What is Inventory Financing?

It’s pretty normal to have a small business of your own and then find yourself running a little low on operational cash. Perhaps you underestimated how much of a cash cushion you need, or maybe some projected expenses were much more expensive than you thought it would be. Sometimes the competition can crowd you out, or maybe a customer you depended on to pay on time suddenly failed to do so.

When these things happen, most small business owners tend to think about getting a traditional bank loan. But these days the odds of actually getting a loan from a bank aren’t all that good. This is especially true if you don’t have any collateral to offer as security for your loan.

In a way, inventory financing is a form of secured business loan, even if you may currently not have any inventory to speak of.

How Inventory Financing Works

With inventory financing, you get either a short-term loan or a line of credit, which you then use to buy the inventory you need. These products are the inventory, and they serve as collateral for the loan. In other words, if you’re unable to pay the loan according to the agreement you drew up with the lender, the lender then has the right to seize this inventory as part of the payment.

Often, the reason you’re unable to pay for the loan is because the inventory you’re supposed to market and sell isn’t selling as well as you expected. According to experts, this makes inventory financing a form of unsecured loan. After all, if your business is to sell these items and you fail, then how is a bank supposed to succeed where you didn’t?

However, if the inventory is selling well, the money generated by the sales is then used to pay off the loan. For example, let’s say that the lender advances you $100,000 to buy gadgets at $5,000 each which you can sell for $10,000. You can then use the money from each sale to pay off part of the loan or use that money to get more inventory.

In the end, you pay off the loan plus the interest or the cost of the cash advance. Usually, the cost of this form of financing is greater than what factoring entails because of the greater risk and uncertainty. With factoring, items have already been sold, but in inventory financing this is merely hoped for.

Should You Use Inventory Financing?

It depends on the marketability of your inventory. If your inventory is selling well, then you can use inventory financing to reap more profits for your business. However, if your items are not selling well, then lenders may find them unsuitable as security for the loan.

To get inventory financing, you usually need a good credit record and a viable business plan, along with the inventory (and the values) you want to finance. The lender will then offer financing based on the realistic expectations of sales and profits from the inventory.

As the recipient of the loan, part of your responsibility is to make sure that your inventory is in good condition. Lenders have the right to inspect the property to certify that it retains its value as collateral.


What is Inventory Finance?

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.


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