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Inventory Financing: A Guide to Inventory Loans

Inventory Financing: A Guide to Inventory Loans
Written by Publishing Team

Small business owners who need working capital to purchase inventory but don’t have assets to offer as collateral may overlook one potential resource that can help: inventory they want to buy.

What is inventory financing?

With inventory financing, the supplies, materials, or products you buy act as collateral for you, securing the loan. Short-term inventory loans and lines of credit are designed to provide quick access to cash flow to purchase inventory.

How do stock loans work?

Borrowers who are looking to purchase inventory but do not have all the capital required to apply can apply for inventory financing from lenders who specialize in this type of business financing.

You can usually borrow about half the value of the inventory, so you’ll still need to pay the rest.

Your loan is secured by the inventory you buy. This means that if you are unable to repay the loan, the lender has the ability to seize the inventory to cover your debts. You’ll pay off your loan as you would any other loan, with monthly payments of up to a year that include fees, interest, and principal.

Pros and Cons of Inventory Financing

Of all the loan options available, there is no other option that is quite suitable for purchasing stock like this. Still, there are drawbacks to consider.

Positives

Inventory provides you with the capital you need to quickly cover business expenses related to inventory purchases. If you get a loan from a traditional bank, it can take weeks or months for your application to be approved. Inventory financing happens quickly.

The inventory you buy can help you boost your business during a slow season when you may not have cash on hand to make inventory purchases. Then you can pay off the loan during your busy season.

Another benefit is that even if you don’t qualify for other types of financing, you may still qualify for stock loans. So if you’re running a startup that has been denied a bank loan or SBA loan because of your lack of creditworthiness, know that this may still be an option.

Negatives

The first drawback to consider is that you may have a higher interest rate with inventory loans than with other types of business loans. If you qualify for lower interest rates with traditional bank loans, consider that first.

Also, these loans are usually short-term loans and must be paid back within a year. If your budget can’t accommodate these expenses, you may end up in hot water.

Finally, you cannot use these loans for anything but inventory.

What are the types of inventory financing?

There are many lenders that offer different types of business inventory financing for your consideration.

Inventory credit limit

If you’re not looking for a lump sum cash to buy inventory with, consider a business credit line. A certain credit line is approved but you can borrow up to that full amount and pay it back. This is great if you have ongoing inventory buying needs.

factoring

Some funded lenders specialize in stock factoring. In this case, you sell purchase orders or accounts receivables to purchase inventory that you need to fulfill the order. The lender takes a fee.

credit cards

Another financing option, although not specific to purchasing inventory, includes business credit cards. This is a form of revolving credit line that you can use to purchase inventory, office supplies, and other items in stores and online.

Merchant cash advance

Although it’s not a type of loan, a merchant cash advance can help you get the new stock you need if you don’t have a large balance and can’t qualify for other financing options.

Where to find inventory financing

There are online lenders that specialize in inventory financing. Start by asking for recommendations from others in your field. Most banks do not offer inventory loans.

What is the best way to finance inventory?

The best way to finance inventory is to find a financing company that offers terms that work for you. Consider the fees or interest you will pay and how quickly you will have to pay off the loan.

Do your homework to learn how the company operates in terms of customer service. You don’t want to get a low-rate loan if you can’t get customer service over the phone to answer questions.

If you are able to pay off the loan faster, can you save money, or is there a penalty for prepayment? Ask a lot of questions before landing on a lender.

What is the cost of inventory financing?

Just like any small business loan, stock financing options come at a cost. Most of them charge interest, and depending on your business and personal credit, these rates can vary widely. The better your credit, the lower the price and vice versa as well. If your credit score is poor, you will pay a lot more to get the loan.

How to qualify for inventory financing

Before applying for an inventory financing loan, check your business and personal credit scores. If you don’t have a business credit history, lenders may look more at your personal results, so make sure they are on point.

Unlike bank loans that require collateral, you will not have to put up any business or personal assets for the loan. You may be asked to provide order details for the inventory you are looking to purchase so that the lender knows the value and can decide how much to lend you.

How to obtain inventory financing

The process for applying for inventory financing works differently with different lenders, but it usually requires little more than a few details about your business, how long it has been running, and your annual returns. You may also be asked for details about the inventory you are looking to purchase.

Depending on the value of the inventory you want to buy, the lender will determine the amount of money they will loan to you. If approved, you will sign the loan agreement, which includes the loan amount, interest rate and repayment schedule. Your money will be deposited into your commercial bank account in less than one day.

Naf’s rule: stock financing

If you don’t have the capital to purchase products or raw materials on hand, it’s good to know that there is small business financing like inventory loans and lines of credit to help!

This article was originally written on December 21, 2021.

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