3 Pros and Cons of Using Inventory Business Loans to Fund a Business

Ezra Cabrera

September 16, 2019
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Inventory is a crucial component of every product-based company. It’s important to make sure your shelves are full of the goods you sell to keep your business going. But unfortunately, even the most successful companies sometimes find themselves in need of working capital for inventory purchases. If your working capital is tied to unsold inventory or if you need money to purchase more goods, inventory business loans can help.

Approximately 51% of entrepreneurs borrow money for the sole reason of controlling their inventories. Having enough stocks is crucial in the survival of your business, especially if you have multiple locations or you have a seasonal business. This will help maintain steady sales and make sure that you never miss out on opportunities.

But applying for inventory financing is a big step to take. Before going through with it, take time to weigh out the pros and cons of this business loan option.

Inventory Business Loans

Inventory business loan is a type of asset-based loan where business owners leverage the value of their inventory to secure funding. Once approved, lenders will give you a lump sum based on a percentage of your inventory value. You generally won’t have to provide collateral because the inventory will secure the loan. Business owners typically use inventory loans to purchase inventory, but you can also use it for other business purposes as well.

The Pros and Cons of Inventory Financing

Before making big business decisions, like applying for a loan, it’s important to weigh your options. With that said, here are the pros and cons of inventory financing.

The Pros

1. Readily Available Working Capital for Inventory Purchases

If your business is running low on inventory, it’s important to replenish it in time for the peak season. Without enough inventory, there won’t be any sales; without sales, you won’t have a business to run. An inventory loan can help you break out of that cycle by providing you with the money you need to purchase goods for your business.

Aside from inventory purchases, you can also use the funds to improve inventory management. You can invest in an inventory management software or a point-of-sale (POS) system that has inventory management features. Inventory management software allows you to keep track of your inventory purchases and more.

2. Add New Product Lines

Not only does an inventory loan allow you to replenish goods, but you can also use it to expand your product lines. By adding new product lines that are in demand, you can increase your sales and grow your business. Inventory loans offer the flexibility for growth and expansion without using up all your working capital.

3. Best for Small-Scale to Large-Scale Businesses

Inventory business loans are open to everyone. However, this financing solution is best for small to medium-scale companies. Inventory financing is for different types of businesses that need inventory but failed to secure for traditional loans. If you need inventory and you can’t secure a loan from the bank, you can apply for inventory loans from online lenders like SMB Compass.

The Cons

1. Limited Use

As the name suggests, inventory loans can only be used for inventory purposes. If flexibility of use is one of your major concerns, then inventory loans are not for you. You won’t be able to use it for payroll or taxes. But if you only want to use the funds to purchase goods, then these limitations will not affect you.

2. Short-Term Funding

Compared to traditional short-term loans, you can repay the inventory loan over shorter periods. Lenders usually set repayment terms based on the lifespan of your inventory. Depending on the lender, you can opt for larger monthly payments for shorter months.

Regardless of your company’s current financial situation, you need to make sure that you’ll be able to afford monthly payments. Otherwise, your business will experience cash flow problems if you fail to repay the loan. Issues with cash flow can be detrimental to your company. If it’s not addressed quickly, it can result in bankruptcy. Keep in mind that you can choose a smaller loan balance if you’re not completely comfortable with the repayment terms.

3. Not Suitable for Large-Scale Companies

Companies like Target or CVS often need huge amounts of money to purchase inventory. Larger companies with the right assets and business history are better off applying for institutional-sized funding rather than inventory loans. Generally, the maximum amount of money provided to an applicant is $500,000 – which is sufficient for small to medium-sized businesses, but not for larger companies.

Apply for Inventory Business Loans Today!

Inventory business loans are best for businesses that need large quantities of inventory, like retailers, wholesalers, and more. But before you apply for an inventory business loan, it’s important to assess your company and determine exactly what you need. These pros and cons will help you decide whether it’s worth it or not. In the end, it’s the business owners who can decide whether this option will be a viable one for the success of their business in the future or not.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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