What is Inventory Financing?
- What is Inventory Financing?
- How Does Inventory Financing work?
- Types of Inventory Financing Loans
- Advantages and Disadvantages of Inventory Financing
- Leverage Accounts Receivable For Capital
- Asset-Based Lending
- How to Apply for Inventory Financing
- Inventory Financing Agreement
- Inventory Financing vs. Accounts Receivable Financing
- Inventory Financing FAQs
- What can inventory be financed through?
- How much is the cost of financing the inventory?
- Are inventory loans secured?
- What is warehouse financing?
- Can you use inventory as collateral?
- Can you get a loan for inventory?
- How do I get funding for my inventory?
- How much can you borrow against inventory?
- What collateral is required for inventory funding?
The term “inventory financing” refers to a short-term loan or revolving line of credit obtained by a business in order to purchase goods to resell later. The loan is secured by these products.
How Does Inventory Financing work?
Companies who need to pay their suppliers for merchandise that will be warehoused before being sold to customers can employ inventory financing. It’s especially important for smoothing out the financial effects of seasonal cash flow changes, and it can assist a company reach bigger sales volumes by allowing it to buy extra inventory on demand.
Asset-based finance includes inventory financing. Businesses turn to lenders to help them buy the resources they need to make items that they plan to sell later.
Small to mid-sized retailers and wholesalers, particularly those with a substantial volume of available stock, frequently use this type of financing. This is due to the fact that they often lack the financial history and available assets required to get the institutional-sized financing options that larger firms, such as Walmart (WMT) and Target (TGT), may access (TGT).
They can’t raise money by issuing bonds or new rounds of shares because they’re mostly private enterprises. Companies can use all or part of their existing stock or new material as security for a loan to cover normal business expenses.
Goods financing, as previously said, allows entrepreneurs to purchase inventory to run their enterprises. The reasons why they rely on this kind of financing include:
- Keeps cash flow steady through all seasons
- Update Products
- Supply and Inventory Increases
- High Customer Demand Response
Types of Inventory Financing Loans
Lenders offer two main types of inventory finance to firms. The alternative selected by the company is determined by its business operations. The lender and the type of business determine interest rates and costs.
- Inventory loan: This type of finance, often known as term loans, is based on the total worth of the company’s inventory. The lender gives the organization a certain amount of money, just like a traditional loan. The business agrees to make monthly payments or pay off the loan in full once the merchandise is sold..
- Line of credit: Unlike a loan, this type of funding allows enterprises to have revolving credit. It allows them to obtain credit on a regular basis as long as they make monthly payments in accordance with the contract’s terms and conditions.
Advantages and Disadvantages of Inventory Financing
There are a number of reasons why a company might choose to use inventory financing. However, while there are many advantages, there are also disadvantages. Some of the most prevalent ones are given below.
Companies can avoid relying on their business or personal credit scores or histories by turning to lenders for inventory finance. Smaller business owners are also not required to put up personal or commercial assets in order to obtain finance.
Having access to credit allows businesses to sell more things to their customers for a longer period of time. Without funding, business owners may be forced to rely on their own earnings or personal assets to make the purchases necessary to keep their operations running.
To be qualified for inventory finance, a company does not need to be created. In fact, most lenders merely demand businesses to be operational for six to twelve months in order to qualify. This makes it easier for newer business owners to get finance.
As they endeavour to establish themselves, new firms may already be in debt. Taking out inventory loan can increase their debt. As a result, these businesses may be unable to repay, resulting in credit limits in the future as well as an unnecessary strain on current finances.
Lenders may not always provide the whole amount needed to purchase merchandise. As a result, there may be delays and deficits. This is more likely to occur in the case of newer businesses or those that are having difficulty obtaining the funds they require to keep their operations running properly.
Borrowing expenses could be considerable. Fees and interest rates may be expensive for struggling firms. Having to pay more in additional fees may put these businesses under further strain.
Businesses don’t need to rely on business credit ratings/history and assets to qualify
Repayment may be problematic for new and struggling companies
Companies can sell more products to customers over longer periods of time
Lenders may not advance the full amount requested
Newer businesses are eligible and can access credit quickly
Higher fees and interest rates for new and struggling businesses
Leverage Accounts Receivable For Capital
Companies in need of working capital frequently use accounts receivable finance. To get over this crisis, you may need to get funds right away. Companies can use this type of financing to get early payment on their outstanding invoices from a finance firm by committing their accounts receivable to the financing company. Businesses can quickly boost cash flow and pay down outstanding debts this way.
There are two primary types of A/R financing.
Factoring businesses pay a discount for receivables due by a company’s customers. The factor then collects payment from those clients on the receivables. Factoring allows businesses to free up capital held in accounts receivable while simultaneously transferring the receivables’ default risk to the factor.
