Poor back-to-school spending levels could increase reliance on inventory financing

Late July and August are typically good months for U.S. retailers, as parents are shopping for back-to-school items for their kids. However, spending expectations are down this year, which could add to the problems of already reeling retailers. 

When sales levels fall, small- to medium-sized businesses can struggle to cover operating costs. Luckily, inventory financing is available to help keep stores afloat. 

After a record breaking year in 2012 that saw parents average $688.62, American families are expected to hold back spending on apparel, shoes, supplies and electronics this year, with an average expenditure of $634.78, according to the National Retail Federation's 2013 Back-to-School Survey

"The good news is that consumers are spending, but they are doing so with cost and practicality in mind," said NRF president and CEO Matthew Shay. "Having splurged on their growing children's needs last year, parents will ask their kids to reuse what they can for the upcoming school season. As they continue to grapple with the impact of increased payroll taxes, Americans will look to cut corners where they can, but will buy what their kids need."

Retailers struggled in June as well
With retail sales coming in lower than expected in June, a boost in back-to-school shopping would have been a welcome sign, but it appears as though that will not be the case. 

Sales at U.S. retailers hit a seasonally adjusted annual rate of $422.8 billion in June, a 0.4 percent bump from the previous month and a 5.7 percent year-over-year gain, the U.S. Department of Commerce reported.

Despite the monthly and annual increases, sales were lower than expected, as economists surveyed by Bloomberg called for a 0.8 percent improvement. 

Inventory financing demand could pick up with sales lagging
As retailers see lower sales levels, cash flow could slow and available capital might decrease, which can make it difficult to keep up with operating costs. That said, these businesses might need to increasingly rely on inventory financing. 

This form of asset-based lending enables small- and medium-sized retailers to use current inventory as collateral to obtain a revolving line of credit, which can then be utilized to cover operating costs. Essentially, this allows businesses to keep the doors open when sales fall below normal levels.