How to Qualify for a Retail Business Loan

The retail business is full of ebbs and flows caused by seasonality, regulatory changes (including tariffs), and product innovations. Because revenue is not always consistent, getting a loan for retailers can be a useful way to finance operations, access working capital, or fund an expansion opportunity.

But before you apply for a loan for retailers, it’s important to understand what it takes to get approved. This article explores what lenders look for when qualifying applicants for a retail finance loan. Our guide will also show you what you can do to improve your chances for eligibility as you navigate your loan application and work toward getting funded.

Understanding Loans for Retailers

A loan for retailers is a specialized type of small business funding that can be used to:

• Purchase inventory, supplies, or equipment
• Boost working capital
• Invest in technology or automation
• Buy or improve commercial real estate
• Market your retail business
• Hire staff
• Expand operations or grow the business
• Open a second location
• Renovate your retail business

Types of Financing for Retailers

If you are looking for a loan for retailers, there are several types of financing available. Each has its own qualifying criteria, advantages, and repayment terms.

• Term Loans: A term loan offers a lump sum of capital upfront that you repay through regular, fixed payments. The benefit is a predictable repayment schedule and potentially lower interest rates. But most lenders require strong personal and business financials and a high credit score. The exception to this is alternative lenders. Online lending platforms have alternative loan products for borrowers that may not qualify for financing from traditional banks.
• SBA Loans: Small Business Administration (SBA) financing is usually underwritten by an approved SBA lender and backed by the government. The SBA 7 loan program is a common loan for retailers. This loan can finance up to $5 million for working capital, refinancing current business debt, real estate, equipment, or buying an existing business. SBA loans have favorable repayment terms with lower interest rates. But the application process can be frustrating and take months.
• Equipment Financing: An equipment loan can be used to purchase business-related equipment, such as business vehicles, POS systems, and display cases. An advantage of equipment financing is that the equipment purchased with the loan funds serves as collateral. This makes it easier to qualify for the loan, even if your credit isn’t perfect.
• Business Lines of Credit: A business line of credit isn’t actually a loan. Instead, it works similar to a business credit card. You’re approved up to a specific credit limit, and you borrow against the limit. The advantage is that you only pay interest on the amount of credit line used, and the line resets as it’s repaid. A line of credit is a good financing option for short-term expenses. While it’s easier to get approval than with a term loan, a business line of credit can have variable interest rates because it’s based on the FED rate.
• Alternative funding: Alternative loan platforms offer other types of flexible retail financing to meet the needs of today’s small business owners. Merchant cash advances and revenue-based financing are two options that provide fast funding by allowing you to borrow from your future receivables.

Qualifying Criteria for a Small Business Loan for Retailers

Small business lenders consider several factors when qualifying a loan for retailers. Traditional lenders, such as banks and credit unions tend to have stricter eligibility requirements than alternative or online lenders. This means that the underwriting process can also take longer and may be more frustrating for retail borrowers who need fast funding.

For those reasons, many retail business borrowers prefer alternative lenders, who fund within days, not the weeks or months it may take with traditional lenders.

The following is what lenders look for in a borrower seeking a loan for retailers:

Credit History

Lenders often determine a borrower’s creditworthiness through their credit score. In general, the better your credit, the better terms you will receive from a lender, although some alternative lending platforms have flexible funding options for borrowers with low or bad credit.

Annual Revenue and Cash Flow

Lenders scrutinize a borrower’s ability to repay a loan. They usually determine this by looking at a business’s annual revenue and its average cash flow. You will likely have to provide your most recent bank statements to prove that you have enough cash flow to repay the loan.

Collateral

Offering collateral for a retail finance loan can increase your odds of approval because it lowers the risk for lenders. How much collateral is needed for approval varies by lender and the amount of financing you are seeking. If assets are purchased with retail financing for a small business, the assets often serve as collateral, with no additional collateral needed. Generally, the more collateral you can put into the deal, the higher the chance of loan approval.

Business Age

Some lenders will also examine the length of time your business has been operating. The longer you’ve been in business, the better. Most banks prefer to loan to businesses that have been operational for at least two years. But some alternative lenders will fund businesses that are less than two years old.

