Here, we are going to talk about the usage of capital when starting a boutique. We will discuss the different types of credit instruments that you can use in order to finance the initial operating costs of your business, inventory, and growth.
Before we begin, I would to stress that taking on debt to start a new boutique (or any business venture for that matter) carries risk. Unlike an investment from you as the founder or a third party investor, debt capital almost always needs to be paid back regardless of the outcome of the business. Lenders are not in the business of taking risks, they are in the business of loaning money to generate interest. As such, if you are considered using business credit to start your boutique then you may want to speak to a certified public accountant (CPA) or business advisor that will provide you with the necessary guidance for this matter.
As with all business ventures, there is a substantial amount of risk involved. One of the main themes throughout this platform is to reduce the overall risks with starting a boutique. This includes using as little capital as possible to launch your dream business. In many articles that are presented on this platform, we provide in depth information about how you can reduce your capital expenditures. This article will focus on both the usage of debt for startup purposes as well as for the expansion of your boutique as you reach profitability.
Using Credit Cards to Start a Boutique
The classic credit card. We all have them and use them on an ongoing basis. It is no secret that credit cards carry substantial interest rates on a monthly basis (ranging from 9% to 29% depending on your credit quality). If you are going to use credit cards to finance your venture then you should create a detailed plan to ensure that you are paying back your interest as quickly as possible.
One of the other ways that you can help manage your cash flow better is by using a charge card, which often offers interest free payments on the first 60 days that a balance is created. One of the most popular cards for this purpose is the Plum Card by American Express. This type of card requires full payment for products and services 60 days in the future. It is an excellent tool for managing predictable and highly recurring costs that your boutique will face moving forward.
Business Loans for Starting a Boutique
Business loans are typically reserved for companies that will be acquiring substantial amounts of tangible inventories for their operations. As discussed above, lenders want to ensure that they will receive their interest fees on a monthly basis without interruption. It should be noted that nearly every lender requires a personal guarantee from the borrower even if the loan is issued in the name of the corporation. There are numerous small business loan programs available either as conventional loans or SBA (Small Business Administration) loans. We will develop a number of articles that discuss the potential use of a SBA loan in order to start a boutique.
Prior to applying for a business loan, you should make sure that you have a well developed business plan, your current personal balance sheet, and your prior three years of tax returns. The vast majority of financial institutions will require this type of information as part of your application process. It is also helpful to retain the services of a CPA during this time in the event that any of your financial statements need to be examined and certified. You will most likely need to submit your W-2, 1099, K-1, and other income forms to the financial institution.
As it relates to the business plan that you will need to provide when applying for a boutique business loan, the following chapters should be included:
- Executive Summary
- Usage of Funds Overview
- Description of the Boutique and its Operations
- Industry, Economic, Competitive, and Demographic Research
- Marketing Plan
- Personnel Plan
- Financial Plan
Generally, most financial institutions require a three year business plan. On this platform, we have several business plans available that can help you with this purpose.
Another way of obtaining a business loan is through peer-to-peer lending platforms such as Prosper.com. In this capacity, you can pitch your loan to provide individuals that will crowd source the capital you need to get your boutique started. Generally, these are considered to be personal loans and they are not available in every state (although they are in most states). The interest rate associated with this type of lending will be determined by your current income as well as your credit scores. For P2P lending operations, interest rates tend to be somewhat higher than that of a traditional financial institution.
On a side note, in many cases – you can use capital from your 401(k) and IRA plans to finance the development of your boutique. Generally, you will be required to provide these accounts with a market based interest rate if you are taking a loan directly from these accounts. There are numerous federal laws that guide the usage of retirement funds for financing a new business venture. As such, and I know that I am starting to sound like a broken record – you must consult with a CPA about how to properly do this and how to properly structure this type of transaction. You could unexpectedly end up with a major tax bill if the proper paperwork is not completed for this type of activity,
Merchant Account Financing
Unlike a traditional business plan, a merchant account financing is directly tied to your daily sales. These types of loans are only reserved for companies that have been in operation for one to two years. It is an expensive form of financing with APRs that are equal to 10% to 15%. This type of financing provides you with a substantial loan that is usually equal to 15% to 30% of your total year’s sales. Rather than paying a bill on a monthly basis for maintain this type of credit, a specific amount of your daily credit/debit card sales will be deducted from your daily settlement amount. The percentage of how much is taken on daily basis can range from 10% to 30% of your aggregate revenue.
