Australian retailers have suffered a nightmarish couple of years, with smaller retailers in particular the hardest hit by pandemic lockdowns, closed borders and supply disruptions.
As retail businesses are emerging from lockdown, many need to invest in digital transformation to win back market share from larger competitors. Consumer behaviours and expectations have changed due to COVID and there’s much more focus on speed and convenience. Former bricks-and-mortar retailers are becoming omnichannel and digital-first.
The need to fund digital transformation
Retailers face the ongoing costs of their physical stores and staff, as well as the additional cost of setting up an ecommerce platform and carrying out online marketing. Whereas a manufacturer can purchase equipment and machinery through hire purchase or asset finance, these options aren’t available to fund things like website design and marketing campaigns.
Raising money is challenging. Banks have stringent criteria including collateral, they may take a long time to process a loan, and interest rates can be very high. They may also be unwilling to lend the amount that a retail business needs to fully evolve into a digital business. The terms and conditions are often very rigid, with fixed-term paybacks. The prospect of losing a family home (if used as collateral) can also be too much of a risk for a retailer to take on.
Venture capital is another option. But it’s difficult to access, particularly for female founders, who only raise about half the funding given to male founders. VC also usually involves a loss of control for retail business owners. This can lead to negative outcomes as VC investors look to cut costs to turn a quick profit. One US report found that 10 out of 14 of the largest retail bankruptcies over the past decade were for private-equity-backed companies.
The problem of seasonal volatility
Another challenge specific to retail businesses is seasonal volatility. Revenues are much higher at particular times of the year, interspersed with leaner periods. For certain types of retail business (ski equipment, swimming pool supplies) this pattern can be particularly severe. Making regular payments to service a loan is extremely difficult during sales cycles.
It’s no wonder that retail businesses are looking outside the box for more creative and flexible funding options. Some are taking out unsecured loans – however these typically come with much higher interest rates and tend to be for smaller amounts. Others are trying peer-to-peer finance and crowdfunding campaigns, but these aren’t always successful.
A new funding option that’s more accessible for many retail businesses is revenue-based funding. With this model retailers secure funding and repay it from future revenues as their business grows.
Fairer, more flexible funding options
Revenue-based funding uses AI and data science to strip out the traditional prejudices from the application process, meaning that female-led businesses, and those run by minorities or in rural areas who face a much harder time getting funding, don’t miss out. Near-immediate lending decisions can be made, based on real-time data that considers sales, cost-of-goods sold, inventory and revenue.
Most importantly, the repayments scale with business performance so they’re much lower during leaner times, avoiding a cash crunch. This is ideal for seasonal businesses that experience considerable revenue volatility.
Conversely if business is booming, the remittance term of pay back can be shorter. Unlike venture capital where investors and owners are often misaligned, revenue-based funding encourages much healthier relationships. Both investors and founders/owners are aligned in their focus on revenue growth.
Successful funding drives stronger growth
One Australian retailer using revenue-based funding is the Vegan Grocery Store, a one-stop-shop for vegan groceries and specialty products. Founder Jessica Bailey has experienced a 37% increase in online revenue growth since taking the first advance in June this year. The process has also been much quicker, easier and stress-free. “Normally when you get finance through banks, you have to fill out tonnes of paper, and they make you feel like you’re having to grovel and beg. It’s a horrible experience.”
Swimwear brand Jolyn, based in Robina, Queensland, also faced past difficulties in getting finance before trying revenue-based funding. Jolyn makes swimwear specifically designed for female athletes and needed capital to expand its inventory. Director Trent Goulding was able to secure revenue-based funding, and saw a 21% increase in monthly revenue growth in the first three months. “Traditional capital raising is time consuming and a lot of effort starting from scratch every time you talk with a new bank. With revenue-based funding there’s a logical assessment of our turnover and data, streamlining the whole process.”
As KPMG’s Head of Retail, Matthew Darby, phrases it, “after experiencing five years of e-commerce growth in a matter of months due to the pandemic, retailers and brands need to leapfrog their investment programs to deliver their 2025 plan today.” New and innovative funding options, such as revenue-based funding, will enable Australian retail businesses to do this.
Dan Peters is managing director at Clearco Australia.