An Overview of Retail Loans
The phrase “retail loans” refers to loans obtained from retail lenders. However, in some cases, the phrase can also apply to loans taken out by retailers. To shed some light on the similarities and differences between these two definitions, here is an overview and a look at some related concepts:
What are retail lenders?
Retail lenders are lenders who work with individuals rather than institutions. Credit card companies, banks, credit unions, and savings and loan institutions as well as many alternative lenders are all classified as retail lenders. The opposite of a retail lender is a wholesale lender. Rather than granting loans to individual consumers, wholesale lenders underwrite loans for other lenders.
To illustrate, a wholesale mortgage lender may extend mortgages to independent mortgage brokers and loan officers. In turn, those brokers and loan officers lend mortgages, classified as retail loans, to individual consumers.
What are retail loans?
Retail loans include a vast range of different loans. Personal loans such as car loans, mortgages, signature loans and credit cards all fall into the category of retail loans, but business loans can also fall into the category of retail loans. If a business owner takes out a business line of credit, an installment loan, a mortgage on a property, an equipment loan, a small business credit card, a microloan or practically any other type of loan for his business, those loans also fall under the umbrella of retail loans.
What are loans for retailers?
In some cases, the phrase retail loans can refer specifically to loans tailored for retailers, and these loans are designed to meet the unique needs of small business owners in the retail industry. As indicated above, an array of loans may fit into this category, and retailers like other small business owners often have to take out mortgages, equipment loans, lines of credit, vehicle loans and other types of loans to support their businesses.
However, there are other specific types of business loans such as inventory loans that appeal to retailers in particular.
What are inventory loans?
Inventory loans are popular among retailers, wholesalers or anyone else who sells products. These loans can be used for anything including working capital, buying new equipment, launching a marketing campaign, paying routine bills or a range of other purposes. Despite their name, they do not have to be used to purchase inventory. Rather, inventory loans are secured by inventory.
Essentially, when a loan is secured by inventory, it means if the borrower defaults on repaying the loan, the lender can claim the business’s inventory as collateral to cover losses. This is similar to how a car lender can repossess a vehicle or a mortgage lender can foreclose on a home if the borrower defaults on the loan’s payment plan.
However, there is a slight difference between loans secured by inventory and loans secured by other types of assets. In most cases, when a loan is secured by other property, such as a car loan or a mortgage, the borrower is not allowed to sell the underlying asset without permission from the lien holder. In contrast, if a retailer takes out an inventory loan, he is allowed to sell and restock the inventory as usual. As a result, the value of the underlying asset fluctuates as the borrower works on repaying the loan. This is called a floating lien.
In order to obtain an inventory loan, small business owners need a solid inventory tracking system, and in most cases, they need to share their inventory records with the lender to help establish how much money they might qualify for. However, unlike many other types of business loans, inventory loans typically do not require detailed business plans, and lenders vary their credit requirements.
When should retailers borrow funds?
Whether a retailer opts to take out an inventory loan or any other type of small business loan, he should take the decision seriously. Before borrowing money, small business owners should think carefully about the potential return on the investment – essentially, they should ask themselves if the cost of the loan (interest, fees, etc.) outweighs the return (expanded marketing, new clients, better equipment to be more competitive, working capital to keep the doors open, or other business advantages).
If the potential benefits are greater than the risks, the business owners should start applying, but if the loan isn’t going to significantly help the business move forward and the repayments are likely to stymie growth, the business owner should start searching for other solutions such as reducing expenses in one area and reinvesting those funds in another area.
If you are a retailer, there are going to be times when you need a boost to your working capital. In those situations, you may need to turn to a retail lender. They can help steer you to the right loan for your needs as a small business owner, a savvy consumer and a retailer.