Finance for shops and retail businesses

A gift shop orders its Christmas stock in September. A garden centre fills its yard in March. A school uniform supplier pays for blazers in June and sells them in August. In each case, the money goes out months before it comes back.

This guide covers the main things shops and other retailers borrow for, the finance that tends to fit each one, and what lenders look at when they assess a retailer.

The retail year

Most retailers have peaks, and each peak has a buying season in front of it. You pay suppliers, often weeks or months ahead, then sell the stock over the following weeks. Between the two, your cash is sitting on the shelves.

The pattern matters for finance in two ways. First, the funding should cover the gap between buying and selling, and end when the stock has sold. Second, repayments need to be affordable in your quietest months, not just your average ones. A fashion shop's January and a garden centre's November both count.

Stock and seasonal peaks

Start with your suppliers. Longer payment terms, staged deliveries or a deposit-and-balance arrangement can cost nothing, and they shrink the amount you need to borrow. Suppliers are more flexible with customers who have paid reliably in the past, so ask well before you place the order.

For the rest of the gap, the usual options are:

• A short-term loan, sized for the stock and repaid over the months it sells. It suits a single, predictable peak.
• A revolving credit facility or overdraft, which you draw on as you buy and repay as you sell, paying interest only on what you use. It suits several peaks a year.
• Stock finance, where a provider pays your supplier and you repay as the goods sell. It's more specialised, and suits larger, well-documented stock purchases.

The rule is simple: you shouldn't still be paying for Christmas stock the following summer. Our guide to funding stock and seasonal peaks compares the options in more detail, including how long each should run.

Fit-outs, tills and EPOS

Opening or refreshing a shop means equipment and building work. They're best funded separately.

Asset finance suits equipment. The lender pays the supplier and you repay over the time you use it. Retail kit that's commonly funded this way includes refrigeration and chillers, display cabinets, shelving systems, security systems, signage, scales, and tills and EPOS (electronic point of sale) systems, meaning the tills, card readers, scanners and software that record your sales and stock.

Some of this kit is what lenders call soft assets: items with little resale value once removed, such as software, bespoke shopfittings and installed signage. Many asset finance providers will still fund them, but usually over a shorter term, with a bigger deposit or for businesses with a strong record. Standard equipment that a lender could resell, such as branded refrigeration, gets the best terms.

Building work, flooring, lighting and decoration have no resale value at all. A business loan over two to five years is usually the better fit. Before you start, check what your lease says about alterations. Most commercial leases need the landlord's consent, and some make you put the shop back as it was when you leave.

For the difference between buying kit on hire purchase and leasing it, including VAT and tax, see hire purchase vs leasing. EPOS and software that date quickly often suit leasing, while a cold room you'll keep for a decade often suits hire purchase.

Merchant cash advances

A merchant cash advance (MCA) gives you a lump sum, which you repay as a fixed share of your future card takings until an agreed total has been paid. In a busy week you repay more, and in a quiet week less. For shops where most customers pay by card, that's genuinely useful, and approval is often quick because the provider can see your card sales.

Weigh that against the drawbacks:

• The cost is fixed from day one. It's set by a factor rate, a multiple of the advance, rather than an interest rate. If you repay quickly in a strong season, the cost in annual terms is high.
• It's usually one of the more expensive options. For planned stock buying or a fit-out, a loan or asset finance is often cheaper.
• Repayments start straight away. Take an advance at the start of a quiet spell and the split comes out of your lowest takings.
• It isn't regulated as credit. The FCA doesn't regulate MCAs as lending, so read the agreement closely.

Some providers offer a version repaid in fixed daily or weekly amounts from your bank account instead of a share of card takings. That removes the flexibility that makes an MCA attractive, so compare it with a short-term loan. Our guide to how a merchant cash advance works shows how to compare the real cost.

