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Limited credit history
Many micro-merchants, especially those who are just starting out, may have a limited credit history. This can make it difficult for them to demonstrate their creditworthiness to potential lenders or suppliers, which may make it harder for them to secure trade credit.
Lack of collateral
Many trade credit agreements require the borrower to provide collateral to secure the loan. This can be a problem for micro-merchants who don’t have any assets to offer as collateral.
High risk
Micro-merchants may be perceived as high-risk borrowers by lenders and suppliers due to their small size and limited financial resources. This may make it harder for them to secure trade credit.
Tight credit markets
In some cases, the overall credit market may be tight, with lenders and suppliers being more cautious about extending trade credit. This can make it harder for micro-merchants to secure trade credit, even if they have a strong credit history and collateral.
Competition for credit
Micro-merchants may face competition for trade credit from larger, more established businesses, which may make it harder for them to secure the financing they need.
Build a strong credit history
One of the most important things micro-merchants can do to increase their chances of obtaining trade credit is to establish a strong credit history. This can involve paying bills on time, maintaining a low level of debt, and using credit responsibly.
Use personal credit to establish business credit
If a micro-merchant doesn’t have a credit history for their business, they may be able to use their personal credit to establish business credit. This can involve using personal credit cards or loans to finance the business and then paying the bills on time to establish a positive credit history.
Offer collateral
Many trade credit agreements require the borrower to provide collateral to secure the loan. Micro-merchants who don’t have any assets to offer as collateral may be able to use the inventory they are purchasing as collateral instead.
Negotiate terms
Micro-merchants may be able to negotiate more favourable terms with suppliers if they have a strong credit history or can offer collateral. It can also be helpful to negotiate longer payment terms to give the micro-merchant more time to generate cash and pay for the goods.
Explore alternative financing options
If trade credit is not an option, micro-merchants can consider other financing options, such as small business loans, inventory loans, or factoring.
It is important for micro-merchants to be persistent and to explore a variety of options in order to secure the financing they need. It may also be helpful to work with a financial advisor or mentor who can provide guidance and support throughout the process.
Listed below are a number of inventory financing tools that can be useful for micro-merchants looking to manage their inventory and improve their cash flow.
Trade credit
Most commonly used, trade credit is a form of financing that allows merchants to purchase goods or inventory from distributors without paying upfront. The merchant agrees to pay for the goods at a later date, typically within a few weeks or months.
Inventory loans
These are loans specifically designed to finance the purchase of inventory. They can be obtained from banks or alternative lenders, and the loan is typically secured by the inventory itself.
Factoring
This is a financing option in which a business sells its accounts receivable (invoices) to a third party at a discount in exchange for immediate cash. This can be a useful way for micro-merchants to access cash quickly, especially if they have a large number of outstanding invoices.
Consignment
This is a type of inventory financing in which the supplier owns the inventory until it is sold to the end customer. The supplier is paid for the goods once they are sold, and the micro-merchant does not need to pay for the inventory upfront.
Drop shipping
This is a fulfilment model in which the supplier ships the goods directly to the end customer on behalf of the micro-merchant. The micro-merchant does not need to purchase or hold any inventory, which can help to reduce costs and improve cash flow.
Small business loans
These are loans specifically designed for small businesses, including micro-merchants. They can be obtained from banks, credit unions, or alternative lenders and can be used to finance a variety of business needs, including the purchase of inventory.
It is important for micro-merchants to carefully consider the pros and cons of each option and choose the one that best fits their needs and financial situation.
Flexible repayment options can be an important tool for micro-merchants, as they allow them to pay back loans or other forms of financing in a way that is more manageable and better suited to their business needs. Listed below are some of the prominent repayment options available.
Graduated repayment
This is a repayment schedule in which the borrower’s payments start out lower and gradually increase over time. This can be a useful option for micro-merchants who are just starting out and may not have a lot of cash flow available.
Interest-only payments
This is a repayment schedule in which the borrower only pays the interest on the loan for a period of time, with the principal being due at a later date. This can help to reduce the burden of loan payments in the short term and allow the micro-merchant to focus on growing their business.
