Why You Should Consider Financing Your Inventory

 In Finance

What is inventory financing?

It can be really tough for small or new businesses to get the funding they need to really get off the ground, but with inventory financing, this is made a whole lot easier. Inventory financing is where a business obtains credit from a financier so they can pay upfront for inventory that won’t be sold immediately, and the loan is then collateralized by the products.

It’s a financing option that’s essentially a short-term loan for businesses that need the funding, but have limited alternative sources due to factors such as the lack of a financial history or limited available assets.

It may seem obvious but the purpose of inventory financing is to help your business buy more inventory. It’s a particularly great option for smoothing out the ebbs and flows of seasonal fluctuations in cash flows, allowing you cover any cash shortages and keep up with customer demand.

How is inventory financing structured?

So, how exactly does it work? Inventory financing works by structuring a financial agreement, where the financier will extend a line of credit or provide a short term loan to a business and this agreement will usually include:

  • An interest rate (typically 3%-20%).
  • How the rate is to be applied.
  • The term of the loan.
  • The specifications of the collateralization.

Financing your inventory can be done as soon as you’ve purchased products, and you’ll get the funding by submitting a request to the lender or financier, who then deposits the funds in your bank account. They fund this by advancing either 75% of its appraised value or 50% of its cost, whichever works out as the lowest figure. Once you’ve received the funds, you can use them for any business expense. As your inventory is turned into sales and sold off to customers, the debt to the financier is settled and paid off.

With inventory financing, there are two ways a lender or financier can provide your business with funding. They can either extend a line of credit or provide a short term loan. With a short term loan, you’re usually provided with the full amount of money upfront, which will be paid back in fixed monthly installments until the debt is paid off.

A line of credit, however, can be used as needed to purchase inventory. And unlike a loan, you only pay interest on the credit line you use, and not much how much credit you have in total. Once you pay off what you owe in credit, your credit limit then returns to the initial amount.

Pros and cons of inventory financing

Like many finance options, inventory financing comes with its advantages and disadvantages. So, it’s all about weighing up the factors and risks to see if financing your inventory is a good option for your business.

Advantages

No business or personal assets needed. You don’t need to sign away any business or personal assets to access or secure this funding, as you’ve already used your inventory as collateral.

Bad credit history isn’t a problem. Most new or small business will lack a thorough financial history that other finance options tend to ask for. But with inventory financing, your financial history as a business won’t limit your ability to secure a line of credit or loan.

New businesses are welcome. You only typically need a year of operation, sometimes even less dependent on lenders, as a business to qualify for this option. A big advantage for new businesses looking for a cash injection, but struggling to secure loans.

Prepared for any season. Financing your inventory will help you prepare and stock up for your busier seasons, avoiding any last minute panic buying and unhappy customers. It ensures you don’t miss out on those crucial sales!

Inventory financing

Disadvantages

Due diligence. Inventory financing requires a bit more work than your other business loans, mostly to determine the value of your inventory. A process that can be both time-consuming and expensive, especially for a small business.

Regular check-ins. Your financer or lender may ask for regular check-ins, usually as part of the financing agreement, to monitor your inventory levels and sales. As a new or small business, this could amount to a significant amount of work, again proving quite time-consuming and expensive.

Interest rates. These tend to be higher for inventory financing options when compared to other small business funding loans, so could mean that your business is losing more money than it’s gaining in the long run.

Who’s a good fit for inventory financing?

Any business considering inventory financing as finance option needs to look at the pros and cons, and make a decision based on the personal needs of their own business. In the end, only you know if you have the resources to stay on top of the due diligence or if you have the funds to pay back the interest rates. That being said, however, inventory financing is a great fit for businesses who are relatively new and in need of funding, those who need to cover a short-term gap in their cash flow, and those who have peak or busy seasons in their customer sales.

The top five inventory financing companies

If inventory financing sounds like a real option for you, and is something you want to explore further, then we’ve pulled together a list of our top 5 inventory financing companies. When researching funding options, we always recommend looking inwards in your business to really define and prioritize your funding needs. It can be a daunting task to do alone, but we’re here to help!

We can help you prepare for seeking finance options, determine how much financing you’ll need, and make sure your business model is set up properly to maximize your cash flow. As well as our Accountant and Controller packages that provide full and comprehensive support with your accounts, you can also book some time on our calendar to chat through how best we can help your business grow.

Book a Discovery Call Today, We’re So Ready to Help >>

Recommended Posts
AR Financing is a great alternative financing method.angel investors vs venture capital