Retailers might need to increasingly rely on inventory financing with consumers pulling back

The past couple of months have seen numerous consumer confidence indices hit highs not seen in years, but it appears as though that momentum is slowing, which could lead to a drop in spending at retailers. 

Should that be the case, small- to medium-sized retailers might need to turn to inventory financing more frequently to ensure they are able to get through times where cash flow might fall below normal levels. 

Consumer comfort dips in the second week of July
After five consecutive weeks of increases, the Bloomberg Consumer Comfort Index fell in the seven-day period ending July 14. The index dropped to minus-28.4 from minus-27.3 one week earlier. Meanwhile, the consumer expectations gauge fell to a five-month low in July. 

Two of the biggest contributing factors to the drop were higher gas prices and wages that are struggling to keep up with inflation, the source noted. 

"Despite modest employment gains, wage increases have remained relatively restrained," said Joseph Bursuelas, senior economist at Bloomberg LP. "The decline in overall assessments of economic conditions is a lagged response to the slowing of the economy, which is on track to grow barely above 1 percent in the first half of the year."

Another indicator that consumers are feeling less confident in the current state, and future prospects, of the economy was the unexpected dip in the Thomson Reuters/University of Michigan preliminary index of consumer sentiment in early July. 

The index fell to 83.9 from 84.1 in the previous month, which was lower than the gain to 84.7 projected by economists surveyed by Bloomberg. However, TD Securities strategist Gennadiy Goldberg told Bloomberg this shouldn't be too concerning. 

"It's a slip in confidence from recent highs rather than the start of a new downward," Goldberg said.

Inventory financing could be beneficial if retail sales levels decline
As consumers feel less confident in their personal financial situations, there is a potential that retail sales could decline. 

Should this be the case, small- to medium-sized businesses might need financial assistance to help out as cash flow lags. Inventory financing could be utilized in this situation, as it allows retailers to use current product as collateral to obtain a revolving line of credit, which, in turn, can be used to cover operating expenses while sales levels are below normal.