What is inventory financing?
Inventory financing typically comes in the form of a short-term loan or a revolving line of credit that a business can use to purchase products to increase its inventory. Sometimes a business may want to increase its stock numbers right before an anticipated busy time of the year but they lack the working capital to make the purchases that they need to make. With inventory financing, a business can make all the purchases they need to make to ensure that they can fulfill all of their orders during the busy time of the year, and once they start to see the revenue come in from those sales, they can turn around and pay back the loan plus interest and still manage a sizeable profit.
It’s also important to be aware of the fact that most lenders who offer inventory financing may require that the inventory being purchased serve as collateral to secure the loan. If for any reason the business is unable to pay back the loan, the lender can repossess the inventory to cover the debt.
How does inventory financing work?
The specifics on how inventory financing works will depend on the type of financing and the agreement. In most cases, inventory financing will use the inventory as collateral. Therefore, you’ll need to determine how much inventory you need and what it will cost. You can then work with a lender to qualify for financing. Once you’ve qualified and are approved, the lender can either pay the supplier directly for inventory or deposit funds to you. Repayment schedules can vary. In some cases, you will only need to repay the loan when inventory sells. In some other cases, there will be a set repayment schedule. General business loans can also be used for inventory financing and may allow more flexibility for how funds can be spent.
Why would a business need inventory financing?
There are so many reasons why a business would want and could benefit from inventory financing. To name just a few. . .
- Ramp up inventory before busy seasons
- Manage seasonal demand
- Improve cash flow
- Update product lines
- Increase inventory supplies
- Boost sales
- Free cash flow to invest in other operations such as marketing
What are the best options for an inventory loan?
The best options for inventory loans depend on what your business is able to qualify for and how much money you need to make the required purchases. For most small businesses, inventory financing may be the best option to get the money needed to stock inventory. While inventory financing may cost money, it can create opportunity and free up cash flow to invest in other operations. For example, if you can confidently stock plenty of inventory, you can invest more in marketing to increase sales. Businesses often also use a revolving line of credit to purchase inventory and improve cash flow. There are plenty of alternatives too such as invoice financing, purchase order financing, or a merchant cash advance to purchase inventory. The best type of financing depends on the credit history and financial situation of the business and its owner(s).
What are the inventory financing rates and terms?
Inventory financing can be up to 100% of an inventory’s liquidation value, however, most lenders and inventory financing companies typically commit to somewhere between 50% and 80% of the inventory’s liquidation value.
Repayment periods most commonly fall between the 3-month and 12-month period, but sometimes repayment periods can span up to 3 years depending on the type of inventory and its value.
APRs can vary dramatically depending on the lender, the loan term, the type of inventory, the inventory’s resale value, and the creditworthiness of the business applying for the financing. APRs can range anywhere from as low as 4% to as high as 99%.
In addition to any APR that an inventory financing company or lender may charge, inventory financing can also include additional fees. Fees like origination fees, prepayment penalties, and appraisal fees may be assessed depending on the lender, the inventory type, and the creditworthiness of the borrower.
What are the types of inventory financing?
There are two main types of inventory financing that many small and midsize businesses use to make the purchases they need to be fully stocked to keep up with demand and seasonality. The two main types of inventory financing are inventory loans and inventory lines of credit.
An inventory loan is a straightforward short-term loan based on the liquidation value of the inventory being purchased. The loan provides an upfront lump sum payment to the business that they can pay back the loan with monthly payments over a fixed term, through payments based on a percentage of the inventory sales, or as a lump sum payment once all the inventory has been sold.
Inventory lines of credit:
An inventory line of credit can provide a business with ongoing microloans that can be obtained on an as-needed basis. Only get charged interest on what you borrow from the credit line and pay back what you owe through monthly payments or as the inventory is sold. Often, inventory lines of credit can be used for other expenses other than inventory purchases whereas inventory loans must be used to purchase inventory.
What are the pros and cons of inventory financing?
There are many advantages and disadvantages to inventory financing that every business should consider before pursuing it. Here are some of the most common pros and cons of inventory financing.
- Flexibility: Most inventory financing options come with a few different options for repayment. You can either pay off the loan through monthly payments or pay as you sell the inventory.
- Prepare for busy seasons: Some businesses do most of their business during a small window of time during the year. For the rest of the year, it may be more difficult to maintain cash flow and make new investments in inventory when the revenue is not there. inventory financing allows a business to make all the purchases they need to prepare for their busy season to ideally generate a high amount of revenue to pay back the loan and to make a large profit.
- Add new product lines: Inventory financing can allow you to add new products and expand your business without using your working capital.
- High monthly payments: If you get an inventory loan, typically they are short-term loans that can come with extremely high monthly payments that can restrict cash flow.
- Higher interest rates: inventory financing typically comes with higher interest rates than conventional loans, SBA loans, and other types of business financing.
Is inventory financing right for my business?
Inventory financing is often a bit easier to obtain than other types of loans. Since it’s normally secured by inventory, the lender has some collateral in exchange. Whether it’s right or not for your business will really depend on the circumstances. You’ll need to consider the cost versus benefits and any risks associated to determine if inventory financing is right for your business.
What documents do I need to apply for inventory financing?
As a business owner, if you’re looking to apply for inventory financing, you most likely will be asked to provide the following documents and information.
- Business and personal tax returns
- Business and personal bank statements
- Current inventory list and liquidation value
- Details of inventory management and POS systems
- Balance sheet
- Profit loss statement
- Sales forecast
Which lenders offer inventory financing?
There’s a long list of lenders that offer inventory financing. Business owners should use the wide selection to their advantage. To access offers from multiple lenders, visit PrimeRates to check offers. Within minutes you can access the best offers personalized just for you at PrimeRates. Skip false advertising and hope. Replace it with real offers that are just for you. Simply submit some basic information and access offers from a network of vetted and trusted lenders. With no credit impact, investing a little bit of time in checking offers at PrimeRates can have a healthy ROI. Our lending partners are experts at what they do, therefore, you can avoid red flags or scams by working only with a network of top-rated lenders.
Boost sales with more inventory. . . unlock inventory financing offers today!