Seasonal repayment
This is a repayment schedule that takes into account the fact that many micro-merchants have busy and slow seasons. Under this plan, the borrower pays more during the busy seasons and less during the slow seasons, which can help to even out the impact on their cash flow.
Customised repayment
Some lenders may be willing to work with micro-merchants to develop a customised repayment schedule that takes into account their specific business needs and financial situation. This can be a useful option for micro-merchants who need more flexibility in their repayment option.
It is important for micro-merchants to carefully consider the pros and cons of different repayment options and choose the one that best fits their needs and financial situation. It is also important to communicate openly with the lender about any challenges or changes in the business that may affect the repayment schedule.
Meet Maria, a micro-merchant who owns a small boutique grocery store in a busy shopping district. Maria has been in business for five years and has a loyal customer base. However, she has struggled with managing her working capital and has often found herself short on cash when she needs to pay for inventory or other expenses.
To help improve her cash flow, Maria decides to try using trade credit to purchase her inventory. She is able to negotiate a payment term of 60 days with her supplier, which gives her some extra time to sell the goods and generate cash.
Initially, this seems to be working well for Maria. She is able to keep her store stocked with fresh produce and dairy and trending snacks, and her sales are strong. However, she starts to run into problems when some of her customers delay paying for their purchases. This creates a cash flow problem for Maria, who now has less money available to pay for the inventory she has purchased on credit.
To address this issue, Maria decides to try using a flexible repayment option. She talks to her lender and is able to negotiate a repayment schedule that allows her to pay more during her busy seasons and less during her slow seasons. This helps to even out the impact on her cash flow and makes it easier for her to manage her working capital.
Over time, Maria is able to improve her cash flow management and build up a buffer of working capital that she can use to weather any unexpected challenges. She continues to use trade credit to purchase her inventory, but she is now better able to manage the risks and make sure she has the cash on hand to pay for the goods when they are due.
In this case, trade credit and a flexible repayment option were useful tools for Maria to improve her working capital management and grow her business. However, it is important for micro-merchants to carefully consider the risks and benefits of using these tools and to communicate openly with their lenders to ensure that they are able to manage their working capital effectively.
In contrast, using cash to purchase inventory allows micro-merchants to avoid the risks of financing. However, it may be more difficult for micro-merchants to come up with the cash needed to make large purchases, especially if they don’t have a lot of capital on hand. Additionally, using cash may not allow micro-merchants to negotiate as favourable terms with suppliers as they would with financing.
Financing tools that offer personalised repayment options can help micro-merchants to improve their working capital by providing them with more flexibility and control over their cash flow. Listed below are some of the ways financing tools can help micro-merchants.
Allowing micro-merchants to purchase inventory without upfront payment
Many inventory financing tools, such as trade credit or consignment, allow micro-merchants to purchase inventory without having to pay upfront. This can help to preserve their cash and improve their working capital by freeing up funds that can be used to meet other business needs.
Providing a buffer to weather unexpected challenges
Having a buffer of working capital can help micro-merchants to weather unexpected challenges, such as delays in payment from customers or unexpected expenses. Inventory financing tools that offer personalised repayment options can help micro-merchants to build up this buffer by allowing them to manage their cash flow in a way that is more suited to their business needs.
Enabling micro-merchants to grow their business
By providing micro-merchants with access to inventory and the flexibility to manage their cash flow, inventory financing tools can help them to grow their business. This can in turn improve their working capital by generating more revenue and increasing their cash flow.
Reducing the risk of financial difficulty
By providing micro-merchants with more control over their cash flow and the ability to manage their inventory more effectively, inventory financing tools with personalised repayment options can help to reduce the risk of financial difficulty. This can provide micro-merchants with greater peace of mind and allow them to focus on running and growing their business.
In summary, financing tools with personalised repayment options can be a useful tool for micro-merchants to improve their working capital by providing them with access to inventory, flexibility in managing their cash flow, and the ability to grow their business.