Business Loans for the Furniture Industry
The furniture industry has been going through some tough times during the COVID19 pandemic – but luckily there are signs of a rebound. Many consumers view furniture as discretionary spending, and cut back during economic downturns. During 2020, industry revenues in the $24 billion industry dropped 18.5%, but in the first five months of 2021 demand grew 31% over the prior year.
The industry space has been undergoing vast shifts as generational trends on furniture spending impact retailers and manufacturers alike. Nearly half of millennials shop online for their furniture, compared to just 37% of Baby Boomers. Younger generations have delayed home ownership, and look for different features in furniture intended for a rental.
Retailers and manufacturers who respond to these shifts will continue to grow and succeed. If you own a retail outlet or furniture manufacturing company, you’ve likely felt the impacts of these changes. Maybe it’s time to invest in new equipment to expand your product offerings into modular, lightweight furniture favored by newer consumers. Or, you know it’s time to invest in a website or online sales platform.
If it’s time to grow your business, or you’re still recovering from 2020, borrowing could help you reach your goals. Read on to find out some reasons you might want to consider borrowing, questions to ask before taking out a loan, and the best business loans for furniture companies.
Reasons for Furniture Companies to Borrow
What are some common reasons furniture companies might borrow?
- To acquire or merge with another company
- To open a new retail outlet or launch a website
- To invest in drop-shipping or warehousing capabilities
- To replace old equipment or buy new
- To better manage cash flow and meet working capital needs
- To expand product lines
There are as many reasons to borrow as they are types of upholstery, but before you apply for a loan, ask yourself these questions.
Questions to Ask Before Taking out a Loan
Once you know why you want to borrow, and have a projected loan amount, you can start narrowing down your list of potential lenders. Banks specialize in certain borrower types, industries, and loan sizes, so you want to approach the right lender when it’s time to borrow.
Why do you need to borrow and how much do you need?
Small business owners in the furniture industry borrow for a variety of reasons – whether it’s to make payroll on Friday, or to invest in marketing a new CNC router. After determining why you plan on borrowing, make a budget for your business plan and add up how much you need to borrow.
Putting together a complete plan helps you fully think through your project. Think about increased labor hours to install or train employees on a new machine. Will your loan cover the equipment costs and transport? Or, if you have concerns that a customer’s payment will not arrive on time, maybe take out a working capital loan to cover an extra two weeks of payroll.
When borrowing, it’s important to borrow the full amount you’ll need to realize your plans. If you run out of funds during an expansion, it could delay the opening of your new warehouse or drop shipping site. Failing to make payroll one week could lead one of your best employees to look for work elsewhere.
After you know why you need to borrow, add up all your projected expenses to get the total amount for your loan application. Lenders offer loan products within lending ranges – there are loans for small business owners ranging in amounts from $10,000 to $2 million. If you need a loan for $100,000, spend your time wisely and apply with a lender that you know offers loans that high.
How long do you need to use the funds?
When borrowing for a small business, your loan’s term should match how long your business will receive a benefit from the borrowed capital. If you’re taking out an equipment loan for a new industrial saw that will be fully depreciated in three years, you don’t want to still be making payments on it in five years.
Traditional lenders prefer loans that last for several years, not several months. Underwriting a short-term loan has the same costs for them as a long-term loan, but they make less money on it. Focusing on long-term loans allows them to maximize their profits. If you only need funding for a short period, such as a few months, apply for a loan with an alternative lender.
What can you afford to borrow?
Sit down with your budget and make reasonable predictions about growth in both revenues and expenses that might result from adding a new furniture line targeting millennials, or expanding into online sales. The goal is to have a fairly accurate idea of how your business plan will impact your business’ cash flows. Then calculate the potential loan payment on the amount you plan on borrowing. Can your business’ cash flows extend to cover these payments?
Lenders calculate a loan’s payment by taking the interest and fees on the borrowed capital and amortizing it plus a portion of the capital over the loan’s repayment term. If you have a longer repayment term, you have a long time to repay the loan and will have a lower monthly payment and vice versa. If your business’ cash flows might struggle to cover the predicted loan payment on borrowed capital, you have a few choices.
