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How To Finance A Growing Business: Guide For Large Retailers

how-to-finance-a-growing-business:-guide-for-large-retailers
How To Finance A Growing Business: Guide For Large Retailers

You did it. You took your business from startup to scale up. For businesses generating at least $1 million in annual revenue, it’s time to further optimize your operations and achieve greater predictability at scale. At this stage, large retailers need to think differently about business financing for continued growth.

So what’s next for you? Maybe you want to expand into a new market. Launch a new product. Upgrade your tech stack. Or maybe you just want to make more bulk inventory orders to get a better price. All of this costs money, and financing is a tool that can help you scale and increase cash flow. 

Shopify Lending: Business financing made for commerce

Leveraging machine learning to analyze data about your business, Shopify will reach out the moment you’re eligible to apply for financing

Check your eligibility

How to evaluate your business’s financing needs

Investing in your business doesn’t stop once you’ve got your feet underneath you. Growth usually means you’ll need more working capital. With many lending options available to businesses these days, it’s helpful to ask yourself a few questions to guide your search:

Do I need financing?

It’s a simple question: Do you need to borrow money to meet your business goals? According to a 2023 Federal Reserve survey, a growing number of businesses used financing to meet operating expenses and drive business expansion. 

How much financing do I need?

Another important question. Money can solve problems, but there’s always a cost to debt. It might sound obvious, but taking money without a real plan to pay it back could potentially lead to more problems.

How will I use financing?

Figuring out how you want to use financing to invest in your business is a good way to determine how much money you’ll actually need. Do you want to open a new location? Buy new equipment? Smooth out your cash flow? Here’s where you can start to identify where your business needs investment, what sort of return you can expect, and how you’ll make repayments. 

What are common financing challenges?

As you might have experienced when pulling together startup funds, financing is not without its barriers. Depending on the lender, you might need to pass ever-rising credit standards, offer collateral, provide documents to prove profitability, or even show a proposal for how your business will use the money. All of these requirements take time to pull together and verify. 

To give you a better idea of what your options are, here are seven of the most common financing options for large retailers. 

7 most common financing options 

  1. Self-financing
  2. Revenue-based financing
  3. Term loans
  4. Lines of credit
  5. Credit cards
  6. Bank loans
  7. Equity financing

1. Self-financing

If you’re a large retailer, chances are you’re already self-financing in some capacity. You make sales, generate a profit, and then reinvest those profits into the business.

Pros

It’s simple: There are no debts to repay or equity you have to offer. It can be a sustainable way to run your business, because growth comes from your profitability. 

Cons

With self-financing, it can take time to generate the cash reserves required to make meaningful investments. During that time, things like cash flow and market conditions can change, which could force you to delay or even abandon investment plans.

2. Revenue-based financing 

Revenue-based financing is a type of loan that is repaid through a portion of future revenue. One type of revenue-based financing is a Shopify Capital Loan. For example, through Shopify Capital, select merchants can repay loans through a percentage of sales.* 

Pros 

Because the loan is repaid through future sales, revenue-based financing can be easier to secure compared to more traditional loans. What’s more, there are no fixed payments. Repayment is variable: You sell more, you repay more; you sell less, you repay less. 

Cons

The flexibility of revenue-based financing can come at a higher cost of debt compared to other financing options out there. Also, while repayment is variable, you’ll still have to prove your business is healthy, as some lenders might require revenue minimums before approving financing.

3. Term loans

A term loan is a type of business financing that offers a lump sum upfront and is repaid over a set schedule with a fixed or floating interest rate.

Pros 

Term loans offer a range of benefits for established businesses. The top advantages of term loans are lower cost of debt, predictable repayments, and the ability to optimize finances and operations. They also offer the ability to customize your loan rates, sizes, and repayment schedule. 

Cons

Term loans often come with rigorous requirements, which means they’re effectively available only to businesses that have established themselves. Depending on the lender and the type of term loan, verification can take days, or even up to a few months in some cases.