In regards to the usage of these funds, this type of loan is usually used for inventory purchases rather than financing the growth of the business through expanded marketing. As a sizable chunk of your daily sales will be taken each day, it is imperative to determine whether or not your business can sustain this type of financing. The terms of the loan typically range from 18 months to 36 months.
Trade Credit
As you work with vendors on an ongoing basis, your company’s credit score (via Dun & Bradstreet) will nationally increase as they are informed of the ongoing satisfaction of your credit obligations.
Working Capital Lines of Credit
Similar to a credit card, you can obtain a working capital line of credit in order to financing ongoing inventory purchases as well as your ongoing expenses. These lines of credit tend to have much larger maximum balances than a traditional credit card. This is due to the fact that you will transfer funds directly from your credit line into your corporate bank account. Some financial institutions do provide card access for a working capital line of credit. Much like a standard business loan, your financial institution may require that you put up collateral in order to secure the credit line. In some instances, the purchases you are making (such as apparel, fashion, and/or home décor) can act as partial collateral.
Typically, this type of financing is used once the business is operational and generating revenue. You will be required to pay a certain amount of the credit line’s drawn down balance on a monthly basis (usually 2% to 4% depending on the agreement that you have with your credit institution).
Alternative to a working capital line of credit, you may want to consider using a home equity line of credit. However, this involves securing the equity in your home for staring a boutique. As you can already imagine, there are inherent risks when using the equity in your home for a business venture. Again, it is definitely in your best interest to coordinate your borrowing efforts with your CPA to make sure that an undue risk is not being taken.
Alternative to Debt Financing
If you do not have a stellar credit score, there are alterative methods of financing that you may engage which can allow you to effectively start your boutique. Foremost, you can always work with a private investor that can provide you with the capital that you need to launch your initial operations. Most investors will want a direct ownership interest in your boutique. It is highly unlikely that you will be able to source a private loan from a private individual (outside of using a platform like Propser.com) as these individuals want to receive a much higher return on their investment rather than simple interest.
If you ultimately decide that using an investor to finance your boutique is in your best interest, then you are definitely going to need the services of a qualified business attorney. Your attorney will be able to create the necessary contract between you and your funding source, which will include documentation about what will happen in the event of a business failure. It is no secret that emotions can run high when large sums of money and business matters are involved. A proper contract between you and an investor will address issues that could be potential issues for litigation in court. If you cannot afford an attorney to help you with these matters, you can work with platforms such as LegalTemplates.net where you and your funding source can create the contract together.
I know you may be wondering where you can find investors at this point. There are now a number of platforms where you can become a member in order to showcase your boutique development to both qualified and accredited investors. These platforms include:
Typically, they will charge a fee for allowing you to establish an account while also receiving success fees when capital is successfully placed at with your business. There is also the ability to source capital from a number of private investors that will come together to syndicate the funds you need to get started. Similarly to working with an individual investor, there will be numerous legal requirements and contractual obligations that you will need to adhere to when going down this road. Again, an attorney will be a valuable source of information if you have specific questions about raising capital from one or a number of investors. Further more, you can also work with crowdfunding promotion firms that will ensure that you capital raising activities receive substantial interest among potential funding sources.
Using Grants to Start a Boutique
The reason why I have decided to discuss grants as the last type of financing that you should seek is that they are rarely provided to most entrepreneurs. The vast majority of grant programs that are available for for-profit entities do not provide nearly enough startup capital to successfully launch a business. They should be considered complimentary to any type of traditional or alternative financing methods that you may be pursuing to start your boutique. Additionally, the applications for business grants are very long and very complicated. You will be competing against hundreds if not thousands of other entrepreneurs.
Conclusion
In closing, obtaining credit for your boutique is a complex process. You will need to determine exactly what type of financing that best suits the needs of your business. Again, working with your CPA, accountant, or business advisor will be invaluable as you progress through these operations. They will be able to provide you with the proper insight and guidance as it relates to the costs, benefits, and risks that are associated with each financing method. Finally, there are always investors that are available that are more than willing to put up capital for a promising boutique enterprise.