For some businesses, a large, monthly payment due one day a month can be difficult to align with cash receipts. This is particularly true if the payment date coincides with another large expense, such as payroll. Traditional lenders prefer a monthly lump sum payment – often selected by them – but alternative lenders offer daily, weekly, and bi-weekly payment options. Consider how this might positively impact your cash flows and make that loan payment possible.
You can also take out a smaller loan. This reduces the amount you have to repay, and the interest you’ll be charged, and thus lowers your loan’s payment. If a potential loan payment makes you nervous, take another look at your plans and identify areas where you could scale back.
How long have you been in business?
Traditional lenders prefer lending to a business that has a long history of success. When you apply for a loan at a bank they could ask to see several years of tax returns, bank statements, and financial statements. If your revenues dipped in 2020 and you’re still recovering, it could be harder to borrow at a bank.
Without a long and stable business history, it’s hard to have a loan approved at a traditional lender. Alternative lenders look at other factors when evaluating a loan application. As long as you have sufficient revenues, they will extend credit to a business with just two months of history and some blemishes in their past.
Do you have good credit?
Your credit score reflects your current debt level, debt to income ratios, and past payment history. If you’ve made late payments on a credit card or loan, defaulted on a loan, or declared bankruptcy, you’ll have a lower credit score. Before applying for loans, find out if you have good credit by requesting a free copy of your report.
If you have poor credit, it will impact who will give you funding. Banks prefer to work with borrowers who have credit scores of 720 and above unless you have significant collateral to pledge. But pledging collateral means that you’re taking on the risk of losing it should you default on the loan. Alternative lenders fund loans for borrowers with scores as low as 530.
The Best Business Loans in the Furniture Industry
When it’s time to start applying for loans, you have different loan products available. One of these will best fit your capital needs.
Equipment Financing Loans
Is it time to replace a double-headed sander or CNC router, or buy new equipment? Equipment financing loans fund the purchase of a specific piece of equipment, and can’t be used for any other purpose.
The equipment the loan pays for serves as its collateral. Because it’s a collateralized loan, equipment financing loans have lower interest rates. Should you default on the loan, the lender will just repossess the equipment to recoup their losses.
Interest rates for equipment financing loans range from 7.5% to 12.5%. For larger and more expensive equipment, the lender might request an independent appraisal. Before approaching lenders, you’ll need to know the exact piece of equipment you intend to buy. It will make the loan approval process faster and the lender might not require an appraisal.
Bad Credit Business Loan
Small business owners with a credit score below 720 can get funding with lenders who offer bad credit business loans. Alternative lenders work with businesses who find it difficult to work with banks. With a low credit score, there’s more worry that you might default on the loan. Thus, you will pay a higher interest rate than on a bank loan or SBA loan because you represent more risk to the lender.
Repayment terms are anywhere from 2 to 18 months and loans have interest rates of 12% to 45%. If you have a credit score at or above 500 and minimum monthly revenues of $8,000, you can take out a loan with an alternative lender.
Working Capital Loans
Working capital is the money needed for your business’s daily operating activities. If a customer hasn’t paid on time and you’re worried about paying employees and rent consider a working capital loan.
Working capital loans have shorter terms because they’re meant to help small business owners who face temporary and emergency cash flow issues. Lenders review and approve your loan application in hours, and can release the funds in as little as 24 hours. You can borrow between $10,000 to $1 million if you have a credit score above 650 and minimum monthly revenues of $10,000.
A short term loan has a variable repayment term of one to three years to repay it. It can be used to fund a smaller project – such as building a new finishing booth and installing proper ventilation – which will be completed within a year.
Short term loans require two years in business, a minimum credit score of at least 650, and minimum monthly revenues above $10,000. You can borrow as little as $15,000, up to $750,000. There are no prepayment penalties if construction completes earlier than planned and you decide to pay it off early.
Large Business Loan
A large business loan could help fund an acquisition, building out inventory, or an investment in another large project. A large business loan funds in amounts between $50,000 to $2 million, enough to purchase another company. You can get a loan with a repayment period of up to three years, giving you time to integrate an acquisition and realize its financial benefits.
A large business loan will have lower payments than you might expect because the loan’s capital and interest is spread out over a longer repayment term. This makes cash flow management easier during the project’s launch phase. Interest rates range from 12% to 45%. If you have a credit score above 530 and minimum monthly revenues of $10,000 you can qualify for this loan product.