Business Financing for Retail Shops in the UK
Retail businesses are on the frontline for many of the UK’s economic challenges, and now more than ever it’s vital for retailers to have access to affordable, flexible funding options to help their businesses survive and thrive. The good news is that the business financing market in the UK is competitive, and retailers of all sizes can obtain financial assistance from a number of sources. But choosing the right financing for your business is imperative. Here’s what you need to know to make the best decision for your business:
What is business financing?
Simply put, business financing is any type of financial assistance given to a for-profit business, by any entity. 39% of all small and medium sized businesses in the country used external financing between 2018 and 2022, and 43% are considering seeking financing in the next 12 months. So it’s fair to say that business financing is a necessity for a growing number of UK companies.
Why might a retail shop need business financing?
The UK’s 314,000 retail businesses face a number of challenges, some of which are unique to the industry, but all of which threaten stores’ and brands’ revenue. These challenges include:
- Cost pressures, including rising employment costs, rising rental costs, rising energy prices, and tax pressures
- Lower consumer spending due to the cost of living crisis
- A move to net zero, demanded by an increasing number of consumers
- Adapting to new consumer expectations, including the necessity of a well-curated and accessible online presence
These issues, coupled with broader economic uncertainty and intense competition from international e-commerce, make it more likely that retail businesses in the UK will need financial support to bridge tough times and pivot to new methodologies, even if only in the short-term.
What can shops in the UK use business financing for?
Fortunately, business financing – of most types – can be used in almost any way a retail business sees fit. This includes for:
- Purchasing stock
- Purchasing equipment
- Hiring new employees or investing in employee training
- Completing renovations or refurbishment
- Moving to new premises
- Buying another business
- Start-up costs
- Marketing and advertising
- Cash flow
- Debt consolidation
Although financing can be used for any – or all – of these reasons, 69% of small and medium sized businesses in the UK using external financing do so for cash flow reasons. If you’d like to know more about how to manage cash flow through difficult conditions, read Swiftfund’s blog on the subject, here.
What kinds of business financing exist in the UK for retail shops?
Given that the retail sector accounts for 4.9% of the UK’s total economic output, and employs over 2.7 million people, it’s no surprise that plenty of options exist to support businesses in the industry. This includes:
Traditional business loans
Business loans are among the most common forms of financing, for businesses of all types, large and small. Set up as installment loans, these loans allow borrowers to access potentially large lump sums, which must then be repaid over time in installments. Interest is charged on the amount borrowed. The terms of the loan – the borrowing amount, loan fees, length of loan contract, interest rate, and so on – can sit within a wide range, and depend a lot on both borrower and lender. For example, it’s common for business loans to offer up to £750,000 on an unsecured basis, with a long repayment term, but this requires a certain credit score, monthly income, and length of operating history for the applying business.
Business loan pros: Large borrowing amounts; low interest rates
Business loan cons: Hard to qualify for; application processing times can be slow; repayments are fixed
Types of traditional business loan: Bridging loans; VAT loans; commercial mortgages; working capital loans
Invoice financing
Invoice financing is only possible for retail businesses that invoice their customers. That could mean retailers offering big-ticket items, retailers who serve corporate clients, or other types of retailers matching this description. The key is that the financing is reliant on outstanding invoice(s), so a business must have some in order to qualify. The invoice(s) act as a form of collateral for the loan; usually up to 80% of outstanding invoice(s) can be drawn down as a loan. When an invoice is paid by a customer, the funds are redirected to the lender, until the borrowed funds (plus interest and fees) are repaid in full. Invoice factoring is usually a short term, small scale solution only suitable to certain types of business, but may be relevant depending on sales methodology.
