Inventory financing is a type of lending that uses your company’s inventory as collateral for the loan or line of credit. It is a popular form of small business financing and can be found through traditional banks as well as online lenders. Inventory financing can be structured as a term loan with a fixed payoff period or a revolving line of credit, which will require you to repay only the amount that you actually use. When shopping for inventory financing, you will want to compare rates and terms from a variety of lenders. Make sure that you understand the repayment terms, which will include interest payments and origination fees, before you commit to a lender.
A company can use inventory financing to purchase new merchandise or to expand existing inventory. Companies that have a high rate of inventory turnover and that generate steady cash flow from sales of their products are more likely to be approved for this form of lending. Lenders will review your company’s inventory management systems, and they may request additional financial details as part of the application process.
It is important to remember that your inventory will be used as collateral for the loan or line of credit, so it can be a hard form of debt financing to obtain if you are a newer company without a proven track record. Additionally, this type of lending typically involves a higher rate of depreciation for the goods than a normal business loan, which can increase the cost of the financing over time.
What are the benefits of Inventory Financing?
If you need to purchase inventory to meet customer demand or prepare for a busy season, inventory financing is an excellent option. You can usually secure a line of credit for up to 50% of the value of your merchandise, which means that you won’t have to sacrifice as much of your personal or business assets. Furthermore, your credit score will be less of a factor in obtaining this type of financing since the value of the goods is the main consideration for most lenders.
Another benefit of inventory financing is that it can provide working capital that your company needs quickly, so you can take advantage of opportunities and boost growth. This is a key differentiator when compared to other forms of debt financing, which tend to require a lengthy loan application and approval process.
As any entrepreneur knows, running a business comes with ebbs and flows. There are times when your company’s inventory will dwindle and other times when you’ll be buying in bulk to prepare for seasonal demand. Inventory financing is an ideal solution for managing these peaks and valleys in cash flow, but it’s important to choose the right lender after carefully evaluating all of your options and considering the repayment terms. Ideally, you should aim to shorten your cash conversion cycle so that you aren’t relying on this type of financing too often.