Warehouse Loans: Warehouse Inventory Financing

What is warehouse inventory financing?

Even in a thriving business, there can be times when more capital is needed to keep things flowing smoothly and make the most of new opportunities. Small companies cannot raise money from issuing a bond or a new round of stock like large public companies. Banks are often reluctant to help unless stringent qualifications are met. This is where warehouse inventory financing comes in.

Inventory financing is a form of secured loan whereby a short-term loan or line of credit supplies the cash you need to pay your suppliers while the inventory you are purchasing acts as the collateral. The lenders may be traditional banks, specialist inventory financing companies or online lenders.

Some finance providers only offer inventory loans with high minimum amounts. Figures like $500,000 or even more are common. For large warehouse businesses, that will not pose a problem, but those with smaller set-up shouldn’t worry as there are plenty of other lenders in the sector who have much lower minimums.

When the figures are high, so are the qualifications needed to secure the loan. Apart from credit score and trading history, the finance company will also demand an on-site inspection of your warehousing and analysis of your inventory management systems, accounting and so on.

Inventory finance is also unlikely to be offered to startups, lenders preferring businesses with a two or three-year record of profitable trading behind them. The bottom line is, if your business is large scale and you are seeking to borrow generous sums, then you need it to be both in a robust state of financial health and have the infrastructure to back it up; only then will your application be successful.

What warehouse equipment can be financed?

If you get a general business loan that is not tied to your equipment or inventory, then you can finance anything. If you want financing as you would for vehicles, you can find equipment financing for:

• Forklifts, pallet jacks, platform trucks, and more
• Other material handling equipment
• Racking equipment and storage solutions
• Other machine tools
• Robotics
• Conveyors

For many of these needs, you can find specialist equipment finance that will be geared toward these necessities.

What warehouse inventory can be financed?

Finance can be obtained for most warehouse inventory but most readily available for product lines with a high liquidation value. Lenders use this value rather than the retail value when working out what they are prepared to lend your business.

Generally, most loan providers will offer between 50% and 80% of the total cost of the goods, and you’ll need to finance the rest. This is so they can ensure that, should the worst happen and you default or close down, they will still be able to recoup their losses through selling the remaining inventory at less than market value.

Pros and Cons of Warehouse Financing

Providers of finance to businesses that utilize warehouse space are commercial; they have to make a profit. Any sort of loan will cost you money, so you need to make certain that warehouse financing is a good fit for your company and your needs. Here are a few of the pros and cons you should consider:

Pros

• The warehouse business often requires flexibility, adapting to the demands of an ever-changing market. Warehouse financing gives you that flexibility. To be successful, a warehouse business needs to capitalize on opportunities while maintaining the cash that it needs to operate. Not being able to stock up on the latest “must-have” product line would mean missed sales and lower profits.
• It allows you to grow quickly. All businesses should seek to grow and develop. When more real estate is required, greater warehouse space is wanted, and more staff and machinery required, then warehouse financing becomes the most common option.
• With most forms of business loan, the borrower is often put in the position of using his or her home and property as collateral. Even if the worst doesn’t happen, this situation is unpleasant and can become extremely difficult for all involved. Inventory financing provides an answer. When the inventory guarantees the loan, the threat of having your property seized and sold by the lender is removed.
• Even the most successful and profitable businesses have ups and downs which warehouse financing can help smooth out. Having cash always there at the right times is not always possible, and warehouse financing can ease cash flow problems, help out in emergency situations, and generally make the business run better and more efficiently.

Cons

• Often, the qualifying process for warehouse financing can be rigorous and not every business can meet those requirements. Even inventory financing, despite the collateral the goods provide, can involve exacting criteria that will rule out your business.
• Very often, warehouse finance, particularly from traditional sources, can have a long-winded application process and take a long time to get funding. This can lead to an unacceptable delay between the need for a cash injection and receiving the money into your account. The extended time scale can result in missed business opportunities.
• When money is required quickly, as is often the case in the warehouse industry, the interest rates for loans can be high or even crippling. Time and resources have to be used to find a lender that offers as low interest rates as possible.

Types of Warehouse Inventory Financing 

There are two forms of loans involved with warehouse inventory financing. The most common is a business line of credit, while some lenders offer short-term loans. In both, the inventory acts as the loan’s collateral.

Line of Credit

It is helpful to look at a line of credit as operating like a business credit card. The finance company sets you a limit up to which you may borrow. You then dip into this sum as and when needed, paying back the loan regularly. As you repay the loan so that money is available for buying inventory once again. In addition, you only pay interest on the amount you actually withdraw. For example, if you have a line of credit for $400,000, but you only use $200,000 for the buying of inventory, then interest is charged on just the $200,000, not the full $400,000.

Short-Term Loan

A term loan for inventory is normally a short-term one, with no more than 12 months to repay the amount borrowed. The lender advances the cash you need for the inventory, and your business repays it regularly through the term of the loan. Because of the restricted time scale, interest rates are often high.

Many find that, of the two, the business line of credit is the most useful. It is far more flexible than a term loan, and if it is a rolling line of credit, then you only need the original agreement to use the cash limit many times, allowing for fast responses to opportunities.

How to Get Warehouse Inventory Financing

Obviously, using the inventory itself as collateral is of huge benefit, but that doesn’t mean securing a warehouse inventory loan is easy. The finance company will want to examine your credit report, financial statements and supply chain. In addition, they will check that there are no complaints registered with the Better Business Bureau, that you have an accurate list of the inventory, and that your business plan is realistic. In many cases, they’ll want to tour your premises, too. While this shouldn’t turn you off if the solution is right for you, it’s best to be aware of it before you start the application process.

If you own a business that utilises warehouse space, it is very likely you will need to source outside finance if your business is to grow. It is possible to do this without outside help, but that will absorb time and resources. You need to make sure that your choice of loan provider is the right one for your business and that the terms they offer fits.

Primerates offers a simple solution for comparing suitable business loans, offering a fast application process and a choice of suitable finance opportunities. It takes the burden from your shoulders and gives your business the ability to respond to market forces and remain at the forefront of your sector.

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