What is a retail loan exactly?

17 AUGUST 2023

Have a great idea for an expansion for your existing business? A retail loan can be a critical tool when taking the next step.Woman sitting coach and working on laptop and calculatorRetail loans differ from conventional commercial loans in that they are not collateralised; instead, they are based on your creditworthiness. Below we’ll discuss some details regarding retail loans and what they can do for your business.

Let’s first understand what it is

A retail loan is one that a bank gives to a natural person, whether or not it is secured or intended for a particular use; it excludes credit card facilities, current account overdrafts, and loans to individuals for starting their own businesses.

To be clear, retail loans aren’t for starting a business, however cash flow is important for small business owners when it comes to expanding their enterprise. You might need to take out a retail loan in order to buy a new retail location, merchandise, or a business car. Similar to how your customers might occasionally use retail loan products to lower the cost of your items or services. Retail loans are probably going to be included in your company plan at some point.

Since loans are debt, choosing one of these funding options requires careful consideration and smart financial planning. Retail loans exist in a wide variety of forms, but they all have interest rates and costs. For you to make a profit and pay back the loan, it helps to be quite certain that you are likely to earn more money than the cost of the loan.

Even if you have a strong preference for keeping your small business debt-free as it expands, it's very likely that your clients may use retail loans to pay for your products and services. Although most clients have credit cards of their own, it can be beneficial when a small company additionally provides its own financing options.

Why should you choose a retail loan?

Retail finance can be a lifesaver because it's often simple to use and provides immediate liquidity. Do you have to overcome financial uncertainty or other challenges when beginning your business? The best option might be a retail loan. It gives business owners immediate access to money, which will aid them in launching their projects.

How much you can qualify for depends on your credit score, the loan term, and the annual percentage rate. You can usually borrow more money if your credit score is higher and your debt-to-income ratio is lower. Interest rates will vary per lender, just like they would with any other kind of loan. The normal range of retail loans is R10,000 to R200,000. When evaluating how much you can borrow, lenders frequently consider the worth of your inventory.

It may be easier to obtain finance if you can demonstrate that there is a high demand for your products and/or if you are able to provide new or distinctive products. On the other hand, getting a loan could be challenging if there are retail establishments offering identical goods or if your inventory has a low resale value. Because they don't want someone with no assets taking on a significant amount of debt, lenders may also consider whether you have enough personal assets to repay the loan.

In general, a retail loan should be used in situations when an investment into your business is likely to result in increased profits, which will not only help replay the loan but leave you permanently at a higher profitability.