“If you need business financing, leveraging your inventory can be a reasonable option.”
What Is Inventory financing?
Inventory financing is a loan depending on the worth of some or all of your inventory. The lender issues a loan based on a proportion of your inventory’s value, and the inventory actually serves as security for the loan. This type of financing enables you to acquire much-needed inventory while using the products you intend to buy as collateral.
It’s a challenging situation for many businesses. Due to the COVID-19 pandemic, business owners are having a much more difficult time managing cash flow, payroll, and other expenses than ever before. Inventory financing can be useful if you need to release capital trapped in inventory or if you’re having difficulty meeting client demand.
Let’s take a look at how you might be able to benefit from inventory financing. In this article, we will explore inventory financing— how it works, and how it can be beneficial for your business.
How Does Inventory Financing Work?
“Due to the flexibility and cash availability that inventory financing can provide, it’s a good option for businesses that are seasonal and have a range of physical assets.”
Inventory financing is indeed an asset-based loan or inventory line of credit that can be used to buy more inventory, retain steady cash flow, or strengthen working capital.
As an example, let’s assume you have a wholesale clothing company that serves a vast range of retailers. As a wholesaler, you must keep your inventory filled and available so that your clients may have the products they require as soon as possible. You predict a big spike in sales around the holidays and will need to acquire twice as much inventory as normal to increase production. But how can you afford to buy that much inventory even while keeping a healthy cash flow in your business?
In this scenario, inventory financing can be really helpful.
Is It Right for You?
Inventory financing can be an excellent pick for several businesses. Others may find it to be the wrong choice. Some may even be ineligible for inventory financing in the first place.
Here are some questions you should ask yourself to determine whether inventory financing is right for you.
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Are you selling a physical product?
Of course, inventory financing is designed for businesses that require inventory. If you don’t sell a physical item, inventory financing isn’t for you. However, if you run a store and need things on the shelf for your consumers to purchase, inventory financing could be a wonderful way to get the money you require. Whether you’re a retailer, wholesaler, or specialized shop, inventory financing can help you get the money you need to purchase the products you sell.
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Do you have an established business track record?
It can be tough for start-ups to acquire inventory financing. Lenders are more inclined to work with your business if you can present at least one year of proven experience selling a product to a pre-existing customer base. For this reason, start-up businesses are often ineligible for inventory financing.
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Are you willing to borrow a sufficient amount of money?
In addition to having a good sales record, you may also need to be ready to acquire a large amount of money
To make the contracts financially feasible for lenders, they mostly require businesses to borrow huge sums of money. So, if you’re only wanting to borrow a small amount, it may not be for you.
Benefits of An Inventory Loan
“With more capital available, businesses will be more comfortable in ordering additional inventory or investing in highly profitable business opportunities.”
Inventory financing can help businesses in a number of industries, particularly those in retail or wholesale. Here are four ways an inventory loan can actually support your business:
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Expand Product Lines
As a business person, you understand the importance of maintaining your existing product lines. By emphasizing your present lines, you may be passing up an opportunity to give your clients more products. When a customer buys one thing, they will also want a similar, related item. For example, if you sell nutritional supplements, think about selling protein shakes and sports drinks. By diversifying your product offerings, you will help your business grow.
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Purchase in Bulk
If you work in the wholesale sector, you need to buy inventory in quantity. Large purchases can be difficult to place. It can help you run your business more smoothly by helping you with the funds you need to keep your stores and warehouses filled with the things you need.
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There Is No Need to Cut Costs
One of the key benefits of an inventory loan is that you will not have to cut spending in other areas of your business in order to purchase inventory. An inventory loan can provide you with the open funding you require to buy products while operating your usual business.
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Meet Seasonal Demands
Many businesses experience seasonal fluctuations in sales. Business owners who run a seasonal business can use an inventory loan to buy products during slower seasons of the year. Retail stores, for example, may see an increase in sales over the holiday season. It can be used to buy additional products in advance, allowing you to satisfy customer demand when they start their Christmas shopping.
Applying for Inventory Financing
Inventory financing applications are identical to other types of financing; businesses must present balance sheets, income statements, and cash flow statements. A lender will also require an inventory list as well as a sales estimate or financial planning document. A copy of a business plan, as well as bank and tax statements, is always a smart idea.
