Inventory financing is a type of business loan that allows businesses to borrow against the value of their existing inventory. A lender will estimate the sales value of your inventory and offer you a loan amount based on this value, and then set payment terms and interest rates. If you fail to repay the loan, the lender will have the right to seize and sell your inventory to recover the cost of the debt. Inventory loans are more risky for lenders than other types of business financing, so the fees and rates associated with this type of financing are typically higher.
In order to qualify for an inventory finance loan, you will need a well-established business with strong sales history that shows your products are in high demand and have rapid turnover. You will also need to have a good inventory management system in place. Many companies choose to apply for an inventory loan with an established bank or a credit union, but online loan matchmaking services are also available that can help you find a lender for this type of financing.
Unlike other types of business loans, you don’t have to put up any personal assets as collateral in an inventory financing deal. However, your lenders will require detailed information about the inventory that you want to borrow against, including the number of units and their resale value. Some lenders may also conduct a due diligence period, in which they review and audit your inventory management system and business finances. They may even have a third party conduct an appraisal of your inventory as part of this process. If the process is successful, you can expect to receive the funds from your inventory loan within a few days.
The main drawback of inventory financing is that the cost of the finance eats into your profit margins, so this isn’t a good option if you run a business with low profit margins. Also, if you are unable to sell your inventory for a reasonable price because of market conditions, you can end up losing money on the deal.
There are alternatives to inventory financing, such as purchase order (PO) financing and invoice factoring. But these options are generally better for smaller business-to-consumer companies, such as independent retailers or direct-to-consumer sellers, because they allow you to borrow against completed orders.
Generally, you can only borrow up to 65% of the estimated value of your inventory through inventory financing. If you need more than this, then it’s a good idea to consider other types of financing, such as a short-term working capital loan or business line of credit, which don’t have the same requirement for a robust sales history and tangible assets as collateral. They are also often more flexible in their repayment terms, so you can borrow more quickly if you need to. This can be particularly helpful for newer companies that are still building up their business credits. In these cases, the alternative is to wait for cash flows to catch up, which can be detrimental to your business’s bottom line.