It is no secret that financing plays a large role in the success and growth of many tactical retailers. Loans provide funding for inventory purchases, marketing and advertising among other things. Although the gun and ammunition store industry has been among the fastest growing, it continues to live in fear of stricter regulation and fewer financing options.

The current financing woes aren’t a matter of bad credit. After all, with many loans, bad credit doesn’t factor in the decision-making process since the operation’s revenue and profits are usually considered by many traditional lenders. However, today, it is the type of business seeking funding that is all-too-often the deciding factor.

Unfortunately, financial institutions that traditionally lend to or invest in the firearms industry are being pressured to curtail their involvement. Fortunately, there are a number of new financing options in addition to the more difficult to obtain bank loans, SBA financing and asset-based loans.

However, for speed and a willingness to fund small businesses, even businesses in troubled industries, fast-growing, but little-known Fintech financing may be an attractive option.  

Fintech Loans

So-called “alternative loans” are available to businesses that have been turned down for traditional funding or those in industries out of favor with the public such as firearms businesses. With an alternative loan, the retailer can get funding for working and operating capital.

Alternative loans are among those offered by fintech companies that rely on technology to underwrite the loan. Each of these fintech loans has its own unique criteria and requirements. Fintech refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers. It works primarily by unbundling offerings by fintech firms and creating new markets for them.

Before fintech was developed, businesses would go to banks to obtain loans and financing. But, with the advent of fintech, businesses can easily get loans, financing and other financial services through mobile technology.

Fast-growing Crowdfunding

One type of fintech alternative financing, Crowdfunding, is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet.  More commonly associated with appeals by individuals or groups for charitable projects and worthy causes, Crowdfunding is increasingly used to fund a wide range of for-profit ventures.

Crowdfunding platforms allow internet and app users to send or receive money from others on the platform, and have allowed individuals and businesses to pool funding from a variety of sources all in the same place.

Instead of seeking traditional bank loans, it is now possible to go straight to investors for support of a project or business. As Crowdfunding has increased in popularity, the Security and Exchange Commission (SEC), state governments and the U.S. Congress responded by enacting and refining many capital-raising exemptions to allow easier access to alternative funding sources.

Although businesses were, for years, banned from soliciting capital from the general public for private offerings, the so-called “Jobs Act” in 2012, removed the ban on general solicitation activities for issuers qualifying under a new exemption.

The SEC now allows shooting sports retailers and even first-time start-ups to raise up to $1 million online from non-accredited investors over 12 months. The compliance usually required in private fund-raising is waived although borrowers must usually provide financial statements — statement that don’t have to be audited.

According to the SEC, an individual investor with an annual income and net worth of less than $100,000, can invest $2,000, or 5 percent of their net worth, whichever is greater during a 12-month period. An investor with annual income or a net worth equal to or more than $100,000, can invest 10 percent of their annual income or net worth, whichever is greater.

For fund-raising and security sales, it is the Crowdfunding sites, not the shooting sports equipment business, that must be registered with both the SEC and the Financial Industry Regulatory Authority (FINRA). In fact, today, a tactical retailer can broadly solicit and generally advertise an offering while remaining compliant with the exemption’s requirements if:

* The investors in the offering are all accredited investors, and 

* The business takes reasonable steps to verify they are accredited investors by reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports, etc.

Today, Crowdfunding is challenging venture capital and angel funding as an alternative source of financing for many small business start-ups. As is the case with both debt and security-related Crowdfunding, so-called Peer-to-Peer (P2P) lending, is also experiencing rapid growth.

Peer-to-Peer Lending

The U.S. Small Business Administration (SBA), has found P2P lending is a viable financing alternative for many small businesses. P2P lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers.

With P2P lending, borrowers are matched directly with investors through an online lending platform. Investors get to see and select exactly which loans they want to fund. The P2P platform operators generate revenue by charging fees to borrowers and taking a percentage of the interest earned on the loan.

Among the many advantages for borrowers with P2P loans is they often see better rates than traditional banks offer. Interest rates and the exact methodology used to calculate these rates can vary among P2P lending platforms, although the interest rates are usually less volatile than other investments.

How Do They Do That?

P2P lending uses online software to match lenders with borrowers. Although features may vary from platform to platform, on most P2P lending platforms, a borrower fills out an application that may include a credit check. After learning what the interest rate will be, a shooting sports equipment retailer can choose to move forward and take the loan into the funding stage.  

During the funding period, investors review the loan listing and can fund the loan in increments.

If the loan is successful, it moves to the repayment phase. As with a traditional loan, payments are made over the life of the loan, with each investor receiving proportional shares of the payments.

P2P lending platforms, such as industry leaders Lending Club and Prosper, can charge fees to both lenders and borrowers, making it important to review the platform’s terms.

Marketplace Lending

Marketplace lending and P2P lending are often used interchangeably, but there are differences between the two.  Pure P2P lending usually involves individuals lending to borrowers, while marketplace lenders are usually non-bank financial institutions that match borrowers with lenders. Using technology, Marketplace lenders evaluate and process loan requests. This allows them to cut costs and streamline the entire process.

Banks take customer deposits and lend them to borrowers. The difference between the interest rates they pay out and the interest rates they receive on their loans equals their profit. Marketplace lending is different because these lending platforms do not take deposits or lend their own capital.  Instead, they serve as brokerage firms matching lenders and borrowers, and taking a fee for operating the lending platform.

Marketplace lenders currently pose a significant threat to banks. Perhaps that is why some banks now buy loans on Marketplace lending platforms. In fact, a number of large financial institutions reportedly have plans to build, buy or form partnerships in order to create their own Marketplace offerings.

Security, Other Pitfalls

There is a degree of uncertainty surrounding the industry and the potential risks Marketplace and other FinTech lending options pose to borrowers as well as investors and the financial system. Many Marketplace lenders do not hold the loans they make themselves and make much of their revenue through origination and servicing fees, which potentially creates incentives for weak underwriting standards.

Borrowers could potentially be harmed in a number of ways. Faulty underwriting could result in borrowers being rated as higher credit risks and having to pay unnecessarily high interest rates. Or, if the underwriting is too lenient, loans could be made to borrowers lacking the ability to repay the loans. Defaulting would, of course, restrict these borrowers’ future access to and prices paid for credit.

As a result of the recent publicity surrounding calls for “gun control,” some major banks have pulled away from financing firearms businesses. A number of state governments are following the lead of Louisiana, which refuses to do business with banks and other financial institutions that provide funding for firearms dealers, retailers and manufacturers.

The fintech industry, including Crowdfunding, Peer-To-Peer and Marketplace lending, may provide options to retailers facing constraints from more traditional funding sources. Although this type of funding and the unique online platforms can produce results, fees, along with potentially high interest rates might make this a more expensive option.

Obviously, borrowers should consider all financing options.  Among the options that may or may not be open to a shooting sports equipment retailer are bank loans, SBA loan guarantees, alternative loans, asset-based loans, cash advances and, of course, the growing fintech financing programs. But every tactical retailer should do their homework, weighing the pros and cons of all options, before committing.