4. Lines of credit 

line of credit is an account you can borrow money against. However, there are various types of lines of credit designed to meet the needs of large businesses. When you apply for a line of credit, you’ll receive a maximum credit limit that you can use or draw from, up to that limit. 

Pros 

Because you only need to apply for a revolving line of credit once to start borrowing money, they’re perfect for handling short- and mid-term expenses. Most businesses use lines of credit to smooth out their cash flow and pay for unexpected expenses.

Cons

A revolving credit account isn’t the right fit for every situation, especially because these accounts may have variable interest rates. You may be better off with a term loan for a few reasons: You may be able to save money by locking in a lower interest rate, or a term loan’s payback period might align better with your business needs. Lines of credit are designed for short-term expenses, whereas business loans support long-term investments. For example, if you’re buying inventory that you need to pay back in 12 months, a loan might be a better choice, rather than a line of credit.

5. Credit cards 

Credit cards and lines of credit are not the same thing, although they sound similar and both can smooth cash flows. Here a few key differences between credit cards and lines of credit:

  • Credit cards have shorter repayment periods compared to lines of credit.
  • Credit cards typically have higher interest rates than lines of credit.
  • Credit cards tend to have lower credit limits than lines of credit. 

You can use a credit card to borrow money and pay it off regularly to use it repeatedly, up to a specific maximum credit limit. 

Pros 

Credit cards are helpful when businesses need to make short- or mid-term expenses as well as unexpected expenses. With credit cards, businesses can regularly pay off the balance in full to avoid paying interest. Credit cards also offer flexibility through minimum payments without specific repayment periods. You can also get rewards for using a credit card, including points or cash back on certain purchases, in addition to other perks. 

Cons

Credit cards generally have high interest rates. So if you miss or delay minimum payment, you’ll end up paying the amount borrowed plus interest. Credit cards also tend to have lower credit limits compared to lines of credit, limiting how much you can borrow. It’s also important to understand any fees associated with the card, such as an annual fee or fees based on usage, like foreign transactions and balance transfers. 

6. Bank loans

A private bank loan involves borrowing money from a bank that you can reinvest into your business. You can take out a small business bank loan or a personal bank loan, each with its own benefits and drawbacks. Borrowing for your business against your personal assets could be risky, but it can be done.

Pros 

Banks may give you low interest rates, especially if you bundle your loan with other lending options, such as a commercial mortgage. Banks also have a high level of expertise in lending, given that loans are their primary business.

Cons

Private bank loans can have cumbersome application and loan management processes, with significant documentation and stringent requirements. Banks also sometimes restrict borrowers from using other financing options, making it challenging to add more working capital.

7. Equity financing 

Equity financing is when you raise money by selling a portion of the ownership in the business to investors. Selling shares is an example of equity financing. Equity financing is essentially the opposite of debt financing—the former involves selling stock while the latter involves selling debts.

Pros

Because you’re selling a part of your company instead of taking on debt, there is no immediate financial impact when it comes to equity financing. What’s more, bringing on investors means you’ll also have access to their business expertise and guidance. 

Cons

It’s commonly understood that equity costs more than debt. This is because investors usually expect to see greater returns on their investment compared to lenders. Leveraging equity financing is a highly strategic decision that has more implications than just borrowing money to grow your business. This is because equity financing requires you to give up a portion of your company, and potentially control over how it operates.

5 things to ask your financing partner about

  1. Credit checks
  2. Fine print
  3. Restrictions on other financing
  4. Fees
  5. Liens and other adverse actions

1. Credit checks

Love it or hate it, credit can play a large role in determining which financing options are available to you, and the terms you can expect. While you might have leaned on your personal credit rating in pulling together startup funds, some lenders might expect a solid business credit rating when it comes to financing a scaling business.

2. Fine print

The devil is always in the details. While one financing option might look good on paper, it’s always worth looking into the fine print to understand the fees and terms in detail. As with any other contract, it’s on you to read through it fully before signing. The thing about debt financing is that you have a legal obligation to pay it back.

