Every business needs financial support from time to time. A retailer is no exception.
High costs are often associated with the retail industry due to rents, staff and stock requirements. These costs may lead to cash flow difficulties if they aren’t balanced against suitable revenue. This is equally true for online businesses.
Fortunately, stock finance is a solution created to boost cash flow. It’s also highly relevant to the product-based nature of retailers.
Our guide explores stock finance in more detail and how it can help retail businesses unlock capital.
- Why is stock finance helpful for retail businesses?
- How does stock finance work?
- Considerations
- Alternative funding forms for retailers
- Access finance for your business
Why is stock finance helpful for retail businesses?
Stock finance – also known as wholesale stock finance – is highly compatible with retail businesses. It only works with product-based ventures – which retailers are.
Many retailers have stock sitting in their storage facilities. Stock finance allows you to turn this unused stock into capital rather than just gathering dust.
It will also offset the costs associated with running a retail business, including the expenditure on supplies and inventory.
Some retailers are subject to seasonal peaks, which affect sales volumes. It might mean their revenue fluctuates over the year or certain products sell more frequently at specific times. In off-peak times, unused inventory is likely to be highest, giving you more collateral to raise finance against.
Better yet, utilising stock finance will also boost cash flow during low revenue periods.
Finally, stock finance offers a consistent credit line that fuels the operating cycle, allowing you to be productive even in periods of low revenue. It will provide reassurance during these stages, giving you the cash flow you need to survive when sales are down.
How does stock finance work?
Stock finance is a form of lending that uses your inventory as collateral. Once you identify a lender, they will conduct a third-party stock valuation to determine its worth.
Once the stock finance facility terms are agreed upon, you must update the lender regularly (usually weekly or monthly) regarding your inventory. The lender will revise the funding based on stock movement.
Stock finance is often provided in combination with an invoice finance facility so that once stock is delivered and invoiced, the invoice finance repays the stock finance. However, this won’t be an option if your business is consumer facing.
For consumer-facing brands, stock finance will typically take the form of a short-term loan or credit line. In some cases, it may include merchant cash advances, enabling you to borrow money upfront and repay the lender with a percentage of future sales.
Stock finance is also confidential, so you do not need to disclose it to your customers and stakeholders. It may also be used alongside other funding types.
Another benefit of stock finance is that it monitors stock movement. This also helps you to gain insight into your inventory, allowing you to understand how much stock you use and when for better management.
Considerations
Although stock finance benefits retailers, there are considerations to determine if it suits your company.
Stock finance solutions typically have strict terms that won’t suit everyone. You need to have a stock of significant value – in some cases, at least six figures for the lender to be willing to underwrite the loan.
Stock finance is expensive with rates in the region of 3% per month and upwards. You need to pay to set up the facility as a detailed appraisal of your stock will be carried out by an expert evaluator. The ongoing costs could also be high as stock appraisals are repeated regularly.
This is on top of the effort required to secure stock funding, which usually requires you to hand over detailed financial records to the lender – including balance sheets, profit and loss statements, inventory turnover ratios and any other information that might showcase how your business is performing. Failure to do so will make you ineligible.
The documentation and valuation needed also slow down the process. If you seek a quick release of funds, stock finance likely isn’t the one for you.
If you plan to grow your company soon, it’s vital to understand how it will impact the facility. It can complicate things as the value of your inventory is more likely to fluctuate, meaning your funding level will adjust too.
It’s worth bearing in mind that the lender will seize inventory to clear the balance if you do not stay on top of repayments. If this happens, it could harm productivity and make it difficult for you to meet demand.
Finally, getting the balance right when using stock finance is crucial. Too little stock will make it hard to fulfil sales, while too much will cause you to lose money tied up in unused inventory. Before considering stock finance, you should get a handle on your stock management processes and ensure they are efficient to avoid any issues.
Alternative funding forms for retailers
If stock finance doesn’t sound like a fit, or you want to compare it against other routes, there are other options to boost cash flow in the retail industry. We’ve listed them.
Invoice finance
We’ve already mentioned that invoice finance is sometimes combined with stock finance. It can also be used on its own, provided your business sends invoices to other businesses.
Invoice finance utilises unpaid invoices as collateral, enabling you to unlock capital of up to 90% of the total amount owed. It helps release funds that would otherwise be frozen until your customers pays you, allowing you to maintain productivity and cash flow in the interim.
As stated, invoice finance requires you to have invoices in place with your customers. If your customers pay upfront for your goods or pay deposits, then these amounts would be discounted from any facility. This is accessible for many businesses selling in a B2B environment.
Trade finance
If your business sells goods to customers overseas or imports materials to sell to UK customers, you may benefit from trade finance.
Trade finance closes the funding gap between exporters and importers. Rather than awaiting customer payment, you will receive a loan that allows you to purchase supplies to complete orders. You simply need an order from overseas or a UK customer which you need imported supplies to fulfil it.
Utilising trade finance will support you in taking your brand to a global marketplace and strengthening supply chains while managing cash flow and reducing financial risks.
Commercial loans
If you have a funding gap in your business, a loan may be the solution. Depending on your eligibility, you can raise anywhere between the low thousands to significant sums for your company.
There are many options for commercial loans on the market, designed to suit a variety of businesses. A secured loan will provide higher funding levels at better interest rates if you have assets to utilise as collateral. If not, an unsecured loan will give you capital without the need for security.
Most loans will require an application and supporting documentation that proves your reliability to repay as per the agreed schedule. However, if you are successful, it will offer a financial injection that boosts cash flow and even fuels growth.
Access finance for your business
Stock finance is a valuable tool available to any product-based business – including bricks and mortar and online retailers. If used correctly, it frees capital tied in your unused stock, enabling you to boost cash flow and overcome seasonal challenges.
However, it is always worth considering other options on the market until you find a funding solution that best suits your needs.
Working with a financial specialist like Pegasus Funding is crucial if you wish to access finance for your business. We work with you to understand your specific requirements and find fitting solutions.
We will also put you in touch with the right contacts who will provide the funding you need and guide you through the process.