Opening a second shop

A second site is a bigger step than it looks. You'll need the fit-out, opening stock, deposits on the lease, staff and a few months of running costs before the new shop pays its way, all while the first one keeps trading.

Lenders will want to see that the first shop is profitable and that the second has a realistic plan: why that location, what it should take each week, and how long until it covers its costs. The usual structure is a business loan for the set-up costs, asset finance for equipment, and a revolving facility for the extra stock. Be wary of using the first shop's overdraft to fund the second. If the new site is slow to start, both shops run short at once.

VAT bills

Much of what retailers sell is standard-rated, so VAT bills can be large, and they often fall due just after a peak, when cash has gone into the next round of stock. Remember that some of your takings belong to HMRC, and set it aside as you go.

If a bill lands at the wrong time, contact HMRC before the due date about a Time to Pay arrangement, or take a short-term VAT loan of a few months. Penalties and interest start soon after the deadline. Our guide to borrowing for a VAT or tax bill compares both.

An illustration, not a quote. A gift shop needs £30,000 of Christmas stock in September. Its main supplier agrees 60-day terms on a third of the order, so it borrows the other £20,000 on a six-month loan, timed so most of the repayments fall in November and December, when takings are highest. Its VAT bill for October to December, its biggest quarter, falls due in early February, and it's ready, because it has set the VAT aside every week since October. These figures are illustrations: your terms depend on your business.

Comparing the options

What lenders look at

When a lender assesses a retailer, expect questions about:

• Card takings and bank statements. Usually the last three to six months, and up to a year if your trade is seasonal, so the lender sees your quiet months as well as your peaks. Some will ask for card terminal statements.
• Your lease. How many years are left, the rent, and when the next rent review or break clause falls. A lender is unlikely to lend for longer than your right to trade from the shop, so a lease with two years left limits what's on offer.
• Your margins. Your gross margin (what's left from each sale after the cost of the stock) and how it has held up. Thin or falling margins leave less room for repayments.
• Stock. How quickly it sells, and whether old or seasonal stock is building up.
• Accounts and existing borrowing. Your latest accounts, recent management figures, and any finance or cash advances already in place.

Directors of limited companies are usually asked for a personal guarantee. Lending of £25,000 or less to sole traders and small partnerships is regulated by the FCA, so fewer business lenders offer it. Lending to limited companies and LLPs is generally unregulated.

Common mistakes

• Buying more stock because the money is available. Unsold stock still has to be paid for. Buy for the sales you expect, not the facility you have.
• Using long loans for seasonal stock. If this year's peak is still being repaid at the next one, the gap grows every year.
• Testing affordability in an average month. Fixed repayments must work in your quietest month too.
• Stacking cash advances. A second advance on top of the first can take a large share of every card sale.
• Fitting out beyond the lease. If the lease ends before the loan, you could be paying for a shop you've left.

Questions people ask

How can I finance stock for my shop?

Start with longer payment terms from suppliers, then cover the rest with a short-term loan or revolving credit that's repaid as the stock sells. Specialist stock finance suits larger purchases. Aim for the finance to end when the stock has sold.

Can I get finance for an EPOS system?

Yes. Tills, card readers and EPOS systems are commonly funded with leasing or hire purchase. Because software and installed systems have little resale value, some providers offer shorter terms on them than on standard equipment.

Is a merchant cash advance a good idea for a shop?

It can be for a short, urgent need, because repayments rise and fall with your card takings. But it's usually one of the more expensive options and the cost is fixed from the start. Compare the total you'll repay with a loan first.

How long does my lease need to be to get a business loan?

There's no single rule, but lenders are unlikely to lend for longer than the time left on your lease. A short remaining lease can limit the amount or term on offer, so if a renewal is due, it often helps to agree it first.

Can I get a loan to open a second shop?

Yes, if your first shop is trading profitably and you have a realistic plan for the second. Lenders will look at your existing accounts, the new location and how long it should take to cover its costs. Set-up costs, equipment and stock are often funded separately.