Retail Finance

Retail finance is a broad term that refers to the various types of credit facilities made available to retailers for business operations.

A key reason why retail finance is essential for the maintenance of retail operations and sustaining growth is that cash flow is often a big issue with retailers.

This is because of the capital intensive nature of business and the huge amount of inventory they hold at any point in time.

Goods held in the warehouse and retail outlets are not cash and can often be the reason retail businesses are unable to grow as as fast they potentially could.

For example, a shop can be profitable and have $50,000 held up in inventory. If this $50,000 is freed up, it can use that as capital to open another store to scale the business. And while it can be argued that selling that stock would generate the required funds, a huge portion of sales proceeds would be needed to purchase more inventory.

This is just one management problem that retailers face.

The irony is that the bigger a retail business grows, the more cash flow problems they can face, and the more they need to obtain retail finance.

Types of credit facilities in retail finance

There are countless types of credit facilities lenders can provide to retail companies.

This is in view of the diverse needs required in the various different aspects of running a successful retail business.

These credit facilities are almost always secured with inventory and equipment as collateral. This reduced risk means that retail credit facilities are often underwritten with very high credit limits at very low interest rates.

From the lender’s perspective, profits are made from high volume rather than high margin.

Here are some of the most common types of credit facilities.

Retail credit

Retail credit works some sort of like a credit line offered to the retailer.

A credit limit is set on the facility, and the business would be able to draw on it like a credit card or revolving line of credit to purchase inventory and pay for operating expenses.

This can be useful for payroll to pay the salaries of employees and essential business operating expenses, and general capital expenditure.

Trade line

A trade line enable a retailer to import and export goods with confidence that the risk of losing money from trade is minimized.

For example, when one imports products from China, such facilities enable them to refuse defective shipments without being inclined to pay for them.

So to ensure that they get paid, supplies would have to ensure that the goods they ship meets the criteria that is requested by the importer.

This can also happen when the wrong shipment of products are sent.

Inventory financing

As mentioned earlier, inventory on hand is one of the biggest problems that retailers face.

On the one hand, they want to have enough stock on hand to sell to their customers. On the other hand, the more inventory they hold, the most funds are locked up in the warehouse as inventory.

Inventory financing is often structured as a short term loan in cash that the borrower can use as working capital, or as a retail credit line.

Because a business is expected to sell of inventory within 6 months to a year, inventory financing usually have short tenure that don’t exceed 6 months or 180 days.

The exact terms would depend on the calculation of working capital cycle that the retailer has.

Lenders can sometimes avoid dealing with certain types of products.

Accounts receivable financing

This concerns the amount of receivables that the business has on record.

A lot of times, companies are profitable but face problems with collecting payments in the short term. Some even go bankrupt because of these cash flow problems.

To have more liquidity, retailers can look to obtain financing for the receivables they are scheduled to collect at a later date.

For example, a huge bulk purchase from multi-national corporation could mean a 90 day credit term before payment is due. This can potentially cripple a small retailer due to the deprivation of cash flow. Invoice financing allows the business to get access to funds before payment is due from debtors.

These types of credit facilities are also fundamentally short term in nature.


A retailer might already have retail financing facilities on file, but find that the current lender is basically fleecing them from the expensive interest rates, service fees and charges.

In this case, a new lender can offer to refinance the whole facility on hand, and even structure the facility to better meet the needs of the business.

Should you get retail finance?

Retail business owners often don’t get to decide whether they should borrow.

It is often a necessity if founders have an intention to grow the business to it’s full potential in terms of market penetration.

Either borrower or obtain an injection of funds from venture capitalist.

This is assuming that an investor is even interested in a retail business as they are more often interested in high-tech startups that have developed some kind of disruption technology.

So borrowing is often the only realistic channel of financing retailers can call on.

A small retailers could very well not require financing to be profitable. But expansion would be a big challenge.

And because of how competitive this market it, once a retailer grows big enough, the odds are that lenders would show up to offer retail finance.

Giving the business owner a lot of options to choose from.

It’s a big business with a small market. So lenders are pretty pro-active in sourcing for new clients.

However, since new retail shops have a high inherent risk of closing down within 2 year of opening, lenders usually have some basic criteria of borrowers.

These might include:

  • At least 3 years in business
  • A minimum annual revenue of $1m
  • Low debt ratio
  • etc

The focus is mostly on big retailers with millions of dollars in turnover.

This implies that for small retailers, getting retail financing might not even be an option available to them.

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