The Struggle to Find Inventory Financing for the Holidays

The green movement has spawned a growing interest in bicycle commuting and touring that dovetailed nicely with the founding of five years ago. The online cycling trailer and gear retailer, created by president Josh Lipton in his Flagstaff, Ariz. garage, has grown from a one-person to a six-employee operation, with two—soon to be three—Web stores. He says he had $700,000 in revenue in 2008 and estimates $1.2 million in 2009.

But while Lipton had hoped for strong holiday sales this year, boosted by the fourth-quarter addition of a new children's bike store, his company was caught off guard when its $32,000 revolving line of credit from Bank of America (BAC) was cut in half this summer.

"We used all of it during our slow season last fall, but we paid it off in full this spring. Right after that, I got a letter saying we no longer qualified for that large a line, even though when I got it more than two years ago, I had no employees and hardly had an established business," Lipton says.

Many small retailers find themselves coming up short on inventory financing for the holidays this year, says Stacy Janiak, vice-chairman and U.S. retail leader at accounting giant Deloitte. "The credit crisis is being felt more deeply by small business in general, and retailers are bumping up against credit limits on what they can borrow to fulfill orders," she says. "On the other end, vendors are trying to extend terms. And with the advantages of size, the small retailers are getting squeezed more than they can squeeze back."

Bill Hampel, chief economist for the trade group Credit Union National Assn., isn't surprised. "Except for very established retailers, I suspect that inventory financing is probably one of the hardest things to get this year, just because people are so nervous," he says. "Inventory is, almost by definition, self-liquidating, extinguishing collateral because if the business does not sell the vast majority of its inventory, it's essentially worthless. For a lot of business lenders, inventory financing is essentially viewed as unsecured lending."

How Much Stock is Enough? Along with scarce funding, this year's holiday sales are difficult to predict, says Kevin Sterneckert, research director at AMR Research, based in Boston. The economy was in worse shape a few months ago, he notes, when many holiday buying decisions had to be made. And while the overall economy is improving, the jobless rate remains high and consumer confidence—though inching upward—is still shaky. "There's a lot of confusion about where shoppers will be, where the job market will be, and there's not a lot of consistency in beliefs across retail," he says.

The likely result is that many small retailers will realize too late that they've planned incorrectly and find themselves running out of key items. "This will cause a self-fulfilled decline in holiday sales and customers will go elsewhere, while the retailers have missed key item opportunities," Sterneckert says.

Where smaller retailers can gain advantage, however, is by communicating closely with their customer base and aligning their inventory with what shoppers want to buy. "What small businesses can do better than their bigger competitors is to understand the demographics of their clients, what stage of life these people are in, and how they are behaving in these [bad] economic times," says Shane Barber, a financial advisor at Barber Financial Group in Lenexa, Kans.

Retailers that have already cut expenses and are running leaner can survive by being more responsive to trends than their competitors, Janiak says. "Small retailers have a unique ability to connect with their customers as store managers feed information on who's shopping there and what they want to see on the shelves. If they track demands and have shopping events that cater to core customers, they can stay effective and competitive."

Lipton says that sales and discounts have driven his revenue up this year. As the holidays get closer, he's using his American Express (AXP) small business credit card to finance up to $50,000 a month in cash flow and plans to use it for his holiday inventory as well. "They tell us there's no limit and we're able to pay it off within 10 days of getting the statement, so we get a 2% discount," he says.

Still, he recognizes that funding a growing company with credit-card debt is a risky proposition. "We face significant challenges as a small online retailer relying on a single business credit card," says Lipton, who now plans to apply for a home equity line of credit.

Getting another business loan doesn't seem possible in this climate, he says. "I know the banks are cutting everything they can to clean up their balance sheets. I also went to a couple of credit unions and they said we didn't have enough history and would need to show them three years of profits," he says.

But that's difficult for a growing company to do. "We're a startup, so anytime we make a profit, I want to put the money into expanding our operations and growing our employees," he says.

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