Inventory Financing 101: All You Need to Know About It
Ezra Cabrera | July 21, 2019
Grocery stores, e-commerce, and food distribution are some of the industries that rely heavily on the availability of inventory for daily operations. If these companies don’t have sufficient working capital to purchase inventory, this can negatively affect business. Without enough stocks, this can result in missed revenue opportunities and more. Fortunately, inventory financing can help entrepreneurs who are faced with this dilemma.
According to the research conducted by the Electronic Transactions Association, about 51% of small business owners borrow money for inventory control. Inventory financing is a loan option available for companies needing short-term funding to purchase inventory. But what exactly is inventory financing?
Inventory Financing Defined
Inventory financing is a form of asset-based loan in which the amount you can borrow is determined by the value of your inventory. Lenders will give you a percentage of the total inventory value which you can repay based on the repayment terms. You don’t have to pledge collateral since the inventory secures the loan, but this ultimately depends on the lender. Companies that use large quantities of inventory like retailers, wholesalers, and more commonly use this type of financing.
2 Main Types of Inventory Financing
When you apply for inventory financing, you can choose between an inventory loan and an inventory line of credit. Inventory loans are based on inventory value and your lenders will give you a lump sum. On the other hand, an inventory line of credit works like your typical business line of credit. Lenders assign you to a predetermined credit limit where you can withdraw funds from as needed. Many business owners prefer an inventory line of credit because of the quick access to working capital.
Types of Businesses That Qualify
Product-oriented companies or businesses with physical inventory qualify for inventory loans. Obviously, service-based companies without physical inventory cannot qualify. Ideally, inventory financing is designed for existing businesses with a history of buying and selling goods.
In order to increase your chances of approval, it’s important to have an established record of sales performance. Larger and well-established companies usually find it easier to qualify. For smaller businesses, it’s better to apply for inventory loans via alternative online lenders for a higher rate of approval.
How Inventory Financing Helps Businesses
Inventory financing is viable for companies in need of additional inventory or working capital. Other than that, here are some of the ways inventory financing can help your business:
- Keep additional inventory in warehouses. If you need to purchase a large order of inventory to meet future orders and you don’t have sufficient working capital, you can use inventory loans. This type of financing can help you buy extra products to store in your warehouse for future use.
- Stock on inventory to prepare for seasonal demand. There are companies that experience seasonal spikes in consumer demand. For example, retail stores need capital to purchase inventory to prepare for the increasing demand during the holidays. In the same manner, inventory loans ensure that companies that sell seasonal products (swimsuits, Christmas decorations, Easter eggs, etc.) have enough working capital during off seasons.
- Enough inventory to meet demand. If you don’t have enough stocks to meet customer demand, your customers will definitely purchase their goods elsewhere. This financing solution makes sure that you have a well-stocked inventory of your products.
Tips to Increase Chances of Loan Approval
Inventory financing is a great funding option for companies who couldn’t qualify for traditional bank loans. Since the inventory acts as collateral for the loan, lenders are not too particular with credit history or capital. However, this mostly depends on the lender you’re working with. Here are a few tips you can follow to increase your chances of approval:
- Prepare an updated business plan because almost every lender requires one.
- Your financial documents, as well as your inventory management system should be up to date and easy to understand.
- Gather sales records and documents.
- Calculate the amount of loan you’re intending to borrow.
- Be prepared to undergo the due diligence process.
When choosing a lending company, keep in mind that the best lenders are the ones who can cater to almost every industry. More importantly, choose a lender that understands your business’ goals and needs. The lender you should choose should already be familiar with inventory financing. It also helps to consult a financial expert to assist you in finding the best type of loan depending on your needs and preferences. Reputable financial companies understand the urgency involved in securing financing to purchase inventory and fulfill client orders. They make sure that you receive the funding you need when you need it.