Inventory Financing, Loans and Lines of Credit
Many retail and wholesale businesses rely on inventory to serve their customers. It’s what keeps your business afloat and keeps your customers satisfied. Even strong, lucrative businesses, however, may require additional money from time to time. Inventory financing may be able to help you receive the money you need if your business could use some extra cash and you have unsold inventory in your warehouse or storage.
What Is Inventory Financing?
Inventory financing is a type of asset-based loan where the value of some or all of your inventory is used to secure the loan. The lender gives you a loan based on a proportion of the value of your inventory, and the inventory serves as collateral for the loan. Inventory finance is commonly used by business owners to purchase new inventory, but it can also be utilized for a variety of other needs. Inventory finance can help businesses with short-term cash flow gaps or stock up on inventory in anticipation for a busy season.
Businesses that constantly have substantial amounts of inventory, such as shops, restaurants, and wholesalers, are the most common users of inventory financing. Automotive dealers, for example, must purchase significant volumes of very expensive inventory, and this inventory consumes a large portion of their capital. Even a profitable auto dealer may have limited funds to grow their operations or hire additional salespeople. Inventory financing may be able to assist in the provision of that additional capital.
Accounts Receivable Financing vs. Inventory Financing
Inventory financing uses eligible goods as collateral; accounts receivable financing relies on eligible customer invoices. Both involve valuation and collection risks. Slow-moving or obsolete inventory may lose value, while invoices may become overdue, disputed or uncollectible. A provider does not necessarily advance the full face value of an invoice or the full value of inventory. Invoice factoring also differs from a loan because it involves selling receivables.
Collateral is one part of underwriting. Approval still depends on the lender’s requirements and your business finances.
Inventory Financing Options
An inventory loan and an inventory line of credit are the two most common types of inventory financing. While both types of inventory financing use your inventory as collateral, these two loan types have significant implications for your business’s future funding.
Inventory Loan
A business loan based on the value of your inventory is known as an inventory financing loan. An inventory loan, like a conventional small business loan, is for a defined amount that is repaid in monthly payments over a set repayment term or in one lump sum after the inventory is sold. You will be responsible for repaying the entire loan amount, and if you require additional funds, you will need to take out another loan.
Inventory Line of Credit
While a loan’s funds can only be utilized once, an inventory line of credit can supply you with additional funds on a continuous, as-needed basis. Many business owners choose to get a business line of credit so that they can address any unexpected expenses that may arise. You can enter into an inventory finance agreement with a lender to set terms and conditions for a long-term business funding relationship.
Inventory Financing’s Advantages and Disadvantages
Inventory financing can connect borrowing capacity with eligible inventory, but lenders may also review credit history, cash flow and existing debts. Ask how inventory is valued, which goods are excluded, how often reports are required and whether additional collateral or a personal guarantee is needed.
Inventory financing, on the other hand, can be more expensive in the long term than paying cash for inventory, even if the interest rate is modest. Although inventory financing can be secured by the inventory itself, in some cases the lender may require extra security. A lender may like to visit your facility to ensure that the inventory being financed is being properly cared for and will not be damaged or decline in value before being sold. On-site visits are usually accompanied by an appraisal cost, which you will be responsible for paying.
Keep in mind that most lenders will only lend money for a fraction of the value of your inventory, not the entire appraised value. As a result, if you’re using inventory finance to buy inventory, keep in mind that you’ll need to put up some cash.
Obtaining Inventory Financing
Inventory financing can be obtained via a regular bank, a credit union, or an online lender. Because inventory financing can involve ongoing reporting and monitoring, it’s critical to do your research and choose the finest financing business for your company.
Inventory financing is based on the inventory’s liquidation value and the likelihood of a quick sale. Lenders will want to see documentation that shows you have a high inventory turnover and can really sell the product throughout the application process, such as:
- Balance sheet and separate sales-history reports
- P&L statements
- Estimated sales
- Statement of Cash Flow
- Business plan
Lenders will also want to verify that you have a good inventory management system in place so that they aren’t concerned that you are buying more inventory than you need and can sell.
Additional Financing Options
Inventory finance may not be ideal for your business if you don’t have a lot of inventory. There are several other methods of finance that may provide a more flexible funding choice in that instance, such as:
Working capital loan: Compare short-term business financing for eligible operating expenses. Security requirements and permitted uses depend on the agreement; these loans are not always unsecured.
Check out our in depth guide to term loans here: https://gforcefunding.com/business-term-loans-in-2021-what-are-the-best-options/
Equipment Loan: If an unsecured loan isn’t the greatest option, an equipment loan might let you buy new equipment while paying it off over time. Even if you don’t have a perfect credit history, you might be able to qualify for a secured loan.
Take a look at our guide to equipment financing here: https://gforcefunding.com/equipment-financing-what-you-need-to-know-in-2022/
Discuss your inventory funding needs with G-Force Funding. Approval and terms depend on lender review.
For more detail on collateral eligibility and monitoring, see the OCC’s Asset-Based Lending handbook. You can also compare our business line of credit guide.