Inventory Financing Options

Social media has led to an acceleration in the speed trends develop, and if you haven't got the cash to stock up on what's hot, you will often lose out. If you try to do this without external finance, you may find your working capital is restricted and day to day running of your business compromised. If you find yourself in this position or want to expand quickly, you should consider inventory financing.

What is inventory financing?

Generally, inventory financing is available either in the form of a business line of credit or, less commonly, a short-term loan. The important thing to understand is that in both cases, the inventory the business buys acts as collateral for the finance, freeing you of the need to provide collateral of your own.

How does inventory financing work?

Loan providers rarely, if ever, provide 100% of the cash you spend on inventory. As the products you buy are the guarantee on the loan, the lenders have to consider what the value would be if they had to seize the inventory and try to sell it themselves. (Should you default.) The liquidation value will be less than the market value, so the normal amount a lender will give you will be in the region of 50% to 80% of what you actually pay for the goods. What you are buying will affect this figure. Should you wish to purchase inventory that will subsequently have little value if liquidated, then a lender will offer you rather less than for goods that will have a high resale value. Indeed, you may discover that in that case, finance is hard to come by. Loan providers who offer inventory financing vary substantially. While there will be some who are only interested in bigger businesses, with minimum loans of $0.5 million or more, many others will cater to those with lower cash needs. When you start talking big numbers, it is likely that the application process and qualification levels will be rigorous. Lenders will forensically study your business right down to the last detail, including actual site visits. It won't be a simple form-filling procedure. Also, note that startups have a very difficult time trying to secure inventory financing. Though they may try angel investors, crowdfunding, and peer-to-peer lending, most loan providers will not look at any business with less than two to three years of trading behind them.

Who should be applying for inventory financing?

Inventory financing can be a help to any business that requires inventory. Whether you own a retail store, a wholesale business, or some kind of dealership, inventory financing can form a vital part of your commercial armory. It can give you the flexibility to react to changes in the marketplace, take advantage of discounts offered by suppliers and manufacturers, or simply cash in on sudden demands caused by weather, the holidays, social media, or the country's economy. It can be difficult or even impossible to adapt to rapid fluctuations in supply and demand if you are a small or medium business. If you qualify for inventory financing, you will find cash flow problems eased, and business opportunities increased.

What are the different types of inventory financing?

Inventory financing providers usually offer either lines of credit or short term loans. The only similarity is that in both cases, the inventory also becomes the collateral that guarantees the loan should the borrower get into financial difficulties. If you should default, the lender has the right to seize the inventory and sell it to limit its losses. Let's look at them in turn:

Line of credit

The business line of credit is the more popular option by far with both borrowers and lenders. It operates very similarly to a credit card. The lender gives you a limit, and you are free to borrow any sum as and when you like so long as you don't go over your limit. You make regular repayments, and as you pay the amount back, it becomes available to borrow again. Naturally, the provider charges interest, but you only pay the interest on the amount you actually borrow. For example, if your limit is set at $100,000, but you only borrow $30,000 for inventory, then the interest is based on that figure, not the $100,000.

Short-term loan

Some lenders offer a short-term loan for inventory financing. This is based very much on the traditional bank loan, but the repayments are usually over a short period, perhaps a maximum of 12 months. The lender agrees to provide a lump sum to buy inventory, which you repay regularly, plus interest, over a fixed term. While a short-term loan is perhaps the most recognized form of lending, the rolling line of credit is usually the preferred method. This is because it offers flexibility, you only have to negotiate once for what can be effectively multiple pots of money, and you can limit the interest you have to pay. Never forget that the inventory is the lender's guarantee and is liable to be taken away from you if you fail to make the correct payments on time.

How To Qualify For Inventory Financing

With the inventory acting as collateral, the qualification for inventory financing is often not as difficult as that for, say, a long-term bank loan or an SBA loan. The following is a list of things most finance companies will look for:

• They will need to do a credit check, both for the business and the owner(s).
• They will want to see your financial statements showing sales and revenue.
• They will need an itemized list of the inventory you wish to purchase.
• They will want an accurate business plan.
• Your supply chain must be reliable.

Beyond these basics, there may be other checks and records the lender requires. As you might expect, the more money you are looking for, the greater the hoops you will have to climb through.