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Inventory Financing - Take Care of Your Short-Term Financial Needs

A financial crisis can come unannounced anytime and facing such a situation is difficult when you do not have enough assets to apply for a regular loan from the bank. If you are a business owner facing a short-term financial crisis, you can use your inventory or accounts receivables as collateral to secure a loan to meet your credit requirements. An asset-based financial solution wherein the business uses its inventory as collateral to receive financial aid is known as Inventory Financing. The funds received from this financing scheme can be used to increase the cash flow within a company or to expand its operations.

This type of financing scheme is used mostly by borrowers who have a considerable amount of money tied up to their business inventory. Due to this reason, method of financing is more popular amongst manufacturers and dealers. Using this scheme, a business can receive liquid cash to fund its expenses that are not related to the inventory. Since this asset-based, short-term loan can be used to receive quick funds, it is beneficial for businesses to use Inventory Financing instead of selling their inventories during a temporary financial crisis. The amount received from this scheme can be used to pay off a debt quickly in case of any emergency.

What Is Inventory Financing?

It is a short-term, asset-backed financial solution that can be availed by the business to take care of the company expenses that are not related to the inventory. This scheme is usually considered to be unsecured by financial services companies and is offered to small and medium-sized retailers or wholesalers with an extensive inventory. In order to avail this benefit, a borrower has to provide the business inventory as collateral to receive funds and meet the expenses of a temporary financial crisis.

Since the inventory of a company is used to avail a loan under this financial scheme, the borrower can work with the inventory as per his or her convenience as long as the terms of the loan are met. In case a merchant fails to repay the loan on time, the lender has the full right to seize the inventory or any other inventory of similar value. Since inventories plays a central role in Inventory Financing, the specialty financing company will want to ensure that the concerned business inventory has a good resale value before offering the loan. Therefore, this type of financing scheme is not suitable for companies that are new in the business or don’t have tangible products in their inventory.

Advantages of Inventory Financing

Inventory is one of the most important assets of a business. Therefore, it is important to learn about the key attributes of Inventory Financing before deciding to avail this financing solution.

  • Quick Upfront Cash Since the process of application for this scheme is easier than other conventional financial plans, the loan is approved quickly and the funds can be used to pay off any debts in case there is an emergency.
  • Improves Cash Flow This financing plan allows businesses to use the money that is, otherwise, locked due to the inventory or other items. Since this plan releases the locked-in cash, it offers businesses the chance to improve their cash flow, buy new merchandise, or pay the employees.
  • Leverages in the Company Sales By availing this credit plan, businesses can acquire more cash by releasing the locked funds. This additional money can be further used to improve the sales of the company or to expand the current business.
  • Favourable Payment Options As the financial outlook of a business improves by using this asset-backed financing solution, the company can use the additional funds to repay the existing debt. In such a situation, the borrower might also get more time for loan repayment or relaxation in late fees.
  • Preparation for Busy Season A seasonal business can use the loan amount from this scheme to accumulate the company inventory when the business is slow. This can prove to be a smart move to prepare in advance for the busy seasons such as the holidays.
  • Alternative to Traditional Loans While Inventory Financing usually carries a higher interest rates than a traditional loan, it is often availed by small to medium-sized businesses that cannot avail a regular bank loan.
  • Additional Discounts Might Be Applicable When a business sells an inventory carrying a huge resale value, it might be eligible for a bulk discount from the lender. Additionally, the line of credit under long-term financing solution can grow as the business flourishes.

Types of Inventory Financing

Depending on the nature of the business and its products, there are 2 types of financial schemes using an inventory that a business can apply for:

  • Inventory Loan

    This type of financing solution is applicable when a business is facing immediate cash requirements and wants to use the resale value of its inventory to receive funds. Inventory loan is a one-time loan offered to borrowers.

