Inventory Financing: Questions Answered
What is Inventory Financing?
Inventory financing is traditional bank line of credit guaranteed by the borrower’s inventory. This kind of financing can assist in releasing some of the funds you have busy in inventory for more important requirements. A track record in sales is required by the loan provider.
Which Companies Should Use It?
Companies ideal for inventory financing:
- – those w/ assessable inventory
- – those w/ an established sales history and good credit
When Does Inventory Financing Make Sense for a Small Company?
Inventory financing makes sense when:
- – Your company enjoys high inventory turnover but is short of cash needed to replenish it
- – Your company has a warehouse of goods that are ship-ready, but you lack the funds to supply the next production cycle
- – Your high level of inventory ties up much of your cash.
When is Inventory Financing Not Advised?
It’s not recommended when you have obsolete or slow moving inventory.
What Are The Drawbacks to Inventory Financing?
Lenders will typically require additional collateral or security agreements to protect themselves in the case that you dispose of collateral improperly.
Most financial institutions do not offer, or are not familiar with inventory financing rules, so do some research beyond your own institution and note that interest rates will vary widely from one bank to another.
Its common to require fulfillment/repayment within 12 months. Most institutions that serve companies that leverage their inventory to get loans repeatedely will ask the small business to take the thirteenth’ month off before applying for another loan.
The real danger is in sudden sales declines which create a situation in which you may have to unload your inventory at break-even or a loss, which weakens your ability to make payments. As well, beware the high-interest inventory financing tool: the interest siphon funds needed to keep production moving forward on schedule.
Tips for Getting Approved
- – Be certain that the inventory is protected from damage
- – Demonstrate your inventory management software efficiencies
- – Ensure that assets are maintained in good condition; your lender may inspect periodically;
- – Demonstrate regular sales in weekly updates during the underwriting process
- – Show that you maintaining only the minimum amount on hand while maximizing turnover