Opportunity capital or survival capital? Unpacking financing options for your retail business
Your small or medium-sized retail business has survived COVID-19, load shedding, and the cost of living crisis. Perhaps you’ve even managed to diversify your offering or buy new sites during the past few years, as challenging as they were. And now, with the economy moving into a new phase, you’re ready to start growing—which requires quick access to opportunity capital.
The key to managing cash flow and optimising the use of capital in these conditions is finding the right financing instrument and partner for your retail growth goals, says Steven Heilbron, CEO of Capital Connect, a fintech that offers fast and flexible business funding to South African retailers.
He says there are several options, each of which has their pros and cons:
Opportunity capital—Fintechs use technology to offer personalised, data-driven financial products tailored to retailers’ needs. You can ‘Click & Borrow’ via an app to apply for a business loan. Fintechs typically offer fast approval times (24 hours or less) and provide more flexible repayment terms than traditional banks.
Traditional bank loans—Even in these days of digital disruption and fintech enablement, traditional banks remain key partners for retailers. They offer a range of funding products, including commercial mortgages and short-term loans. However, their approval times tend to be long and they usually have strict eligibility criteria. This can be a drawback for retailers that need quick finance to capitalise on an opportunity.
Commercial credit cards—Business credit cards are convenient for short-term financing. They offer easy access to credit, along with rewards and benefits. However, interest rates can be high, especially if balances aren’t paid off promptly.
Equity financing—Equity financing involves selling shares of your business to an external party. You don’t need to repay a loan, but you will need to give up a portion of ownership and potentially control of your business. These transactions will usually involve months of negotiations.
Heilbron says that there are several factors to consider when choosing a financing partner. In practice, most retailers will need to use a blend of financing partners and products to address their business needs. Some of the questions you should be asking yourself about when applying for financing include the following:
What do we need to borrow the money for?
Bank loans will generally be better suited for longer-term financing needs such as the purchase of a property on a mortgage, where there is ample time to react to the opportunity. Commercial credit cards are useful for making smaller, short-term purchases when working capital isn’t available. Fintechs offer tailored loans to enable retailers to capitalise on market opportunities or to manage seasonal fluctuations.
What are the costs of financing?
It’s important to compare the interest rates and fees associated with each financing option. Bank loans will generally have lower interest rates and overall costs than credit cards or fintech enabled financing. However, it doesn’t help to get a lower interest rate if the window of opportunity is going to close before the loan is approved. Fintechs offer competitive rates on opportunity capital, but it's crucial to understand if the cost of missing an opportunity is greater than the cost of capital, and is a key driver in making the decision to borrow, or not.
How flexible are the payment terms, and how will it impact cash flow?
You should evaluate the repayment terms, including the length of the loan and the flexibility of the repayment schedule. Ensure that the financing option aligns with your cash flow and revenue projections. You might prefer to repay the loan in daily instalments to minimise the impact on cash flow. Find out if your funding partner offers an early settlement discount if you settle the loan in a shorter period.
How soon will the loan be approved?
Consider how quickly you will need access to funds. Some opportunities won’t last for weeks or months while you wait for long approvals. Fintechs offer fast approval processes, which can be a significant advantage for time-sensitive projects.
What are the eligibility criteria?
For smaller retailers, bank requirements such as collateral and audited financials can be a barrier to funding. Many fintechs offer unsecured financing, where you do not have to provide asset security and can instead provide a personal guarantee.
The benefits of opportunity capital
Research commissioned by Capital Connect shows that growth in credit extension to the retail market (64% in nominal terms) as a whole between March 2015 and March 2023 has outpaced the growth of retail incomes (49% in nominal terms). This indicates that many retailers are using credit to keep their heads above water, rather than to innovate and grow.
One potential reason for this is that most mainstream products are not designed to be ‘opportunity capital’ that supports growth, says Heilbron. This is where fintech providers are addressing a gap in the market with fast, cash-flow-friendly solutions that enable retailers to capitalise on business opportunities, as and when they present themselves.
With opportunity capital, retailers can grab opportunities like:
Stocking up in good time for seasonal events like Heritage Day or Black Friday.
Snapping up inventory at a special, time-limited price from a wholesaler or manufacturer.
Adding new in-store offerings—for example, bakeries, fish shops, cheese bars, and delicatessens.
Creating promotions and investing in social media or advertising to drive customer footfall.
Giving a store a facelift with new fittings and décor.
Expanding current operations or diversifying a business when the bank only approves a 70-80% loan. Fintechs offer top-up financing to bridge the gaps.
Today’s fintechs can offer loans of up to R5 million with funds made available within 24 hours. Retailers can apply for business funding directly from an app, making the application process convenient and easy. “Whether you need funding to bulk buy inventory or store expansions, opportunity capital is a solution that aligns with your needs,” says Heilbron.