Guide to Receiving a Business Loan
for Brick-and-Mortar Stores
Owning and operating a brick-and-mortar store can demand numerous resources from a business owner, including time, money, and determination. If you are looking for additional financing and wondering how to get a business loan for your brick-and-mortar store, Biz2Credit is here to tell you all about the different loan options that are available to you. Before we dive into the different types of loans that could be appropriate for your business, we will review some important considerations that should be addressed before starting the journey of securing financing for your brick-and-mortar business.
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What is a Brick-and-Mortar Store?
A brick-and-mortar store is a physical business that sells products or services in an establishment that a customer can visit. The term can also refer to companies that own and operate factories or warehouses where they produce and store goods.
The Current State of Brick-and-Mortar Businesses
With terms like “retail-apocalypse” being tossed around, it inevitably raises many questions on the current and future state of brick-and-mortar stores. As the owner or hopeful owner of a brick-and-mortar store, it is important to understand just what that landscape looks like. According to The Balance Small Business, e-commerce only accounts for 14% of all sales. So, while it may feel like people are ditching the traditional in-store shopping experience for clicking “add to cart,” the data shows otherwise. When looking at which method people prefer shopping, 46% of people said that they prefer shopping in physical stores rather than online, according to Raydiant. While this is a 9% decrease compared to the 2020 State of the Consumer report, one can assume that a portion of this decrease can be attributed to the COVID-19 pandemic and the fear of exposing themselves to the virus while in public.
Why Financial Needs are Different for Brick-and-Mortar Businesses
Brick-and-Mortar businesses experience financial demands that a business without a physical location will not face. It is important to consider which of those expenses your business will incur and how those will affect the amount of extra capital you will need to acquire. Below are some of the typical costs that an owner and operator of a brick-and-mortar store can expect to cover.
Purchase or Renting of Commercial Real Estate
When you operate a brick-and-mortar store, you will need to purchase or rent the commercial real estate where you will be operating your business. This can come in the form of office buildings, retail or restaurant spaces, hotels, land, or multifamily spaces. If you are seeking financial assistance to cover the purchase or rent of commercial real estate, continue reading to understand what type of loan is the most appropriate for your situation.
Stocking of Inventory
When you operate a brick-and-mortar store, you will need to purchase inventory to keep your store stocked for your customers to browse and purchase when they visit. In addition to the ready-to-purchase goods, you may need some type of warehouse or storage where all additional goods are kept until they are moved to a sales floor.
Purchase of Equipment
As an owner of a brick-and-mortar store, you will likely have to purchase equipment to keep your business up and running. Whether you need to purchase an x-ray machine for your private medical practice or a large pizza oven for your restaurant, these purchases can require a large amount of up-front capital and that is where equipment financing will come in handy.
Point-of-Sale (POS) software is an essential part of operating a brick-and-mortar store. This is where all information will be stored concerning customer transactions, such as purchases, returns, and exchanges. POS tools will also be able to provide you with critical business insights on things such as sales reporting and analytics.
Purchasing Marketing and Signage Materials
All small business owners typically allocate funds to marketing efforts, but when you own and operate a brick and mortar, you will incur unique types of marketing and advertising costs. For example, you may want to print and post physical signs about your business around your community or create materials to display in your store advertising special promotions. Additionally, you may choose to hire a staff member to hand out promotional materials to people around your business location.
Renovation and Upkeep of your Physical Business Location
An inevitable cost of owning a brick-and-mortar store will be the upkeep and renovations that come with operating out of a physical storefront. Whether it is a more minor cost such as repainting the interior of your store or a larger cost like expanding the size of your store, as the owner of a brick-and-mortar store, be prepared to allocate money to these types of expenses.
Now that you understand the different types of expenditures you will typically incur as the owner and operator of a brick-and-mortar store, you may be considering if an e-commerce store might be the most appropriate route for you and your business. Like a brick-and-mortar store, an e-commerce store will face expenses that the other will not, so it is important to consider those before deciding what type of model is best for you. Check out this in-depth article from Biz2Credit that discusses the unique expenses that e-commerce businesses incur and the types of financing you can apply for to cover those expenses.
