Need Inventory Financing? Valley Funding Is Here To Help Make Inventory Financing Easy!
What is inventory financing? The term refers to a short-term loan or a revolving line of credit used to purchase products to sell at a later date.
These products serve as the collateral for the loan. Businesses use inventory financing to pay their suppliers for stock that will be warehoused before being sold to customers.
It is particularly critical as a way to smooth out the financial effects of seasonal fluctuations. It also helps a company achieve higher sales volumes by allowing it to acquire extra inventory for use on demand.
How Inventory Financing Works
Inventory financing is a form of asset-based financing. Businesses turn to lenders so they can purchase the materials they need to manufacture the products they intend to sell at a later date. The reasons why they rely on this kind of financing include:
- Keeping cash flow steady through busy and slow seasons
- Updating product lines
- Increasing supplies of inventory
- Responding to (high) customer demand
This kind of financing is common for small to mid-sized retailers and wholesalers, especially those with a large amount of available stock.
Most small businesses are private companies. Therefore, they cannot raise money by issuing bonds or new rounds of stock.
Special Considerations
Banks and their credit teams consider inventory financing on a case-by-case basis. They look at factors like resale value, perishability, theft, and loss provisions as well as business, economic, and industry inventory cycles, as well as logistical and shipping constraints. This may explain why so many businesses weren’t able to get inventory financing after the credit crisis of 2008.
Depreciation is another factor lenders consider. And not all forms of collateral are equal. Inventory of any kind tends to depreciate in value over time. The business owner who seeks inventory financing may not be able to obtain the full upfront cost of the inventory.
Inventory financing is not always the solution. Banks may view inventory financing as a type of unsecured loan. That’s because if the business can’t sell its inventory, the bank may not be able to either.
Advantages
There are a variety of reasons why businesses may want to turn to inventory financing. But while there are plenty of positives, there are downsides as well. We’ve listed some of the most common ones below.42
By turning to lenders for inventory financing, companies don’t have to rely on their business or personal credit ratings or their financial history. Smaller business owners don’t have to put up their personal or business assets in order to secure financing.
Being able to access credit allows companies to sell more products to their consumers over a longer stretch of time. Without financing, business owners may need to rely on their own sources of income or personal assets in order to make the purchases they need to keep their operations going.
Businesses don’t need to be established to be eligible for inventory financing. In fact, most lenders only require companies to be up and running for a minimum of six months to a year in order to qualify. This allows newer business owners to access credit quickly.
Types Of Financing
Lenders provide businesses with two different kinds of inventory financing. The option that the company chooses is dependent on its business operations. Interest rates and fees depend on the lender and the type of business.
- Inventory Loan: Also referred to as term loans, this kind of financing is based on the total value of the company’s inventory. Just like a regular loan, the lender issues the company a specific amount of money. The company agrees to make fixed payments every month or to pay the loan off in full once the inventory is sold.
- Line of Credit: This form of financing provides businesses with revolving credit. Unlike a loan, it gives them regular access to credit as long as they make regular monthly payments to satisfy the terms and conditions of the contract.
Are There Any Risks?
This type of financing also tends to be fairly risky. This is why interest rates tend to be higher compared to other kinds of loans. These loans are short-term. Thus, the loan must be paid back sooner. Another key risk is that the borrower may not sell some or all of the goods that serve as the collateral for the loan, which means they may end up in default.
What Are Costs?
Inventory financing allows companies to borrow to pay for products that they plan to sell at a later date. This inventory is used as collateral for short-term loans or lines of credit. The costs associated with this type of financing include interest rates, origination fees, and prepayment fees if the loan is paid off earlier than expected. Other charges include late payment charges and late payment fees, if any.
Why Do Businesses Use Inventory Financing?
As stated above, these loans are a form of short-term borrowing. Companies tend to use it as a way to pay their suppliers before selling their products. Small or mid-sized businesses that may not be established or have established enough of a credit history to get long term financing. It also allows these businesses to access financing without having to put up their business or personal assets for collateral.
We Make Financing Easy! We Only Need These Documents:
- Business registration information
- 3-6 month business bank statement
- Last year’s tax return
- The cost of education
Validation Period:
- From 2 hours to 96 hours
- Valley Funding sends the funds to the borrower’s bank account
- 24 hours to 7 days.
