Inventory Finance: A Guide to Inventory Loans
Small business owners who need working capital to buy inventory but cannot put assets as collateral may overlook one potential resource that can help: the inventory they want to buy.
What is inventory funding?
With inventory financing, the consumables, materials, or products you purchase act as collateral securing the loan. Inventory Short-term loans and lines of credit are designed to provide quick access to cash flow for buying inventory.
How do storage loans work?
Borrowers looking to purchase inventory but do not have all of the capital needed to place an order can obtain inventory finance from lenders who specialize in this type of corporate finance.
Typically, you can borrow roughly half the value of the inventory so you still need to be able to pay the rest.
Your loan is secured by the inventory you purchased. That said, if you cannot repay the loan, the lender has an option to seize the inventory to help cover your debt. You pay back your loan like any other loan with monthly payments of up to one year including fees, interest and principal.
Advantages and disadvantages of inventory financing
Of all the loan options, there is no other that is as good as this for buying inventory. However, there are disadvantages to be aware of.
Inventory gives you the capital you need to quickly meet business expenses related to inventory purchases. If you have taken out a loan from a traditional bank, it can take weeks or months for your application to be approved. Inventory financing is quick.
The inventory you buy can help you keep your business going during a slow season when you may not have cash to make inventory purchases. Then you can repay the loan during your busy season.
Another benefit is that you can qualify for inventory loans even if you don’t qualify for other types of financing. So, if you’re running a startup that’s been turned down for a bank or SBA loan because of your poor credit rating, you know that it may still be an option.
The first downside to consider is that existing loans may have a higher interest rate than other types of corporate loans. If you qualify for lower interest rates on traditional bank loans, these should be considered first.
Also, these loans are usually short term loans that must be repaid within a year. If your budget can’t cover these costs, you could end up in hot water.
After all, you can only use these loans for inventory.
What types of inventory funding are there?
There are several lenders who offer different types of business inventory finance.
Existing line of credit
Unless you’re looking for a lump sum to buy inventory with, consider a line of business credit. You’re approved for a certain credit limit, but you can borrow and repay up to that full amount. This is great when you have an ongoing need for inventory shopping.
Some lenders specialize in inventory factoring. In this case, you are selling your orders or accounts receivable to buy the inventory you need to fulfill the order. The lender charges a fee.
Another financing option, but not specifically geared towards buying inventory, includes business credit cards. This is a form of a revolving credit line that you can use to purchase inventory, office supplies, and other items in stores and online.
Cash advance for dealers
While not a type of loan, a cash advance from the merchant can help you get the new inventory you need if you don’t have good credit and can’t qualify for other financing options.
Where can I find inventory funding
There are online lenders who specialize in inventory financing. First, seek recommendations from others in your industry. Most banks do not offer existing loans.
What’s the best way to fund inventory?
The best way to get inventory funding is to find a finance company that has terms that you are happy with. Consider what fee or interest you will have to pay and how quickly you will have to pay back the loan.
Do your homework to find out how the company fares on customer service. You don’t want to get a low interest rate loan when you can never reach customer service over the phone to answer questions.
If you can pay the loan faster, can you save money or is there a prepayment penalty? Before you land on a lender, ask plenty of questions.
What are the costs of financing the inventory?
Like all small business loans, inventory finance options come with a cost. Most charge interest, and these rates can vary widely depending on your business and personal credit. The better your credit, the lower the interest rate and the opposite is also true. If your credit rating is bad, you will pay a lot more to get the loan.
How to qualify for inventory financing
Before applying for an inventory finance loan, check your business and personal credit scores. If you don’t have a business credit history, lenders may be more attentive to your personal results, so make sure they are up to date.
Unlike bank loans, which require collateral, the loan does not require you to put on any business or personal assets. You may be asked to provide order details about the inventory you want to buy so the lender knows the value and can determine how much to lend you.
How to get inventory funding
The inventory finance application process works differently for different lenders, but it usually doesn’t require much more than a few details about your business, how long it has been in operation, and your annual revenue. You may also be asked for details about the inventory you want to buy.
Based on the value of the inventory you want to buy, the lender will determine the amount of money they will lend you. When approved, sign the loan agreement that includes your loan amount, interest rate and repayment schedule. Your funds will be transferred to your commercial bank account within a day.
Nav’s verdict: inventory funding
If you don’t have the capital to buy products or raw materials, it’s good to know that small business finance like inventory loans and lines of credit is available!
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