inventory loan

Why an Inventory Loan is Important | SMB Compass

Ezra Cabrera | August 23, 2019


    If you don’t have enough inventory to meet the demands of your customers, your business could be in trouble. Many small businesses struggle with inventory management and insufficient working capital due to fluctuations in sales and demand. Fortunately, financing options such as an inventory loan, can give small business owners room to breath by providing the funds for inventory purchases.

    Inventory Loan in a Nutshell

    Inventory loans are a financing solution that provides working capital for business owners looking to invest in inventory. Similar to an equipment loan, the inventory you’re going to purchase serves as collateral for the loan.

    Repayment terms are also similar to a traditional loan. Depending on the lender you’re working with, they may ask you to make regular monthly, weekly, or annual payments. If you fail to repay the loan within the agreed terms, the lending company has the right to repossess the inventory you purchased or other assets with similar value. Before applying, be sure you can meet your obligations on a consistent basis.

    Related: Inventory Financing 101: All You Need to Know About It

    6 Reasons Businesses Should Apply for Inventory Loans

    Aside from giving you the working capital you need to purchase inventory, here are six other ways inventory loans can help your business:

    1. Additional Liquid Cash

    For small businesses and startup companies, meeting daily expenses can be a struggle. When there is a gap between accounts payable and accounts receivables, an inventory loan can bridge the gap by allowing business owners to leverage inventory. Your inventory can help you apply for short-term, fast business loans. This will then free up the cash flow tied to your stocks of goods.

    2. Prepare for Peak Seasons

    It’s not uncommon when running a business, that there are both slow and peak seasons. As you prepare for the holidays or a busier season, you should strategically manage your inventory. If you need to double your inventory in preparation for the busy seasons, inventory loans are a great option. You’d have the money you need for additional stock without disrupting your cash flow.

    Related: 3 Best Loan Options for Seasonal Businesses

    3. Opportunity to Increase Profits

    With an inventory line of credit, your business has a chance to earn additional profit. For example, you qualified for a five-month inventory line of credit to purchase 50 pieces of stocks, and all 50 of them sell out in 20 days. Since your line of credit is still open, you can purchase more inventory and sell them again, increasing bottom-line profits without affecting cash flow.

    4. Close Time-Sensitive Deals and Promos

    Slower seasons are the best time to purchase inventory because of the abundance of off-season discounts and special offers. These promotions allow small businesses to stock up on inventory at a lower price. A majority of the time, these offers are time-constrained and often occur during slower seasons when your capital is at its lowest. With inventory loans at your disposal, you’ll be able to take advantage of time-sensitive deals anytime.

    5. Expand Your Product Lines

    Business owners know how important it is to stay consistent and keep up your current product lines. But if you’re looking to expand your reach, you may be missing out on opportunities if you only focus on the existing products you offer. It helps to know that if your customer purchases a certain item, they’ll also need to buy a related/supporting product.

    For example, if you’re selling footwear, you might want to sell shoe-cleaning products, socks, and more. By offering new items, you’ll be able to increase your sales. Inventory loans can provide you with the working capital needed to invest in new product lines that will expand your business.

    6. Effectively Plan Inventory Purchases

    Keeping up with customer demand is challenging if you don’t have an inventory management system. Ideally, every company should have an inventory plan that forecasts your rise and fall in revenue. Cash flow problems often hinder business owners when it comes to purchasing the inventory they need. An inventory loan helps these companies buy the products necessary to keep up with customer demand. With access to inventory loans, you will be able to make smarter, cost-effective buying decisions which will allow you to effectively plan your purchases.

    Inventory Loan for Product-Oriented businesses

    If you’re a product-oriented business and you need to purchase inventory on a regular basis, an inventory loan can help. Inventory loans allow you to leverage your inventory to acquire more cash. You can use this to obtain more inventory to stock up your shelves, so you won’t have to miss sales opportunities during the peak season of your business. Moreover, inventory loans are relatively easy to qualify for. Be sure to weigh your options and know what the requirements are so you can do your best to get approved for the financing.

    About the Author

    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.