Spot Funding Enters Stage Left As Small Retailers Struggle With Short-Term Capital

Vacant space is scarce in some of the most competitive U.S. retail markets, sitting at about 4.2% nationally for the first three months of the year.

Yet landlords are having trouble getting spaces filled quickly, and it isn't for lack of will. Leasing rates are on the rise, but closing deals is taking longer, especially for small and service-oriented retailers lacking hefty capital reserves.

That has smaller retailers and landlords looking to close a record gap that is slowing down full lease-ups and the ability of both sides to start turning profits. 

The average time it took for landlords to fill vacant retail spaces reached a six-year high of 124 days last year, according to a report from Datex. That was up almost 28% over 2023, when it took an average of 97 days.

The property management solutions firm said much of the delay has been “prompted by nervousness as inflation, changing logistics and labor costs pressure margins.”

But lags are also on the rise because many emerging businesses tend to lack the short-term funds they need to sign leases and begin operations in a timely manner, according to a company that has stepped into the breach with spot funding to help close the gap.

Bonside, a New York-based small-business financing vehicle focused on brick-and-mortar retailers, is one of the tools smaller retailers are tapping for quick capital, CEO Neha Govindraj said. 

“We’re neither equity nor debt,” she said of the firm, which provides growth capital, underwriting for about four years, in exchange for a portion of the borrower’s revenue until what it calls “an unsecured advance” is repaid.

Bonside's financing platform launched out of beta in June 2023. It closed its Flagship Fund, led by REIT Kimco Realty, last year, raising $15M to “realize the largely untapped potential of multi-unit retail,” Govindraj said in a release.

Right now, that means getting tenants into spaces faster, and Bonside's strategy is focused on service sector businesses like spas, gyms and experiential retail.

Govindraj said those businesses are somewhat insulated from the Trump tariffs whiplash because they tend to be labor-centric and less dependent on foreign imports.

“For a really long time, everyone kind of looked at the small-business economy as one,” Govindraj said of traditional lenders. “Carving out brick-and-mortar services as a subsector has allowed us to identify a portion of the small-business economy we think has a lot of strength.”

Polsinelli partner Jared Rothkopf, who works extensively with retail landlords, agreed with Govindraj’s assessment of the services sector and its need for capital to expand quickly.

The tenant improvements these businesses often require also present a financing challenge for his clients.

“Newer concepts that are still in the capital-raising stages of their life cycle may need more money from landlords,” he said. “[They] are going to see higher rents because of the TI that the landlord is willing to give. ... The landlord is going to require guarantees, principals.”

Bonside helps business owners get the cash they need in those situations without taking on debt or giving up partial ownership of their venture.

“It allows the operator to access growth capital without diluting their ownership and without having to put up personal guarantees or capital,” Govindraj said. “They actually have time to use the capital without being burdened by heavy payments every month.”

Traditional lenders can paint the small-business world with a broad brush, the CEO said. Bonside differentiates between various segments of that market and makes use of analysis based on financial figures gleaned from its clients.

Retail landlords should also be looking at data like this on a more granular level.

“If you can better understand these businesses, you can fill your vacancies,” Govindraj said.

Rothkopf said the additional lead time for construction materials caused by tariffs and the general lethargy of the permitting and review process at the municipal level have put those financing retail construction in a tough spot.

“I think it is causing a lot of pressure on tenants who are burning through whatever capital they’ve been able to raise,” he said.

Landlords are “pressing to get rent as soon as possible, especially if they’re giving an increased TI package,” Rothkopf said.

“They’ve got lenders. Their mortgage payments are due.”

The nation is experiencing “a huge moment of uncertainty,” he said. 

“It’s been such a great run that it feels like, to a certain extent, there was some inevitability to things slowing down,” Rothkopf said. “I don’t want to say it’s all doom and gloom. I don’t know that to be true.”

But he and Govindraj said the services sector isn't immune to a potential economic downturn, which could reduce consumer spending across the board. Other shifts in the national zeitgeist, like an ongoing immigration crackdown, could impact labor-centric businesses as well, Rothkopf said. 

But barring the onset of a recession, Govindraj said the future of the services and experiential retail sector is bright.

“We think the consumer is demanding these kinds of businesses,” she said. “It’s less about going and purchasing a certain item and more about experiencing something outside of the home.”