Existing Debt and Debt-to-Income Ratio

Lenders utilize a debt-to-income (DTI) calculator to determine a borrower’s ability to repay a loan. They calculate the DTI by dividing the business’s monthly debt payments by its gross monthly income. Then, they multiply the number by 100.

For example, if a business’s monthly debts are $3,000 and its monthly income is $14,000, the DTI would be 21.4%.

The lower the DTI, the better. Many lenders prefer a DTI of 36% or lower.

The Financial Documentation Process for a Retail Finance Loan

Another important component of the loan qualification process is preparing your business’s financial documents for the lender to review. This list of documents includes:

• A solid business plan
• Balance sheets
• Profit and loss statements
• Personal and business tax returns
• Bank statements
• Applicable business licenses and permits

Documentation must be as accurate and up-to-date as possible. Lenders prefer to loan money to borrowers who are well-prepared and thorough.

Your business plan should provide an executive summary with an overview of your business, goals, a market analysis, and a description of the business’s operations. Include helpful and relevant financial projections and explain the purpose of the loan.

How to Improve Your Eligibility When Applying for a Loan for Retailers

1. Improve your credit score.

The higher your credit score, the more likely you’ll qualify for a retail business loan. You’ll also get better repayment terms. You can raise your credit score by paying all bills in a timely manner, establishing trade lines with vendors, and reducing your credit utilization.

An easy way to do this is to ask for a higher credit limit with current creditors, so it looks like you’re using less of your open credit. Also, look for inaccuracies on your credit reports and dispute anything that’s incorrect and damaging to your credit.

2. Reduce existing debt.

Lowering your current debt can make room for new debt and look more favorable to lenders. Start by paying off smaller accounts. You might also consider refinancing your current debt so you have a smaller, more manageable payment.

3. Establish relationships with lending specialists.

Forging a rapport with lenders and other loan specialists provides a way to receive valuable advice when seeking a loan for retailers.

Final Thoughts

To get the best terms and qualify for a loan for retailers, boost your creditworthiness by raising your credit score, reducing your debt load, and lowering your debt-to-income ratio.

Many retail business owners also find that working with an industry expert pays off when exploring their options.

For example, when the pandemic impacted Marie Bibum’s pharmacy business, she consulted with Biz2Credit. Although she had applied for an SBA loan, she was discouraged by the lengthy process. Then she heard about Biz2Credit. After a funding specialist walked her through the application process, she had the money she needed for her business much sooner than she anticipated.

The moral of the story is that sometimes, building rapport with an experienced funding specialist can make all the difference when seeking a loan for retailers. Contact us to get in touch with your own funding specialist.

FAQs about how to get a loan for retailers

What types of businesses qualify for a loan for retailers?

The retail industry includes many types of businesses, such as clothing stores, boutiques, convenience stores, gas stations, supermarkets, and specialty stores like furniture, liquor, and sporting goods shops. It also encompasses department stores, pharmacies, malls, chains, franchises, catalog retailers, and e-commerce businesses.

What is the minimum credit score to qualify for retail financing for small business needs?

The minimum credit score required for a loan for retailers is around the 640 to 650 range with a bank and the SBA. But you’ll have an easier time getting approved and receiving better terms with a score of 700 or higher. Alternative lenders have more flexible credit score requirements, with financing options for borrowers with lower credit scores.

Do banks and the SBA require a downpayment for a retail finance loan?

Depending on the loan amount and what it’s used for, a bank typically requires 20% down, while the SBA may require as little as 10% down. Lenders will typically want to see that you are just as invested in your retail business as they are.

Is retail financing for small businesses as easy as getting a loan for other types of businesses?

It can be because the loan funds are often used to purchase inventory or other assets that can be used for collateral. However, other things come into play with a loan for retailers, such as how well the industry is doing as a whole, how long you’ve been in business, and your business’s annual revenue.

Is it better to get a loan for small retail shop financing through a bank or an alternative lender?

Many variables play into whether a loan for retailers is better with a bank or an alternative loan provider. These days, many small business owners prefer alternative loan options. The reason is that it’s easier to qualify with alternative loan platforms, and they offer faster funding.

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