expect to see strong revenues, and it can help your overall approval chances.

4. Use Inventory as Collateral

Retailers might not have a lot of assets to use as collateral, like real estate. This can cut down the number of options you have when looking for financing. However, you can use your inventory as collateral to reduce the amount of risk to your lender. The only downside is that your lender will require you to keep your inventory at a certain value for collateral.

Your other option is to find a lender that doesn’t require collateral. Many alternative lenders will look more closely at your revenue and personal credit score to approve you for a loan than how much collateral you have.

Bottom Line

Retailers need capital to fund growth through marketing efforts or to purchase inventory to prepare for your busy season. Retail business loans can help your business get the capital needed to grow and maintain inventory levels to maximize your sales. The best loans will fund quickly and provide enough capital to buy enough inventory to fill up your store.