Using your inventory to get financing for your small-scale company successfully is a reliable option for many business owners. It will help you buy the essential inventory by using the stuff you want to purchase as collateral.
Not everyone is familiar with the way inventory financing works. Therefore, it is important to discuss this popular type of financing in detail to ensure you are familiar with its advantages and disadvantages before making any decision.
What is Inventory Financing?
Inventory financing refers to a type of short-term loan meant for small businesses to get funding to purchase essential inventory. It is also known as an asset-based loan because the products serve as the collateral in this popular type of financing.
It is important to note that companies typically use such loans to buy new inventory, but they can also be used to meet other business expenses.
Which businesses use Inventory Financing?
Small businesses prefer inventory financing to cover short-term cash shortages and acquire the necessary inventory they need for the smooth functioning of the company. However, every type of business can search for lenders who are willing to provide financing for inventory.
Generally, businesses that need a large inventory like restaurants and wholesalers rely on inventory financing to fulfill their needs. This type of financing is also common in automotive dealers because they often need extra cash to fulfill various business requirements.
Many people also prefer to get an inventory financing loan so that they don’t have to worry about offering their car or property as collateral. Instead, they get the option of offering the inventory they want to buy as collateral to secure the loan. In other worders, if you fail to make the payments on time, the lender will seize the equipment that you will buy through the loan.
How Does Inventory Financing Work?
There are two primary ways in which inventory financing work:
- You can get a term loan from a bank or a lender to get the entire amount of money upfront and pay back the loan in monthly payments over a specific period.
- You can get a line of credit that you can withdraw whenever you need to buy inventory.
Whichever type of financing you choose, the products you buy with the loan will serve as collateral. There is no specific amount of money that you can borrow as it varies from lender to lender.
Banks, credit teams, and other lenders consider various factors in providing loans that usually vary from case to case. Factors like resale cost, perishability, financial situation, constraints, and industry inventory cycles affect how businesses obtain inventory financing.
Advantages and Disadvantages of Inventory Financing
Before you take any final decision about getting the best loan for your business, you should get familiar with the pros and cons of inventory financing to ensure you are making a smart choice.
Let’s look at the advantages and disadvantages of inventory financing one by one.
Inventory financing is an efficient way for companies to get capital without fully relying on their financial history. Owners of small businesses don’t have to provide their personal belongings or properties as collateral.
It is also easier for the newer businesses to get an inventory financing loan as most lenders are willing to provide this type of loan to even those companies running for just six months.
Moreover, businesses can obtain financing quickly compared to other types of loans. Having a revolving line of credit facilitates businesses to buy inventory when they think it is right to expand their business.
If a new business is getting an inventory financing loan, it can lead to various debt issues at the very beginning of the business. There is a very high chance that you will not be able to get the full amount to purchase inventory from a single lender, due to which you might have to apply for multiple loans.
The overall cost of borrowing is typically high in this type of financing. Coping with such high fees and interest rates can be challenging for companies, especially small businesses. You might have to pay additional charges monthly that will add more financial stress to the company.
It is also common for lenders to require regular inventory inspections to check their quality and ensure the companies are using the capital correctly.
Top 5 Inventory Financing Lenders
A lot of banks and financial institutions provide inventory financing to different types of businesses. Some of these best lenders are:
Who Should Get Inventory Financing?
If you are still wondering whether inventory financing is the right type of financing for your business, you should consider the following five conditions to make the best choice:
- Product-based companies need funding to buy inventory for the smooth functioning of their business.
- Your credit score or financial history will make you ineligible for other types of loans.
- You don’t want to offer your property or other assets as collateral for a loan.
- You have no issues with a financial company or lender visiting your business to inspect the inventory’s condition.
- You are getting suitable repayment terms and conditions from the lender.
Once you have considered these factors, you should have no issue determining whether the inventory financing is good for your business.