Invoice factoring pros: Can be quick to obtain; small amounts available; stabilizes cash flow
Invoice factoring cons: Only certain businesses qualify; can be an expensive form of borrowing; issues if customers do not pay their invoices
Merchant cash advances
Merchant cash advances (or MCAs) are more relevant to the retail industry at large, as all that’s required is for a business to receive at least some of its income via credit and debit card. And as of 2023, 76% of all sales in the UK were by card at point-of-sale. Here’s how an MCA works: a business borrows a lump sum of money at the start of the agreement, and then repays it over time via a small percentage taken from each sale that’s run through the card payment processor. This percentage is fixed, but as it is only taken when a sale goes through, the level of repayment fluctuates in accordance with sales volume. The overall cost of borrowing is set at the start of the agreement, and does not change, no matter how long it takes to repay the funds. MCAs are therefore perfect for businesses with fluctuating income, and can be obtained relatively quickly and easily compared to other forms of borrowing. To learn more about MCAs, read Swiftfund’s in-depth article on the subject, here.
Merchant cash advance pros: Quick; accessible; flexible repayments
Merchant cash advance cons: Relies on receiving income from card sales
Revolving credit facilities
Revolving credit facilities act much like credit cards. There is a pre-set borrowing limit associated with the facility (just like the limit on a credit card), and a business can borrow as much or as little from the facility, as needed, up to that limit (akin to using a credit card as and when needed, until it’s maxed out). The only real difference from a credit card is that when funds are borrowed from a revolving credit facility, the amount is deposited into a bank account, and there is no physical card involved. Interest is only charged on what’s actually borrowed, and when borrowed funds are repaid, the facility can be reused, time and again. Repayments can be flexible, but just as with a credit card, it’s important to ensure that interest payments are made regularly to prevent the cost of borrowing from skyrocketing.
Revolving credit facilities are incredibly versatile and flexible, but as with more traditional business loans, they’re not the easiest to qualify for. Lenders rely heavily on business credit history when approving a revolving credit facility, and revenue, operational history and existing business debts all affect the facility’s borrowing limit. Many businesses have a revolving credit facility for occasional use, and to ensure there is easy access to funds in case of emergency, but their cost makes them less well suited to lump sum or long term spending needs.
Revolving credit facility pros: Flexible; re-usable
Revolving credit facility cons: Hard to qualify for; interest costs can be high
Types of revolving credit facility: Business lines of credit; business overdrafts; business credit cards
Asset based financing
Asset based financing is tied to a specific asset being purchased. A commercial mortgage is a type of asset based financing: the asset is the property being purchased, and financing is needed to purchase it. The financing is predicated on certain details relating to the asset, and the asset itself is used as collateral against the loan. Equipment loans are another type of asset financing common in the retail sector. If a business needs to buy new equipment, for example new display fixtures or a security system, then it can access financing to help cover the cost of the new equipment; this must then be repaid in installments. This allows the shop to use the new equipment immediately, while spreading its cost out over time.
Asset based financing pros: Potentially low interest rates; large borrowing amounts
Asset based financing cons: Restricted to specific asset purchases; assets can be seized if repayments are not made
Types of asset based financing: Commercial mortgages; commercial vehicle loans; equipment loans
Start-up loans
Start-up loans are exactly what they sound like – loans for new businesses looking for help covering the costs of getting going. As with many other types of business loans, they’re set up as installment loans: the business receives a lump sum at the start of the contract, and then repays it, plus interest, over the life of the contract. These loans can be extremely versatile and used for a wide number of relevant business costs, but they require that the business is less than three years old; and because new businesses are considered inherently riskier than established businesses, the interest charged is higher than with traditional business loans. They may also require collateral or analysis of the business owner’s personal credit history to secure approval.
Start-up loan pros: Access to versatile funding for new/young businesses
Start-up loan cons: Cost; approval highly dependent on business plan/assets
Government loans and grants
Lastly, it’s important not to overlook the financial tools offered by the government to help businesses in the retail sector. Many of these are area-specific, but there are some nationwide ones, including:
- Start-up grants for new businesses
- The Growth Guarantee Scheme for small businesses
- Broadband Voucher Scheme for businesses upgrading their connectivity
To search for region-specific programs that may be relevant to you, you can use the government’s search tool, found here; or, discover the many programs offered by the British Business Bank.
