Inventory Financing, Inventory Loans, and Inventory Line of Credit

What Is Inventory Financing?

Inventory financing is an asset-based loan where the value of some or all of your inventory is used to secure the loan. This allows the inventory to serve as security for the loan.

Business owners commonly use inventory finance to purchase new inventory, but it can also be utilized for various other needs. Inventory financing can aid in the resolution of two major difficulties.

• Short-term cash flow gaps for businesses who have a lot of their capital tied up in inventory
• Stocking up on inventory in preparation for a busy season

Automobile dealers, for example, must purchase vast quantities of costly inventory, tying up a significant portion of their cash. As a result, even a thriving auto dealer may have limited funds to grow their operations or hire additional salespeople and technicians.

Inventory financing may be able to assist in providing that much-needed additional capital. 

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.

With accounts receivable financing, like invoice factoring, the amount of money owed by your clients remains constant, 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.

Is Your Inventory Working for You?

While both types of inventory financing use your inventory as security, these two loan types have significant implications for your business’s future funding.

Inventory Loan

A loan based on the value of your inventory is known as an inventory financing loan. Like a conventional small company loan, an inventory loan is for a defined amount that is repaid in monthly payments over a set repayment term or in one lump sum after the inventory is sold.

You will be responsible for repaying the entire loan amount, and if you require additional funding, you will need to take out another small business inventory loan.

Inventory Line of Credit

While a loan’s funds can only be utilized once, an inventory line of credit can supply you with additional funds continuously, as needed. In addition, many business owners choose to get a business line of credit to address any unexpected expenses that may arise.

You can enter into an inventory finance agreement with a lender to set terms and conditions for a long-term business funding relationship. 

Types of Inventory Financing

An inventory loan and an inventory line of credit are the two most common types of inventory financing.

While both types of inventory financing use your inventory as security, these two loan types have significant implications for your business’s future funding.

Inventory Loan

A loan based on the value of your inventory is known as an inventory financing loan. Like a conventional small company loan, an inventory loan is for a defined amount that is repaid in monthly payments over a set repayment term or in one lump sum after the inventory is sold.

You will be responsible for repaying the entire loan amount, and if you require additional funding, you will need to take out another small business inventory loan.

Inventory Line of Credit

While a loan’s funds can only be utilized once, an inventory line of credit can supply you with additional funds continuously, as needed. In addition, many business owners choose to get a business line of credit to address any unexpected expenses that may arise.

You can enter into an inventory finance agreement with a lender to set terms and conditions for a long-term business funding relationship.

Pros and Cons of Inventory Financing

Because these loans are secured by inventory, finance lenders can place less attention on your business credit history, credit score, and other creditworthiness factors.

This can make inventory finance more accessible to companies who can’t secure a traditional business loan, such as a working capital loan. This type of finance is also more convenient to apply for and acquire than a company loan.

On the other hand, inventory finance might be more costly in the long term than cash inventory purchases due to interest, even if the interest rate is modest. In addition, although the merchandise itself can secure inventory financing, the lender may require additional security in specific cases.

A lender may like to visit your facility to ensure that the financed inventory is adequately cared for and will not be damaged or decline in value before being sold. On-site visits are usually accompanied by an evaluation cost, which you will be responsible for paying.

Call-out/Tip

Keep in mind that most lenders will only lend money for a fraction of the value of your inventory, not the entire appraised value. As a result, if you’re using inventory finance to buy merchandise, keep in mind that you’ll need to put up some cash.

Inventory Loan

Inventory financing can be obtained via a regular bank, a credit union, or an online lender. Because inventory financing is a recurrent loan, it’s critical to do your homework and choose the finest financing firm for your company.

Inventory loans for small enterprises are contingent on the inventory’s liquidation value and its sale in the near future. Lenders will want to see the documentation that shows you have a high inventory turnover and can really sell the product throughout the application process, such as:

• Balance sheet, including sales history
• P&L statements
• Sales projections
• Cash flow statement
• Business plan

Lenders will also want to verify that you have a sound inventory management system in place so that they aren’t concerned about buying more merchandise than you need and can sell.

Other Financing Options

Inventory finance may not be ideal for your business if you don’t have a lot of inventory. Several other methods of finance may provide a more flexible funding choice in that instance, such as:

Working Capital Loan: These short-term loans provide flexible and unsecured capital to help bridge any cash flow shortages. Working capital loans can be used for anything a business needs, from inventory purchases to hiring extra employees. As the owner, you have the last say.

Equipment Loan: If an unsecured loan isn’t the greatest option, an equipment loan might let you buy new equipment while paying it off. Even if you don’t have a perfect credit history, you might be able to qualify for a secured loan.