Common Business Models Chosen by Brick-and-Mortar Stores
Within the category of brick-and-mortar stores, there are several different key business models that business owners will need to decide between.
Franchising allows the franchisor to license its resources and brand name to a franchisee who will own and operate the store on the franchisor's behalf. The popular fast-food chain, Mcdonalds is a notable example of a successful franchise model, as 93% of their 38,695 restaurants are franchised.
Department stores consist of products across a variety of departments such as beauty, clothing, home furnishings, and more. This can be an attractive business model as these types of stores typically offer something for every type of shopper, which will allow a department store owner to generate a substantial amount of business.
In contrast to a department store, a specialty store will only sell goods related to one specific area. A benefit of this type of business model is that you can give each of your customers a specialized in-store experience that will cater to exactly them and their specific needs.
Convenience stores are a great way to start a business that will ensure very high foot traffic. As the name suggests, convenience stores are usually located in residential or commercial areas so they are easily accessible. By offering customers a quick place to stop and get things like gas, snacks, drinks, and many other everyday items, you are sure to see a high frequency of customers every day.
Focused on selling food and culinary-related items, grocery store business owners have the benefit of operating a business model that sells goods that are essential to each person. When you operate a grocery store, you will likely possess products with short shelf lives that need to be sold quickly to avoid losing money on spoiled goods. If you want to operate a store with goods that have a much longer shelf-life, consider if a liquor store could be the right option for you.
In the United States, alcohol sales made up a multi-billion dollar a year industry. If done right, operating a liquor store can be a very lucrative business model, but it will take patience and dedication. Due to the high regulations of the importation, distribution, and sale of alcohol, the market is not over-saturated with other stores. Because of this, if you enter the market, you will typically have low competition. Another benefit of owning a liquor store is that, unlike a grocery store, your inventory will be very shelf-stable. So, if operating a brick-and-mortar store in the food and drink space interests you, but you do not want to deal with expired goods, a liquor store could be an excellent option. Read how this Maryland entrepreneur was able to build four thriving liquor stores after receiving financing from Biz2Credit.
Are you Managing Small Business Finances Optimally?
Before you begin to apply for financing for your brick-and-mortar business, it is important to ensure that you are managing the finances of your business in a manner that is sustainable for you and your business. Fully understanding the financial situation is also vital to know what type of small business loan is best for you and your business. Our Guide to Managing Small Business Finances covers everything you need to know to manage the financial side of your business, explains the importance of having a business plan in place, and discusses the different tools and techniques you will need for your business. This helpful article is your go-to guide for everything you will need to consider relating to the financials of running your brick-and-mortar store.
Determine the Best Term Length for Your Small Business Loan
Another important consideration when applying for a business loan for your brick-and-mortar store is deciding on the term length of the loan. It is important to know that there are pros and cons that come with a shorter-term loan versus a longer-term loan. Picking the Right Term Length for Your Small Business Loan is an essential step for securing funding for your brick-and-mortar business.
Understand the Risks and Benefits of Business Loan Collateral
One aspect that you may run into when deciding what type of loan is best for you and your brick-and-mortar store is loan collateral. Loan collateral is when you pledge something of value to the loan lender so that if you default on a loan payment, the lender can take possession of the pledged asset to recoup their lost money. A loan that requires collateral is called a “secured business loan” while those that do not are referred to as “unsecured business loans.” For a deep dive into the topic of loan collateral and to understand how it could impact the type of financing that you receive, check out our article on Understanding the Risks and Benefits of Business Loan Collateral.
How to Apply for Financing for Your Brick-and-Mortar Store
Preparing your application and supplementary materials will be one of the most important steps you take when applying for financing. The documents that you will need to submit when applying for a small business loan will vary by lender and loan type, but here are several of the documents that you will likely need to produce when you submit your loan application:
Business documentation that proves you are a legal business, such as your business license, along with background information that will allow the lender to understand your business (such as a business plan).
