Last year I tried to buy a popular board game for my nieces and nephews for Christmas, but was disappointed to learn it was completely sold out. The game company’s website indicated it would be back in stock in February— too late to send it as a gift my family could all enjoy when they were together over the holidays.
I don’t know why this small business ran out of product. They may have experienced larger than anticipated demand and their manufacturer needed longer lead time to produce more. Perhaps didn’t have the financing or financial resources to get as many copies of the game produced as they wanted. Or maybe it was a combination of both. Either way, it was a missed opportunity, which I am sure they regretted. They lost my sale, and who knows how many others.
If your business makes a large amount of sales during the holidays, then you know that stocking up on the appropriate amount of inventory can be tricky. You want to be able to meet demand, but not so much that you’re left with a lot of product you have to store or discount after the holidays. You may also have to staff up, which can mean adding part-time or seasonal employees, or paying overtime for your existing ones.
If you’re lucky enough to have plenty of cash on hand to handle the ramp up, planning is a little easier. But many businesses need to finance those additional expenditures. What are your options?
1. Credit Cards
No doubt this is one of the easiest ways to finance a purchase fast. If you have sufficient credit available on your credit cards, you can simply charge many of the purchases you need. If you don’t, you can shop for a new credit card; many will give you their decision in minutes, if not seconds.
Interest rates on credit cards can vary widely, so try to stick with the least expensive ones you have. What if you need cash for a purchase you can’t pay for with a credit card? You may be able to take advantage of a low-rate balance transfer offer. Instead of using it to pay off another credit card, request that those funds be deposited in your bank account so you can use that money to pay bills.
But be careful: if you max out credit cards your credit scores may be affected. That’s particularly true in the case of personal credit cards where high debt usage can significantly impact your personal credit scores. Many business credit cards do not report to the owner’s personal credit unless there is a default, so that can be an option that will allow you to avoid hurting your personal credit scores.
2. Terms With Vendors
If you purchase supplies or materials you use to produce a product that you sell, you may be able to get your vendors to let you pay for those items later. Net-30 terms gives you up to thirty days after the invoice date to pay, for example, while net-90 terms gives you ninety days to pay. Talk to your vendors to find out what’s required to get this kind of financing. Some will check a business credit score, and others may want to check your personal credit score as well.
3. Line of Credit
A line of credit gives you the same flexibility as a credit card by allowing you to borrow as much as you need when you need it, up to your credit limit, of course. Business lines of credit may be more generous than credit card lines of credit, and may carry lower interest rates. You can check with the bank or credit union where you have your business bank accounts to find out if you qualify for a line of credit through them. You can also shop for an online business line of credit. The online option will probably be more expensive, but it may be easier and faster both to apply and to get funded.
4. Short Term Loan
A short term loan offers funds for a relatively short period of time— usually anywhere from one to three years. Like a line of credit, you may be able to get one of these loans from your local financial institution or from an online lender. Interest rates are often in the middle of the range for various types of financing, and some lenders will require good personal credit scores for the owner, good business credit scores, or both. The advantage of this type of financing is that the requirements to qualify are less strict, and you can generally expect funds to arrive in less than a week rather than waiting two weeks or more for a longer term loan.
5. Business Cash Advance
If you already process a decent amount of sales via credit card or other payment processors such as Paypal, Amazon or Square, you may be eligible for financing that’s often referred to as a “business cash advance” or “merchant cash advance.” Essentially this type of financing advances you money and collects from future sales. This type of financing can be very fast (minutes) but it can also be very expensive. Costs vary and can sometimes be confusing so make sure you understand what you’re paying and whether it makes sense financially for your business. (See tips #5 and #6 below.) One advantage of this type of financing is that personal credit score requirements may be lenient or even non-existent.
6. Inventory Financing
This type of financing is specifically used for financing inventory. If you go this route, your inventory will be used as collateral for a line of credit or short term loan. Even though the loan is secured by inventory, this type of financing is often expensive because the financing company or lender knows that liquidating that inventory would be difficult and expensive if you default. In addition, the lender won’t lend against the full retail value of the property; instead they will use a lower value to determine the loan amount. Getting this type of financing can be difficult and often takes time, so it’s usually reserved for larger loans and for businesses that can’t get other types of financing.
How to Choose
Here are some questions to ask yourself as you evaluate holiday inventory financing options:
- How is my credit? Your personal or business credit scores (or both) can be a factor when it comes to getting approved. You should know both before you start shopping for a loan so there are no unwelcome surprises.
- How fast do I need the money? Usually the faster you need funding, the more you’ll pay for it, unless you’ve already lined up a lower cost option such as a line of credit through your financial institution.
- What happens if sales don’t meet my expectations? If you can’t sell all the inventory you’ve purchases, or you have higher than anticipated expenses, will you have the flexibility to pay back this loan over a longer period of time? How much more will that cost you?
- What happens if I pay it back faster? If sales skyrocket and you’re able to pay the financing off quicker than you anticipated, will you get socked with the equivalent of a prepayment penalty?
- How much will it cost? Comparing the cost of various financing options can be confusing because business loans don’t have to disclose an APR. These free business loan calculators can help you understand the cost of loans you’re considering.
- How does this financing affect my margins? In other words, will you still make a sufficient profit once you’ve paid back the loan or advance? If you’re not sure, talk to your accountant or get professional advice. It’s tough to work your tail off during the holiday season, then realize you have little to nothing to show for it.
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