Where does UK business financing come from?
There are many sources of business financing in the UK, all of which fall into one of the following categories:
- High street banks
- Challenger banks
- Other financial services companies
- Online financial services companies
- Community development finance institutions
- Private lenders, including venture capitalists and lenders on peer-to-peer platforms
- Local or national government
The type of financing you are interested in, as well as your business’s profile and situation, may dictate which type of lender – and which specific lender – is best suited to assist you. Every lender has their own eligibility criteria, product range and lending terms, and no two are created exactly alike. In addition, certain types of lenders share characteristics that make them more or less competitive in different areas. For example: high street banks can have very low interest rates; but as mentioned above, they also tend to have some of the strictest eligibility criteria, and move more slowly than smaller and more nimble lenders. Understanding your business’s circumstances and priorities is key to choosing the right lender for your financing.
How much does business financing in the UK cost?
The cost of business financing can change significantly, depending on the type of financing, the lender, and the business applying. The majority of the cost comes from interest charges. Interest rates can start from as low as 4.5% for secured installment loans to established businesses with good credit; unsecured installment loans tend to range between 7% and 15%. With any type of financing relying on business history or credit score, lenders will charge more interest to those they deem riskier i.e. those with poor credit, limited credit history, inconsistent revenues, start-ups, etc. However some types of financing do not rely on these factors; merchant cash advances (MCAs) do not consider credit score when assessing an applicant, but instead focus on expected revenue. This means the cost of borrowing is not impacted by the age of the business, or past credit.
The length of borrowing term also impacts the amount of interest paid on financing, and therefore its overall cost. The longer the financing agreement, the more interest will be paid. This is true for all interest-bearing financial instruments; it is not true for MCAs, which do not charge according to an interest rate but instead have a single fixed cost of borrowing known as the factor rate. This means the cost of borrowing for MCAs does not change regardless of how long it takes to repay the financing.
As well as interest costs, it’s also important to factor in loan fees, administrative fees, and legal fees, wherever relevant, to understand the true cost of financing. Not all types of financing have fees, but many do, and these can quickly add up. You can probably expect to add several hundred pounds in fees to the cost of any traditional loan.
Because of the variability in costs, it’s vital to thoroughly compare business financing options before committing to anything. Remember to look at like-for-like; for example, compare APRs on interest-bearing loans, as introductory offers and other numbers can be misleading.
How much can a retail shop borrow with business financing?
Businesses can borrow from just a few thousand pounds to £750,000 with business financing, but this is another area where the type of financing, lender, and business’s profile heavily influence what’s possible. The more financially secure the business, and the higher the revenue, the more they can borrow. And sometimes larger borrowing amounts can be accessed by providing collateral for a loan.
The median amount actually borrowed by SMEs in the UK in 2022 was £25,000. The larger the business, the higher the applied-for amount: medium sized companies had a median requested loan amount of £300,000, small companies had a median requested amount of £50,000, and micro companies had a median requested amount of £24,000.
How can a retail shop get business financing?
Obtaining business financing is not as complicated as you might think; many types of financing and many lenders have streamlined application processes to make it as easy as possible for a business to access their services. But there are a few things every business needs to be aware of when hoping to get financing:
1. Eligibility criteria
As alluded to above, every lender has their own eligibility criteria, which can relate to some or all of the following applicant attributes:
- Type of business
- Size of business
- Business credit score
- Length of operating history
- Past revenue
- Expected future revenue
- Business assets
- Existing business debts
- Business owner’s details
The irregularity in lender requirements means that not every business will qualify for financing from every lender, so step one in getting financing for your business is to identify lenders you can work with. Simply put, applying for financing from any lender whose eligibility criteria you don’t meet is a waste of time, and may harm your business’s credit score and ability to get financing elsewhere in the short term.
2. Documentation
The lender’s criteria also impacts the documentation you need when applying. Any of the following may be asked for:
- Business legal documents, such as articles of incorporation, licensing permits, etc.