Information on all business owners: Lenders will need information on all business owners, along with any business partners. Be prepared to submit documentation for each person, including personal and background information, such as resumes.
Tax returns for lenders to establish both your business and personal income.
Financial documents including bank statements, balance sheets, cash flow reports, and more to show lenders that you can repay the loan.
Lenders will also want to see any current debt that you may have, so be prepared to let them know about any outstanding loans or business lines of credit.
What Are the Different Types of Loans for Brick-and-Mortar Stores?
Now that you know what to consider before applying for a business loan, it is time to research the different financing options and choose which is most appropriate for your brick-and-mortar business.
SBA (Small Business Administration) loans are offered through banks and are backed through the SBA. This backing means that lenders can offer favorable interest rates and repayment terms to borrowers.
- 7A Loans
The 7A loan is the most popular lending option offered by the SBA. Under this program, small businesses can secure federally guaranteed loans of up to $5 million by applying directly with an approved lender. This money can be used to purchase equipment, real estate, construct or renovate an existing building, assist in the operation or expansion of an existing business, or refinance existing debt, under certain conditions.
If you are interested in a smaller loan size, the SBA’s Microloan program could be exactly what you are looking for. Capping out at $50,000, these Microloans are typically used to cover a variety of business-related expenses, including inventory, machinery, and working capital.
- 504 Loans
504 loans allow businesses to access necessary capital for specific fixed assets like real estate, machinery, and other equipment. The upper range of these loan amounts can be between $14 - $20 million and are processed through a network of SBA-approved lending partners called Certified Development Companies.
Small Business Loans
A common financing option is to secure a small business loan. These are typically done through a traditional lender, like a bank or credit union, or a non-traditional lender, like an online lender, such as Biz2Credit. A term loan is a common type of small business loan that has a clearly defined amount, repayment schedule, and interest rate. Considering a term loan for your brick-and-mortar business? We recommend researching different lenders, choosing which one is right for you, and contacting them directly to learn more about their application process and requirements.
Commercial Real Estate Loans
If you plan for your small business loan to be used to purchase commercial property, a commercial real estate loan (CRE loan) might be the most appropriate financing option for your brick-and-mortar business. CRE loans are typically used to purchase property for commercial use or to renovate an existing commercial property.
Working Capital Loans
Working capital loans are a great option for anyone looking to finance their business’ day-to-day operations, including everything from payroll to rent. Many working capital loans require high credit scores and collateral and other requirements that will vary by lender. If you have specific questions about the application process and your eligibility, we recommend that you contact your lender directly.
Bridge loans are short-term loans that provide immediate cash assistance to small businesses, meant to bridge a business’s financial gap. This form of financing is an excellent option if your brick-and-mortar store is looking for cash immediately and you know that you will be able to pay it back quickly. These types of loans are offered through both traditional and online lenders but are not provided by all lenders, so it is important to discuss if bridge loans are offered before you start working with a certain lender.
Business Line of Credit
A business line of credit allows you to take cash out when you need it, up to a fixed amount. While you have access to the line of credit, you can use as much or as little of that capital as you would like, and you only pay interest on the funds that you end up using. A business line of credit is a flexible, often low-cost way to get short-term financing to cover your working capital needs. If this sounds like the type of financing your brick-and-mortar store needs, you can apply for a line of credit with both traditional and nontraditional lenders. It is important to note that eligibility requirements will vary by lender so if you have specific questions about the application process and your eligibility, you should contact your lender directly.
Running a business means that you will have times where your income has ebbs and flows. By securing supplemental financing for your brick-and-mortar business you will help ensure the long-term financial health of your business.
Biz2Credit is pleased to offer several types of small business financing, including Working Capital, Term Loans, and Commercial Real Estate Loans. Are you interested in learning more about our different financing options and how they could potentially be a good fit for you and your business? Contact a Biz2Credit funding specialist today.
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