Factoring companies offer different rates depending on the industry, the creditworthiness of the company’s clients, the average days outstanding, and whether the factoring is recourse or non-recourse. In recourse factoring, if the factor is unable to collect, it has some recourse against the entity that transferred the receivables. The factor assumes all of the risk of uncollectible receivables in a transfer without recourse.
Asset-based lenders lend money based on a percentage of a company’s receivables or inventory. A term loan or a revolving line of credit are the most common options. The assets are put up as security for the loan. The loan amount is determined by an agreed-upon percentage of the value of the secured assets, which is typically 70 to 85 percent of accounts receivable. The loan size and risk influence the interest rate. The annual percentage rate (APR) for a loan secured by accounts receivables normally runs from 7% to 17%.
How to Apply for Inventory Financing
Inventory financing is considered on a case-by-case basis by banks and their credit teams, who assess elements such as resale value, perishability, theft, and loss provisions, as well as commercial, economic, and industry inventory cycles, logistical, and shipping restrictions. This could explain why so many businesses were unable to obtain inventory financing following the 2008 credit crisis. When the economy is in a slump and unemployment is high, non-essential consumer goods go unsold.
Another element that lenders evaluate is depreciation. Furthermore, not all types of collateral are created equal. Any form of inventory depreciates in value over time. The business owner who is looking for inventory finance may not be able to get the entire cost of the goods up front. As a result, any prospective snag is taken into account when determining the interest rate on an asset-backed loan.
Stock financing isn’t always the best option. Inventory finance may be viewed as an unsecured loan by banks. Because if the business is unable to sell its inventory, the bank may be unable to do so as well. The bank could be saddled with the goods if a retailer or wholesaler makes a bad trend bet.
Inventory Financing Agreement
Owners have a variety of finance choices to choose from when it comes to funding their businesses. These possibilities are contingent on the company’s size, industry, age, and collateral availability. Retailers, distributors, and manufacturers buy or make inventory in order to sell it. Inventory finance is a sort of loan that allows these businesses to use their inventory as security. Inventory finance agreements are legal papers that spell out the terms and conditions of a loan.
Inventory Financing vs. Accounts Receivable Financing
At first look, inventory finance and accounts receivable financing appear to be the same thing, but there is one big difference: depreciation.
The amount of money owed by your clients remains constant with accounts receivable financing, such as invoice factoring, no matter how much time passes. The lender could give you a loan for the entire amount of your accounts receivable, so you don’t have to worry about the value of your outstanding bills dropping.
Inventory, on the other hand, is subject to depreciation over time. There will be a gap between the loan payback amount and the value of the collateral if a lender grants you a loan equal to the amount of your inventory and your inventory does not sell as quickly as you intended.
As a result, the lender is at risk of losing money.
Despite the danger of depreciation, inventory financing is often easier to get than an unsecured loan because your inventory serves as collateral, lowering the lender’s risk.
Inventory Financing FAQs
What can inventory be financed through?
Inventory financing can be done in two ways. To buy inventory, you can either receive a term loan from a bank or an internet lender, or you can get a line of credit.
How much is the cost of financing the inventory?
Financing of up to 70% of inventory values is possible if inventory prices remain generally constant. Financing inventory can be quite expensive, costing up to 6% more than prime loan rates.
Are inventory loans secured?
An inventory loan is a short-term business loan given to merchants to help them purchase inventory. The loan is backed by the stock, which will be used as collateral if the stock does not sell. Make sure you can sell all of the stock you buy before asking for an inventory loan.
What is warehouse financing?
Mortgage warehouse funding is essentially a short-term funding arrangement provided to a mortgage originator — usually by a financial institution — to provide funds for loan closings. These loans are held in the “warehouse” once they’ve been closed until they’re sold in the secondary market, which usually takes a couple of weeks.
Can you use inventory as collateral?
It will not only help you develop your product, but it will also serve as collateral if you need to apply for inventory financing. Inventory financing is an extension of asset-based lending that allows businesses to utilize their inventory as collateral for loans.
Can you get a loan for inventory?
Inventory loans are a type of debt-financed loan. That implies you borrow money from a lender with the understanding that you will repay it with interest over time. When you apply for an inventory loan, the lender will either provide you a flat sum of money or a line of credit that you can use to buy inventory.
How do I get funding for my inventory?
Inventory Financing Eligibility Criteria The company should have been in operation for at least a year. The applicant’s business must have a reasonable turnover and a good credit history. The borrower should offer a record of business sales showing that inventory is consistently converted to cash.
How much can you borrow against inventory?
Borrowing amounts: up to 100% of the liquidation value of the inventory (although lenders usually finance somewhere between 50 percent to 80 percent ) Repayment terms: Up to 36 months, however most people opt for three to twelve months. Depending on the lender, loan terms, and creditworthiness, the annual percentage rate (APR) ranges from 4% to 99 percent.
What collateral is required for inventory funding?
The term “inventory financing” refers to a short-term loan or revolving line of credit obtained by a business in order to purchase things to resell later. These items are used as collateral for the loan.