Financing and the Pet Retailer

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Any business would ideally prefer to fund operations solely with its own positive cash flow. It’s readily available, requires no approvals and no interest payments. What’s more, a business that can’t reach this point eventually is probably falling short of its goals in some way.

But most of those who ever started a business needed to access funding before they could survive on cash flow alone and even successful, profitable operations often need to obtain financing when they want to expand.

So what are the issues particular to pet retailers when it comes to external funding for the business?
Like all retailers, pet retailers can be at a disadvantage compared with manufacturers because they are often less likely to own assets that can be used as collateral. Not that it always guarantees approval but the high-capacity machines used in manufacturing settings can often help a bank recoup at least some of its investment if a manufacturer defaults. A retailer, by contrast, owns low-cost fixtures, some point-of-sale hardware and software . . . and lots of merchandise (some of which needs to be fed several times daily).

But from day one, a pet retailer has to pay wages, rent, merchandise costs and many other operating expenses, including the cost of caring for live animals if they are part of a store’s inventory.
How can pet retailers get around these issues? Here are a few ideas:

The Small Business Administration backs loans to small businesses who can demonstrate good fundamentals but it’s not a welfare program. The funds don’t come from the government. They come from your bank, and it’s wise to seek out a local bank that is a preferred SBA lender because they know the ins and outs of the various SBA programs and are in the best position to steer an applicant in the right direction.

The federal government backs the loans but that doesn’t mean the bank is indifferent about defaults. SBA-backed loans offer some avenues to approval that conventional loans don’t but plenty of applicants are still turned down because they can’t demonstrate a solid business plan.

Venture capitalists are often an attractive option for a business that is past the startup phase but still needs capital to operate or grow. Venture capitalists also tend to bring ideas and management expertise to the table. They’re looking for strong growth potential though, so if all you want to do is run a small local pet store, you might not be a good candidate for investors who typically look to get in, spend three to five years seeing the value of their investment grow and then get out.

An angel investor by contrast, is more likely to be an individual who might offer flexibility in terms of what’s expected. But there too, the potential for growth is going to be a major attraction for the investor so your business plan needs to include more than just operating a corner store until you retire.

There are services that will lend money against the value of your inventory or aged receivables but that strategy poses limitations for retailers, who typically operate on a cash-and-carry basis with customers and rarely if ever give payment terms.

Crowdfunding is a hot new way to raise money. Websites like Kickstarter allow people with a business idea or a new concept to seek funding from ordinary people. Not all crowdfunding sites work in the same way. Some allow the business to promise merchandise in return for the investment while others require the business to offer equity to the investors.

A disadvantage for pet retailers however, is that the most successful crowdfunded ventures are those that offer an unusual or innovative concept that gets the attention of large numbers of people, often because it lends itself to a viral video or a social media phenomenon. A truly innovative pet retail concept might succeed in that environment. A fairly typical one probably wouldn’t.

Beyond that, owners of pet retail shops always have the option of selling assets like real estate or

investments, if they have any. Home equity loans don’t always have as much potential today as they did when the housing market was booming 15 years ago but they do represent another option to explore.

Most business owners of course, prefer not to take on personal debt to finance their business especially if it means putting their homes at risk. The best strategy is always to develop a realistic business plan that gets you to positive cash flow as quickly as possible while minimizing the debt you need to incur to operate while working toward that goal. Until then, no financing strategy is perfect because they all put you in debt which has certainly been a step toward success by more than a few businesses who knew how to manage it properly.

Just be sure you’re one of them.