Using debt to expand a business can be smart when planned and executed correctly. And since seasonal sales carry little risk (comparatively), lenders are often willing to extend generous short-term lines of credit to the retailer since their cash will be returning to them very quickly. For instance, if a business has a track record of a 30% increase in sales during the month of December that dates back ten years, this level of dependability will be a no-brainer for the creditor. The only risk involved is if an unexpectedly bad season comes to pass, a supplier falls through, or an “Act of God” occurs. Otherwise, both the retailer and lender will win in this situation since sales will be fulfilled and interest will be paid.
Cash Flow & Savings
Some businesses are lucky enough to have the cash flow or savings necessary to finance their season internally. And although many businesses don’t have this luxury, if yours does, it can lower the risk of an adverse season substantially. One question to ask, however, is whether or not your business would be better off if it allocated this money to other things besides inventory. For example, it may be better to purchase inventory on credit and invest savings into R&D since the first is a short-term investment, while the latter is long-term. Doing so would eliminate years of interest payments yet still provide for the short term seasonal needs of the business with reasonable costs.
If a business is young and neither credit nor strong cash flows and savings are available, initiating an equity offering is one way of acquiring the much needed seasonal cash for increases in inventory and labor. This can also be a great way of raising the company valuation since this equity round will not be the first “seed” round. The business now has projections that are rooted reasonably well in industry and competitor seasonal history. Ultimately, it’s possible that this will be the only financing route for a young business, with the exception of bootstrapping. And although bootstrapping could be used to supply the influx of sales, it’s effectiveness and scope depend significantly on the company size and seasonal projections.