7 Tips for Choosing the Right Lending Options to Stock Your Holiday Shelves
Retailers of all shapes and sizes know the holidays are the biggest shopping time of year, but did you realize that it can account for as much as 30 percent of your annual sales? According to the National Retail Federation, holiday sales in 2015 accounted for $626.14 billion in sales in the U.S., with $105 billion coming from online channels alone. For the coming 2016 season, holiday sales are expected to increase by an additional $19 billion.
To help your business get ready for the all-important holiday-selling season, having access to financing is critical to capitalize on the surge in customer demand. The extra funds can be a huge help in buying additional inventory, hiring seasonal employees, investing in website and commerce technology or beefing up marketing and promotional efforts. Yet today, most small business owners in the U.S. have difficulty getting much-needed funds to invest in their businesses. When asked whether they could obtain adequate financing in 2015, more than a quarter (27%) of small business owners said no.
This lack of access to funding has given rise to newer, more flexible financing solutions available to small businesses today. However, the range of options, quite frankly, makes it challenging to determine which option best fits your business -- and it involves much more than comparing rates and fees. Below are seven options for your businesses to consider when looking for financing to help prepare for the holiday season.
1. Traditional bank loans.
A term loan from a traditional bank remains an alluring option for one reason -- a competitive APR. With a term loan, you borrow a lump sum and gradually repay it over a predetermined length of time, typically one to 10 years.
- Pros: The good news is that many offer favorable interest rates and familiarity.
- Cons: Keep in mind these loans typically have extensive applications, collateral requirements, slower decisions and relatively low approval rates -- especially for online businesses -- versus other types of lending.
- Best for: A well-established, well-documented business that needs to make a large investment into their business.
2. Business credit cards and lines of credit.
Business credit cards can be easier to obtain than most forms of financing.
- Pros: Convenience and rewards. Plus, it is a good way to build up business credit.
- Cons: This financing option can often attract higher interest and fees.
- Best for: Recurring expenses and purchases you can pay off promptly.
3. Alternative balance sheet lenders.
A balance sheet lender, like Kabbage, holds the loans on its books, rather than selling them off to other institutions or investors. Most alternative balance sheet lenders rely on data from business accounts with banks and/or online services to approve or reject loans.
- Pros: Quick decisions and access to funds.
- Cons: Higher-than-average interest and fees.
- Best for: Filling short-term needs quickly.
4. Payment gateway lending.
Payment gateway lending refers to a situation when a company that processes credit and debit card transactions offers financing programs for businesses that regularly use its services.
One example of a gateway lending product is PayPal Working Capital, which can ease the strain of uneven cash flow by basing repayment on a fixed percentage of daily sales, subject to a minimum payment requirement. Small businesses can choose the loan amount (up to a maximum based, in part, on their PayPal account history), as well as the percentage of daily sales used to repay the loan. Plus, there is no credit check or personal guarantee required.
- Pros: Convenience, shorter payment terms, variable repayment options and competitive costs.
- Cons: These types of loans are only available to members and customers, and may only offer smaller loan sizes.
- Best for: Quick capital to pay for inventory or to manage seasonal cash-flow fluctuations.
5. Marketplace/peer-to-peer platforms.
Marketplace and peer-to-peer lending platforms, like Funding Circle, don’t lend money themselves. Instead, they match borrowers and lenders. Borrowers can often gain access to funds quickly, making these online platforms an attractive loan alternative to traditional banks.
- Pros: Typically has lower rates and faster decisions than other lenders.
- Cons: The fees can be high and potentially offer unfavorable terms for weaker applications.
- Best for: A fledgling business with near-term capital investment needs.
Kickstarter and Indiegogo are examples of crowdfunding platforms that solicit donations for a fledging business and provide a form of return on investment to donors.
- Pros: Some of the funds are donations, and some are loans. It can also help you understand and build your potential customer base.
- Cons: You’ll need to heavily invest in marketing and run the risk of wasting resources that could be used on the business itself.
- Best for: Launching a new business or product with a noteworthy story.
7. Merchant cash advances.
With a merchant cash advance (MCA), you get a lump sum in return for promising a percentage of your debit and credit card sales every day until the advance is repaid.
- Pros: Typically offer fast decisions with straightforward approval if you have a strong sales history.
- Cons: Can include higher costs and possibly unfamiliar terms that may be a burden on a small business.
- Best for: Filling a short-term need when your business doesn’t qualify for other options.
If your business needs a cash infusion before the holidays, make sure you do your homework to understand what financing option is right for you. PayPal offers more information on small business lending and other tips for getting ready for the holidays.