With over 1.3 billion in population, India has been one of the fastest growing retail sectors in the world. It is considered to have high market potential, low economic risk and moderate political risk. Retail business is a common yet highly demanding venture. Fuelled by the increase and diversity in consumer base and advancement in technology the retail sector has been undergoing a fast paced revolution.
Every business needs funds to be operational. But unlike most businesses, the retail business can be sector specific and require a sizeable investment. Among other things, these funds are required to maintain a line of credit with wholesalers dealing with a variety of products, marketing, staffing and transportation and storage of the products.
Whether you’re an online retailer or offline, you need a constant flow of funds to keep your retail business going. There are several ways in which these funds can be raised to assist in the operation of your Retail Business.
Bank Loans: Banks provide working capital loans and funding. Working capital loans are granted to stock your inventory or to provide your consumers with credit. While considering the loan, the Banks will assess the working capital requirement of a business based on the projections provided and take a conservative approach to lending the working capital. Funding would involve the usual process of assessing the business plan, valuation, projections, etc.
Line of Credit: As your retail business builds and grows, there is goodwill and brand value generated. Making timely payments to wholesalers, staff and happy customers helps build the goodwill, which directly results in the increase in your credit worthiness. Unlike loans which provide you with lump sum funds, line of credit works like a credit card. This can be set up with any manufacturer, wholesaler or the like. A line of credit is the maximum loan balance provided to your business. An interest component may also be applicable over outstanding amounts.
Use Existing Revenue or Assets: If you have an existing business that’s doing well, consider using your revenues for expansion. Using the existing revenues will help avoid the hassle of taking a loan. While doing this, you must ensure that you are not diverting most of your profits and starving your business. Before putting the profit into expansion, ensure that your current stores can function adequately without the surplus. If not, as mentioned earlier, it will lead to dissatisfaction of employees, consumers and could lead to far greater financial issues, too.
Venture Capital: VC’s are professionally managed funds investing in Companies with great growth potential. This maybe ideal for small retail businesses, building a brand value while generating revenues and looking to grow. You need to practice your pitch, leverage your network and be prepared to address all concerns. However there are a few setbacks to raising funds through VC’s. The major setback is that you are on a short leash as they are looking to make their exit in a few years.
Foreign Direct Investment: The Government has eased its regulations on Foreign Direct Investment in Retail specifically with respect to investment in single brand retail. The current policy permits overseas players to hold 51% stake in an Indian retail company. Once again, building the brand value to make it appealing for foreign investors would play a key role. With the changing regulations and opening up of the market, so far, it seems that only one foreign player, Tesco, has received approval for opening stores under the multi-brand retail policy.
Franchising: Last but not the least, retail franchising could be considered a viable option to build your business. Building and expanding a business requires a lot of investment, not just funds, but also investment of time and effort of the founders and the employees. Once any small business builds a certain brand value through its credible products and customer support, there is a possibility to expand the business by franchising it. An operation model can be worked out with prospective franchisees. Training in operations and product catalogues can be provided to the interested franchisees.
There are many ways to raise funds to scale any business. All of them come with their own benefits and setbacks. Choosing the right options for fund raising will help grow and expand your Retail business.
(The author is Ms Roma Priya, Legal Advisor and Director at Burgeon. She has represented over 150 clients and structured over a hundred ventured deals nationally as well as internationally since the incorporation of Burgeon.)