- Business bank statements
- Debit/credit card receipts for the last few months
- Financial statements for the business, including balance sheet, cash flow statements and income statements
- Tax records
- Business plan outlining the intended use of the funds, financial projections, etc.
- Details of existing contracts with vendors/debtors
- Details of business assets
- Personal details for the business owner(s)
Before your business can get any type of financing, you have to understand your financial situation thoroughly, and these documents are a part of this endeavour. Whilst not every item listed above is likely to be asked for, having these items on hand if needed is essential in securing financing approval.
3. Application process
Once you know which lender you’re applying to, and have all of your documents in hand, it’s time to complete an application form. This is usually the easiest part of the whole process; many lenders have online systems so that an application can be filled in at your convenience, from anywhere.
Once submitted, it can take a lender anything from a day to several weeks to process your application. As mentioned above, different lenders have different processing times, so if speed is a concern, make sure you focus on lenders with quick approvals (like Swiftfund). Once processed, the lender will respond to your application with either approval or denial. If approved, your business will receive a financing offer that details the terms of the loan the lender is willing to give you; this must be carefully reviewed before it is accepted. Once the lender receives the loan offer acceptance, funds will be routed to the business – usually directly deposited into a nominated bank account.
How do I choose the right business financing?
Choosing the right business financing can be broken down into several steps:
- Understand your business’s needs and financial situation, including:
- How much you need to borrow
- How quickly you need to borrow it
- What you can afford to pay for it
- How quickly you can pay it back
- Your business’s revenue, assets, existing debts and credit profile
- Choose a type of financing that fits the borrowing needs you’ve identified
- Choose a lender that offers the type of financing you’ve chosen, and who works with borrowers like you; remember to look at:
- Eligibility criteria
- Borrowing limits and typical lending terms
- Overall cost of borrowing
- Application processing and approvals speed
- Reputation
- Customer service
It’s important to bear in mind that the right financing option for your business is not necessarily the cheapest; while it is vital for business survival to only take on debt that can be repaid, there is more to a loan than its cost. To fully protect your business’s financial health, in both the short and long term, you need to find a financial product that works for you, from a lender you can feel safe partnering with.
If you’d like to discuss your business financing options with an expert, talk to Swiftfund today.
Quick fire questions
How much can a business borrow with business financing?
Depending on the borrower, the lender and the type of financing chosen, usually anywhere from £5,000 to £750,000.
What’s a typical interest rate on a business loan?
Interest rates on unsecured installment business loans currently range from 7% to 15%; interest rates on other types of loans can be anywhere from 4% to 50%+. The loan type, lender and borrower all influence the cost of borrowing.
Do I have to go to the bank my business uses for a business loan?
No; having a business bank account at a high street bank does not mean you have to, or that it’s best to, get business financing from them.
What if my business is declined financing?
Businesses can be declined financing for a number of reasons; the most common is that the business applied for a type of financing, a borrowing amount, or to a lender that is unsuitable for their financial profile. Being rejected does not mean that no financing options exist; plenty of lenders work with businesses who have been rejected elsewhere or who have less-than-perfect credit or a limited trading history, and types of financing exist that do not rely on assets or credit.
What kinds of retail businesses can get business financing?
Any kind of retail business can get financing in the UK, as long as it’s UK-based.
How quickly can I get business financing?
Some providers are able to offer business financing within 1-2 days of application; others may take several weeks. Watch out for those that offer quick approvals if urgency is a concern.
What happens if I default on a business loan?
Defaulting on any debt can have serious consequences, and may lead to legal action, seizure of assets, and damage to your business’s credit. A default will also severely impact your business’s ability to obtain financing in the future.
Can business financing be used to cover staffing costs?
Yes. Most types of business financing do not have restrictions on their use.
Can business financing be used to cover inventory?
Yes. Most types of business financing do not have restrictions on their use.
Can I get business financing for an ecommerce retail business in the UK?
Yes. There is no need for a retail business to have brick-and-mortar locations in order to qualify for financing.