  • Inventory Line of Credit

    The Inventory Line of Credit is more popular among businesses since it can be used to take care of any unforeseen expenses that arise after the borrower has already received the funds from the loan. In this financial plan, the lender offers extra money to the borrower at an ongoing basis whenever there is a requirement.

How to Avail Inventory Financing?

Since a business inventory is a huge asset and can be utilised to avail a loan when the business has credit needs, lenders are very particular about how it is maintained. A lender has every right to learn about the condition of the inventory they are currently looking to invest in. Therefore, they often make surprise visits to the business prior to the loan approval and check how the business handles its inventory. Additionally, the lenders also check for the shelf life of the inventory before providing the loan.

See the list below to find out the steps that can taken to get your loan approved:

  • Inventory Management To ensure that your loan gets approved, you will have to make sure that your inventory is well-organised. You must also present an accurate record of your complete inventory to the financiers. In order to do this, you might need the help of an auditor to validate the integrity of your claim.
  • Protection Against the Elements A business inventory with a longer shelf life usually has better chances of getting a loan through Inventory Financing. Therefore, it is important that you protect your products against the elements of nature.
  • Be Prepared for a Visit If you are a business owner who is looking to avail a loan using your business inventory as collateral, you should always be prepared for surprise visits from lenders to learn about the risks associated. Even if the visit never takes place, preparing for the same will help you raise the working standards of the business.
  • Accurate Sales Records In order to be able to trust the repayment ability of the business, the lenders will need to see that the business is performing well in terms of sale. Therefore, this is the most important factor in getting an inventory loan approved.
  • Unnecessary Inventory While it is good to have a large inventory, it not a good sign when a business has an inventory that is slow moving or doesn’t get turned to cash at all. This not only shows poor management skills and feeble planning, but also indicates meagre sales and a weak leadership within the business. Therefore, your business should have enough products in the inventory to fulfil the customers’ demand for the next few months only to avoid any resource wastage.

Eligibility Criteria for Inventory Financing

In order to secure a loan through this scheme, the following criteria should be met:

  • The business should have been operational for a minimum of 1 year.
  • The applying company must have a decent turnover and a commendable business credit profile.
  • The borrower should provide a record of the business sales wherein the inventory has been turned to cash regularly.
  • A business is eligible for Inventory Financing if its inventory is large in size as well as has a high demand and turnover.
  • To secure a loan through this financial solution, the business must be profitable and have a steady sales history.
  • If a business has a mature product along with less debt, there are high chances that the concerned merchant will be able to avail a loan by financing his or her inventory.
  • There should not be any major credit violation such as bankruptcy, repossession, tax lien, or others by the business in the recent past.
  • If a business has an aging inventory, high debt coupled with poor sales, or wants to avail a long-term loan then the business’ loan application for Inventory Financing is likely to get rejected.

Documents Required for Inventory Financing

See the list of documents you will be required to submit in case you are planning to opt for this short-term financing scheme.

  • Driver’s License of the Applicant
  • Cancelled Business Check
  • Bank Statement of the Account Associated With the Business
  • Company Balance Sheet
  • Registration Information of the Company
  • Appraisal Report
  • Profit and Loss Statement of the Business
  • Business Tax Return Documents
  • Collateral Documents
  • Copy of Sale Invoices of the Company Inventory

Conclusion

Inventory Financing is a short-term, asset-based loan that can be availed using a business inventory as collateral. A business can receive liquid cash to meet the company expenses that are not related to the inventory. If a merchant receives money using this financial solution, he or she can use the inventory as long as the repayments are made on time. In case the business fails to make timely repayments, the lender has complete right to seize the concerned inventory or any other inventory of similar value.

Since Invoice Financing offers access to quick funds, this scheme is preferred by many retailers, manufacturers, and dealers to take care of their emergency credit requirements. This financial solution helps small to medium-sized businesses improve their cash flow, increase sales and operations, or prepare for the busy season. With Inventory Financing, the businesses that have an extensive inventory but cannot apply for regular loans at a bank can receive funds at a discounted rate.

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