Inventory Financing, Loans and Lines of Credit
Most business that aren’t service-based rely on inventory for its survival. 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
At first look, inventory finance and accounts receivable financing appear to be the same thing, but there is one big difference: depreciation. The amount of money owed by your clients remains constant with accounts receivable financing, such as invoice factoring, no matter how much time passes. The lender could give you a loan for the entire amount of your accounts receivable, so you don’t have to worry about the value of your outstanding bills decreasing. Inventory, on the other hand, is subject to depreciation over time. There will be a gap between the loan payback amount and the value of the collateral if a lender grants you a loan equal to the amount of your inventory and your inventory does not sell as quickly as you intended. As a result, the lender is at risk of losing money.
Despite the danger of depreciation, inventory financing is often easier to get than an unsecured loan because your inventory serves as collateral, lowering the lender’s risk.
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.
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
Because these loans are backed by merchandise, lenders might place less attention on your business credit history, credit score, and other creditworthiness factors. This can make inventory finance more accessible to companies who can’t secure a traditional business loan, such as a working capital loan. This type of finance is also more convenient to apply for and acquire than a business loan.
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 is a recurrent loan, 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, including sales history
- 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: These short-term loans provide flexible and unsecured capital to help bridge any cash flow shortages. Working capital loans can be used for anything a business needs, from inventory purchases to hiring extra employees. As the owner, you have the last say.
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/
Apply today with G-Force Funding for business loans and equipment loans from $10,000 – $1,000,000.
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