How Does Inventory Financing Work?
Share this article:
What Is Inventory Financing?
Inventory Financing Example
If your inventory has low turnover, lenders may not be as willing to offer financing. Since the lender would need to resell the inventory to recoup any losses, certain types of more risk-averse lenders (e.g. banks) may be less likely to offer inventory financing — if they offer it at all. Because inventory financing is often seen as riskier to lenders, you may encounter higher interest rates than you might see with business loans or lines of credit, for example. Inventory’s value can depreciate over time, creating a greater loss for lenders (if they need to sell it). Therefore, lenders may calculate inventory loan or line of credit amounts using your inventory’s liquidation value, which is likely lower than its current purchase price.
What Is an Inventory Loan vs. Inventory Line of Credit?
Have high turnover on inventory and need to withdraw just the amount you need. Need financing to pay repeat expenses or cover seasonal cash-flow shortages. Need regular access to cash over a longer period of time.
Understanding Costs Associated with Inventory Financing
Application and/or origination fees: Coverage of the cost of reviewing the application and setting up the loan. Appraisal/inspection fees: Costs to send someone out to inspect and appraise the value of inventory and a business’ inventory management system. Prepayment fees: Fees incurred if a borrower repays the loan early (i.e. ahead of the terms set by your lending agreement). Late fees: Fees incurred if required payments get made late.
Banks: 8% and up Online lenders: 8% to 99% Inventory financing company: 8% to 20%
How to Calculate the Cost of Inventory Financing
Pros and Cons of Inventory Financing
Pros of Inventory Financing
Cons of Inventory Financing
Who May Apply for Inventory Financing?
Car dealerships: Often have high turnover and need to replenish inventory on a regular basis. Retail stores: Sell products daily and often have seasonal needs that require them to stock up on extra inventory. Wholesalers/distributors: Small- to medium-sized wholesalers that want to keep inventory fresh for their customers and stay on top of seasonal demands. Seasonal businesses: Those that earn a majority of revenue during specific times of year with a high level of predictability, making it easier for them to rely on inventory financing.
Applying for Inventory Financing in 5 Steps
1. Determining Amount and Type of Inventory Needed
2. Determining Eligibility
Be in business for at least six months to one year Sell products or raw materials, not just offer services Meet inventory minimums set by lenders Maintain a well-organized inventory management system Be willing to have inventory audited if the lender requires it (this may involve surprise site visits)
3. Choosing an Inventory Finance Lender
1) How soon do you need the funds?
2) How much financing do you need?
3) Does the lender specialize in your industry?
4) Do you want revolving credit?
4. Gathering Documents to Apply for Inventory Financing
Recent balance sheet Profit and loss statement Organized and up-to-date cash flow statements Current inventory list and projected inventory needs Detailed inventory records, which could include: Inventory turnover Inventory gross profits Loss or damage to past inventory Sales forecast statement Personal and business tax returns Business bank account statements
5. Preparing for Inspection
Alternatives to Inventory Financing
Equipment financing: Used for the purchase of machinery, vehicles, or other business-related equipment. SBA loans: Backed by the U.S. Small Business Administration and offered by banks and approved SBA lenders. SBA loans typically take longer to process, but interest rates may be more competitive. Personal loans: Unsecured personal loans are based on your personal credit history (not business credit) and can usually be used for business expenses. Commercial real estate loans: For the purchase of a building for business use, such as office space, a retail shop, or any other commercial function. Business line of credit: Gives access to a maximum amount of funding with interest only charged on unpaid balances. Business credit cards: Similar to a business line of credit, these are designed for short-term business needs on a revolving line of credit with interest charged on unpaid balances from previous billing cycles. Online business loans: Online lenders offer similar loan options as a traditional bank, but typically have a faster approval process and may offer more options for people with lower credit scores. Merchant cash advance: Allows small businesses (“merchants”) to get a cash advance for business expenses in return for a portion of their future sales or receivables. Invoice factoring: Sell your invoices to a factoring company who is then responsible for collecting payment from your customers.
Frequently Asked Questions
About the Author
Share this article: