Consumer spending unexpectedly picked up in March, which could prove beneficial for small- and medium-sized retailers.
Should these businesses see higher sales in the near future, as a result of increased consumer spending, the need to replenish inventory could arise. However, companies of this size can struggle to obtain a bank loan for this purpose, which is where inventory financing could help.
Consumer spending increased 0.2 percent in March, lower than February's advancement, but higher than the projection of flat growth, according to the U.S. Department of Commerce.
"This makes it much more likely than we thought for real consumer spending to post a solid gain in the second quarter and increases the chances that real GDP growth in the second quarter will come in above 2 percent," John Ryding, chief economist at RDQ Economics, told Reuters.
If Ryding's belief comes true, and the second quarter sees a strong gain in consumer spending, retailers could reap the benefits. Increased sales would be a welcome sign for the sector that has struggled in the past couple months.
Despite higher sales, many small- and medium-sized businesses will still need to rely on financing to keep shelves stocked. Retailers of this size might have little available capital, which can lead a bank to turn them away.
Businesses that are turned away by one of these financial institutions can potentially opt for inventory financing. This type of asset-based lending allows a retailer to use current inventory as collateral to obtain a revolving line of credit, which can be used to help replenish inventory.
Small- to medium-sized retailers could also use a revolving line of credit if consumer spending doesn't improve, as this might lead to a period of lagging cash flow.