Whether you’re a new or established business, having adequate inventory on hand is essential for your success. Thankfully, there are small business financing options like inventory loans and lines of credit to help you purchase the products you need when your cash is tight. However, before you apply, it’s important to understand what inventory financing is, how it works and if it’s the right fit for your business.
In a nutshell, inventory financing involves borrowing funds to purchase products that will be sold in the future and using that product as collateral for the loan. The lender will assess the value of the inventory to determine how much money it will lend to you. Once your application is approved, you’ll receive a funding amount and a contract that includes the terms of the loan. The funds will then be deposited into your company’s bank account.
Inventory financing is ideal for product-based companies, such as clothing stores, bookstores and e-commerce sellers who wholesale their products. Service-based companies, such as restaurants, will generally be more suited to other types of small business financing.
The benefits of inventory financing include the ability to create liquidity, take advantage of opportunities and drive growth in your company. In addition, unlike a traditional small business loan, which requires collateral and often has long repayment periods, this type of funding offers short-term terms and less stringent eligibility criteria.
In most cases, you won’t be able to borrow the full value of your inventory. Instead, lenders will usually finance about 50% to 80% of the inventory’s appraised liquidation value. This is to protect the lender in case you’re unable to repay the debt.
Another benefit of inventory financing is that it doesn’t require a personal guarantee from the owner of the business, as the lender uses the inventory as security for the loan. It’s worth noting, though, that most types of inventory financing will still look at the business owner’s personal credit scores when assessing eligibility.
The downside of inventory financing is that it can be more expensive than other forms of small business financing. This is because it can be hard to qualify for this type of financing if your business is brand new, if you have a bad credit score or if you’re not established enough.
There are also some fees associated with inventory financing, such as interest rates, which will vary based on your company’s credit scores and the lender you choose. However, these fees are generally lower than other small business financing options.