Every retailer encounters the need to raise funds at some point. Whether you’re looking to open your first (or 50th) shop, or you need to purchase additional inventory or equipment, the topic of business financing is very common in retail.
That’s why it pays to have knowledge of the different types of financing available to business owners. When you know your funding options, you’ll be able to make a more informed decision and select the best one for your business.
If you’re thinking of raising money for your business, here’s a roundup of funding options you should consider:
Use existing revenue or assets
If you already have an existing business that’s doing well, consider using your revenue to fund your expansion. Doing so will help you avoid the headaches that come with loans or outside investors (i.e. interest, equity, etc.)
However, one thing to keep in mind when using existing revenue is to make sure that you’re not diverting too much funds away from your current business.
Obtain a loan or line of credit
If using your existing funds isn’t an option, you can try to finance your venture using loans or lines of credit. In this section, we’ll talk about the types of loans you can apply for, as well as your best sources of funding.
Let’s take a look at a few broad categories when it comes to loans. It’s best to understand these general loan concepts, as they will help you decide which loan types are suited for your needs:
Long-term vs. short-term loans
Loans can either be short-term or long-term. Short-term loans need to be paid in full at the end of the term (usually 12 months or fewer). They’re typically below R100,000 and are often used for small or short-term projects such as purchasing inventory, covering accounts payable, seasonal costs, etc.
As for long-term loans, repayment is due over a period of more than one year. And unlike its short-term counterpart which requires a full repayment, long-term loans are repaid on a monthly basis. Their interest rates tend to be lower than short-term loans as well. These loans are often utilized for long-term needs or big purchases, such as refinancing, acquisition, and more.
Unsecured vs. secured loans
Creditors naturally want to have some reassurance that they will get their money back and this is where the concepts of secured and unsecured loans come in.
Secured loans are ones that require collateral–meaning, an asset that the creditor can sell in case the loan isn’t repaid. Types of collateral can include real estates, cars, trucks and heavy equipment, furniture and fixtures, receivables, etc.
Unsecured loans on the other hand are credit-based. This means the lender is counting on your creditworthiness when they grant the loan. You won’t have to provide any assets as collateral, but if you default on your loan your credit could take a massive hit and the creditor could try to obtain a money judgment against you.
Lines of credit
Unlike the loan types above, which provide debtors with a lump sum, lines of credit work in a similar way as credit cards. The lender provides you with a maximum loan balance that you can draw from at any time, and you pay interest only on your outstanding balance.
Raising money is a daunting task, but hopefully the information above gave you a better idea of what your options are. Before jumping into a financing method though, be sure to do some digging into your own finances, as well as into the funding source that you’re considering, to ensure that it’s the right option for you.