3. Restrictions on other financing

Before agreeing to accept financing from a lender, it’s worth considering any restrictions one lender might put on other financing options. Known as a debt covenant, this is an agreement between you and a lender that establishes rules around what further financing you can pursue. It’s designed to limit risk to both parties, but it can, in practice, limit your financing options.

4. Fees 

Interest rates are just one element of determining the cost of a financing option. Often, fees can drastically raise your cost of debt outside of the listed interest rate or promotional annual percentage rate (APR). 

5. Liens and other adverse actions 

It’s never comfortable, but it’s helpful to consider the worst-case scenario in the event you can’t make repayments. Often, lenders will claim collateral or put liens on your assets if you default. 

Loan management and payments 

What are the differences between financing from banks vs. fintechs?

Bank financing

Banks often have more stringent requirements for loans, and might even have high minimums on loan amounts to justify the cost of servicing your loan. Bank financing could work in your favor in a few cases: 

  • If you’re a large business with a proven track record who needs a large lump sum of capital
  • If you already have other financing you can package with your deal, such as a commercial mortgage

Fintech financing 

Financial technology (fintech) companies usually have more flexible qualification requirements compared to banks, disperse financing quicker, and are always accessible online. That said, the amount of capital they can lend might be lower, with shorter repayment periods compared to a traditional bank.

How do you renew or continue financing?

Renewing or continuing financing will vary based on your lending provider. Loan renewal might be built into your original loan agreement. For example, if you’re seeking $500,000 in financing, but a lender is hesitant to release that upfront, they might offer an initial $250,000 loan with a renewal for another $250,000 if certain terms are met. In other cases, if you’ve paid on time, they might proactively reach out to renew your loan, or you can proactively reach out to them before your financing agreement matures.

Financing for large retailers: more options, more to consider

Even established, large retailers seek out additional financing to expand their business. Whether they want to purchase more stock, expand retail footprints, or launch new products, it all requires working capital. The good news is that, with a proven track record, it’s likely you’ll have access to more lending options with more favorable terms. Finding financing that works for your business can be key to future growth.

Shopify Lending: Business financing made for commerce

Leveraging machine learning to analyze data about your business, Shopify will reach out the moment you’re eligible to apply for financing.

Check your eligibility

Business financing for large retailers FAQ

How do I get financing for a business?

Before approaching a lender, it can be helpful to examine what you need financing for, how much you need, and what challenges and requirements are involved. From online lenders to traditional banks, there are more options than ever for large retailers to get the financing they need to scale their business.

How do I finance my growing business?

Different types of financing are suited for different purposes. Loans are normally used to finance larger investments like purchasing more stock, opening a new store or entering a new market. Lines of credit usually help smooth out cash flows and cover everyday expenses. It’s not uncommon for a large business to utilize various forms of financing to scale their operations.

Which type of financing requires that the business owner share ownership with investors?

This is known as equity financing, which commonly includes working with venture capitalists or angel investors. While it doesn’t incur any debt, equity also comes with higher expectations for returns to shareholders as well as complexities in ownership. That said, it’s common for businesses to use a combination of equity and debt financing.

What type of financing is needed to scale up a business?

It’s normal for businesses to use multiple types of financing to scale their operations. Revenue-based financing is most commonly used by small and mid-sized businesses to grow. Comparatively, large retailers are more inclined to use combinations of specific financing types, like lines of credit and term loans to further optimize and expand their operations.

*Shopify Capital loans must be paid back within 18 months, and minimum payments apply at 6 and 12 months. Merchants must pay a minimum of 30% of the Total Payment Amount within 6 months of receiving funding and an additional 30% within 12 months of receiving funding.

This article is focused on industry standards and descriptions are not specific to Shopify's financial suite of products. To understand the features of Shopify's lending products, please visit shopify.com/lending.

Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital, Line of Credit, and Term Loans, is issued by WebBank in the United States.

This originally appeared on Shopify and is available here for wider discovery.
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