Retail funding: buying stock before the season that pays for it

A retail store's cash problem is timing. You pay for stock months before it sells, and most of your year is decided by how a few busy periods go. The money that fits is money you can draw for the stock order and repay as the shelves empty, without dragging the payments into the next season.

The cash-flow shape of a store

Stores take most of their money by card, daily. That's the good news: it's visible, steady and easy for a funder to underwrite. The harder part is the calendar.

• Stock goes out before sales come in. Orders for a busy season are placed and often paid for well ahead of it. Suppliers may give terms, but new stores and new suppliers often want payment upfront.
• Peaks and troughs. For many gift, apparel and toy retailers the holiday season carries the year; for others it's back-to-school, summer, or a local event calendar. The quiet months that follow still have rent and payroll in them.
• Markdowns. Stock that doesn't sell becomes cash only at a discount, which is why borrowing to buy more of the wrong thing is so expensive.
• Fit-outs. New fixtures, a POS system, a second store.

Which funding fits, and which doesn't

A line of credit matches retail best: draw for the order, repay as it sells, draw again next season. A merchant cash advance (a lump sum repaid from a share of your daily card sales) also fits the way stores take money, and on a true holdback the payments shrink in quiet weeks. It is usually the more expensive option, so it earns its place only when speed matters or the line isn't available.

What it costs: a worked example

Say you take $80,000 for holiday stock at a 1.20 factor rate (the fixed multiple you pay back) over 9 months, paid daily.

• You repay $96,000.
• That's 189 business-day payments of about $507.94.
• The cost is $16,000, which is about 50% APR.

Now look at the trap. The same 1.20 factor squeezed into 3 months is about 148.5% APR. Stretched to 18 months it's about 25%. And a 9-month term starting in September is still running through January and February, when many stores are quietest. Run your own numbers in the calculator on this page.

In California, commercial financing providers must disclose the total cost as an annualized rate when they make you a specific offer. In other states, ask for it or calculate it.

Sterling's take: the right term ends before you need to place the next big order.

What funders typically ask a store for

• Business bank statements for recent months.
• Card processor statements showing monthly card volume.
• Your lease.
• ID and ownership details for the owners.
• A list of existing loans and advances with balances.
• For larger amounts: tax returns, a profit-and-loss statement, and sometimes an inventory report.

Our funding partner's programs suit stores trading 12 months or more with about $80K a month in deposits, an owner credit score of 600+ and no more than two loans or advances running. Convenience, vape and phone stores aren't covered right now.

Red flags specific to retail

1. Payments sized to your peak. A fixed daily payment set on December's sales will feel very different in February. Ask whether payments follow your card sales or are fixed, and model the slowest month.
2. Borrowing to replace unsold stock. If last season's stock is still on the floor, more stock funded at a high price makes the problem bigger. Clear it first.
3. Over-collection. The FTC has acted against cash advance providers that debited more than they disclosed and used confessions of judgment to reach owners' personal assets. Check your statements against the agreed holdback every month.

Before you sign

Know your sell-through. If you can say how fast the stock you're funding will turn into cash, you can pick a term that fits it.