Inventory financing is a type of financing loan that is used to fund inventory purchases where the purchased inventory is used as collateral to secure the loan. Besides keeping your shelves stocked with inventory, inventory financing also allows you to purse opportunities from suppliers. Inventory financing can help improve your company’s cash flow and provide funds to pay for business expenses or purchase additional inventory when needed.
The terms of your inventory financing agreement will be determined by how quickly you expect your inventory to sell. If you expect your inventory to sell quickly, a short term will make sense for you. If you expect it to take a while, a long term will make sense. Before agreeing to any contract, it’s important for you to take consideration of the total costs of the loan and see if it’s the right fit for you.
How does it work?
Inventory financing is used by businesses that have large inventory quantities such as retailers, restaurants, wholesalers and seasonal businesses. The funds can be used to cover any cash flow gaps, to prepare for a busy season or to launch a new product.
You will get the funds by submitting a draw request to the lender, who then deposits the funds in your bank account. You then have the funds to use for any business expense.
Inventory financing requirements
Some of the requirements you must meet for inventory financing are the following:
- have inventory that is marketable
- have reliable financial statements
- use an inventory management system
- need a minimum of $500,000 in financing
- have tried other financing options such as factoring, line of credit, etc.
If $700,000 is more than what you need, a line of credit or a traditional term loan is better suited for you. However, if you find inventory financing is fitting for your business then you will need the following to prepare for the application process.
A lender will look at your personal credit history and business finances. Your business must be between one to two years old when you apply, and they want to see that your business has had past success with buying and selling inventory and that keep inventory and all accounting records. They will consider your past sales volumes, inventory turnover rate, and any damage or loss of your past inventory. Therefore it is important that you use an inventory management system that keeps track of all this information. If you don’t have an inventory management system and haven’t kept track of any records, it will be harder for you to be qualified for the loan.
The most important factor is that lenders need to know that you can repay the loan. Some inventory financing companies place a minimum on the amount of inventory you purchase with your loan.
Lenders are also going to look at the type of inventory you are buying with the loan. Some lenders have a minimum borrowing requirement for inventory financing that’s higher than for other loan products.
You could also have to go through the due diligence process depending on the lender, your credit score, your business financial history, and the size of your inventory loan. This makes the process take a while as it can take weeks or up to months before you have the cash you need so if you are looking for a quick option for financing then it is not your best option.
How to Apply for Inventory Financing
The application process for inventory financing can be more lengthy than traditional financing options. This process can take weeks or months, requiring a lot of paperwork, interviews, and an audit in person of the company’s assets.
In order to be prepared for this type of financing you will want the following:
- Gather your financial documents – these include balance sheet, profit & loss statements, sales forecast, personal and business tax returns, business bank statements, inventory list, and inventory management records.
- Complete and submit your application – check with your lender directly to make sure you know their specific requirements needed to submit correctly.
- Review your offer and commit to due diligence – a preliminary offer will be presented with the details about the loan, interest rate and terms they can provide you.
- Complete a field audit of your inventory – your space will be visited and examined during an audit to determine if you are a good fit.
- Wait for final approval – after the audit you will have a better idea if you are going to be approved for the financing.
Pros and Cons of Inventory Financing
- You can leverage inventory
- You can accumulate inventory for your business
- Easier than traditional financing
- Line can increase as your company grows
- Prepare for a busy season by purchasing inventory
- May qualify for a bulk discount if you are making a large purchase
- It is a good fit if you have been rejected from traditional financing
- No personal assets as collateral
- The minimum for the loans is usually at least $500,000
- Interest rates may be higher than traditional financing
- Long and expensive due diligence process
- Appraisals and ongoing inspects may occur
- Difficult to qualify
If after evaluating your business and considered the pros and cons of inventory financing and still think it is right for you, then the next move is to apply. But if not, then you will need to consider other alternative options for financing your business.