The holiday shopping season is a critical time for most retailers. In fact, Black Friday, the day after Thanksgiving that is generally regarded as the first day of the holiday shopping season, got its name because it traditionally begins the period when stores go from being “in the red” and “into the black” ( profitability).
Just how important is the holiday season to retailers? Although it varies by industry, some retailers are more dependent on fourth quarter sales than others. For instance, toy stores and jewelers stores typically generate more than one-third of their annual sales (35%) during the fourth quarter of the year, according to US Census Bureau data. Other retailers whose success hinges on a profitable fourth quarter include department stores, electronics stores, and clothing stores.
While Christmas shopping seems like a long way off, small businesses must prepare for it now. Holiday season marketing takes up a big portion of a business’s annual budget, and small business owners much be sure to invest in their website, social media, email marketing, signage and fliers, special events and other pr efforts.
Further, with prices rising for just about every type of material and supply chain issues stalling the flow of inventory, wise business owners should be securing what they need and placing orders well in advance of the holiday season. Hiring staff is more expensive than in years past, in part, because the competition to hire workers has driven up labor costs. Workers are looking for higher salaries and in order to avoid being short-staffed, business owners have little choice but to pay them.
The summer months can be a slow period for many types of businesses, which may not have the cash on hand to take advantage of pre-payment discounts and other special offers that can help them reduce the cost of good sold. As more and more consumers prefer shopping online for gifts, retailers must be prepared to purchase shipping supplies and postage to have ready for the expected influx of inventory sales.
So how can a small business on tight margins plan to pay for year-end business expenses?
There are a number of options.
Business credit cards. Plastic is fantastic, especially for cash-strapped small business owners who want to order inventory and supplies now and pay for them later. The key thing is to only purchase what can be paid off quickly, because credit cards typically come with high interest rates. In the short-term, using credit cards is a viable option IF you are able to pay them off quickly – without having to incur high finance charges that ultimately drive up the cost of year-end supplies. Further, if you are late in paying or miss a payment entirely, it will negatively impact your credit scores.
Business line of credit. For those companies that already have a business line of credit established, using the line can help quickly pay for substantial purchases of end-of-year inventory. Unlike a business loan, a line of credit acts as ready cash in times of need. In many ways it is similar to a business credit card. A line of credit can be a business lifeline in times of emergency or even seasonal cash flow tightening. With a with a line of credit, a business owner borrows only what is needed and only pays interest on the amounts borrowed. In most cases, the interest on a business line of credit is much lower than that of a credit card.
Small business loans. Business owners who plan well enough in advance, can apply to secure a small business loan that can help pay for holiday expenses. If you have a high credit score (700 or above), you should be able to secure a loan at a reasonable interest rate. Anyone considering this funding option should act now because the Federal Reserve has been signaling for months that it plans to raise interest rates in an effort to contain inflation to its 2.5% target rate. Many economists predict that the Fed will raise rates aggressively in coming months.
The down side of applying for a small business loan is that a business owner might not be able to obtain the money as quickly as needed to pay for increased expenses at year end. Traditional bank loans and SBA loans can take weeks to process loan applications.
Online (non-bank) lenders. Non-bank lenders typically are able to quickly make a decision and deposit loan money in a business checking account or savings account in less than a day. These so-called “alternative lender” options include Account Receivables Financing or Invoice factoring. The way it works is that a business sells outstanding accounts receivable (invoices) to a third-party that will then pay the business around 85 to 95% of the value of the invoice. The difference is called the “factoring fee.”
With rising costs, supply chain issues, and other challenges, small business owners will be wise to plan ahead now and secure the capital they need for 4Q expenses now, rather than waiting until it might be too late.