Retailers and wholesalers don’t always find it easy to get financing for their business. Banks are not always the most ideal lenders. And besides, their loan application process can be long, complicated, and ultimately futile.
Small business loan applications to large banks have dipped to an approval rating of just 20.4% in October 2014. Even smaller banks have become more recalcitrant in giving out loans, as the approval rating for loans has dropped to 50.3% in September 2014.
So it’s always great when several forms of alternative financing are available. One of these is inventory finance.
What’s Inventory Finance?
When you borrow money from a bank so that you can purchase inventory, it may be hard to secure a loan if you don’t have any notable security or asset to serve as collateral. With inventory finance, you don’t have to have these assets. The inventory you buy with the loan amount you will receive will serve as the collateral for the loan.
In some cases, you may already have the inventory in hand, and you use that inventory as collateral while you use the loan for another purpose. You may increase your inventory to meet an increase in demand, improve your delivery services, or hire more workers.
Types of Inventory Considered
Once you sell your inventory, you can then pay back your lender with the money you’ve received. The loan in other words acts like some sort of advance against the value of your inventory. If you are unable to sell your inventory, then the bank takes the inventory instead.
Of course, the bank will have a problem when this happens. If the inventory is not selling, then the bank may not get back its money.
Thus, there are conditions as to what kinds of inventory are approved for this type of financing. One possible condition is that the inventory should be very popular and easy to sell. The demand for the product must be high, so that the bank can be assured that the inventory will sell after all and the loan can be repaid.
Another possible condition is that the item should also have a steady clientele. For example, if your inventory is bought by the same people on a weekly basis, then financing may be possible. So if you’re the only gas station in a town where there are a lot of cars then getting this type of financing is going to be very easy. That’s because you (and the lender) know that your items will sell quickly and steadily.
Advantages of Inventory Finance
One of the first advantages you’ll notice when you apply to a lender that offers this type of financing is that the approval period can come very quickly. It will take just two weeks or so, which is fast compared to bank processing times.
This type of financing is ideal when your supplier expects payments in a shorter period of time than it takes you to sell your inventory. If your supplier expects payment in a week while it takes a month to sell your products, then the loan can come in handy to pay off your supplier.