You have to buy inventory for your company, but you don’t have enough capital to do so. Conventional financing isn't a viable option for your business, however, you know you will soon sell the inventory you need to purchase. Is there a way to leverage your inventory and employ that as collateral? What other options are open to you? Read on to learn about inventory financing and whether it’s a good fit for your business.
What Inventory Financing Is & How It Works
Inventory financing is a type of asset-based loan in which the inventory you’re purchasing with the loan can be used as collateral to secure the borrowed funds. Depending on the arrangement, the lending company may also require you to put up your a / r as collateral. The amount of financing you obtain is directly related towards the worth of the inventory in question, usually 70 to 80% of the inventory’s value. While you sell the inventory you purchase using the loan proceeds, you’ll be able to repay the borrowed funds.
Inventory financing is typically used by large upstream producers and distributors of tangible goods, for example manufacturing companies and product wholesalers. You’ll have to both carry a lot of inventory and become investing in a large quantity of inventory to qualify for this kind of financing.
Inventory financing products are sometimes conflated with “inventory loans,” which is a more general term. An inventory loan is simply a loan to buy inventory, whereas inventory financing describes a specific type of mortgage wherein the inventory purchased using the loan can be used to secure the loan. A standard business loan to buy inventory may instead require another kind of specific collateral, a personal guarantee, or perhaps a general blanket lien on all your business assets.
Unlike inventory financing, which is right for large B2B businesses, other types of inventory loans may be used by small B2C businesses.
Types Of Inventory Financing
All inventory financing uses inventory as collateral, but you may still find various kinds of financing agreements. In this section, let’s consider the kinds of loans used for inventory financing.
Inventory Loans
Inventory loans are usually structured as short-term loans, hoping the inventory will sell quickly and purchase itself quickly. With an inventory financing loan, you will receive the entire summarize front and then repay the main, plus interest, in installments.
Usually, the minimum loan amounts for inventory financing take presctiption the high side, meaning the smallest loan you are able to remove might be $500,000 (or higher, depending on the lender). The number you receive is a percentage of the appraised value of the inventory you are purchasing, to account for the truth that inventory depreciates in value with time. For example, if you need to purchase inventory having a liquidation worth of $800,000, the lending company may lend you 80% of this, so you’ll get a amount of $640,000.
An inventory term loan could be a good choice for big, one-time inventory purchases — if you have the opportunity to purchase a bulk amount of quick-turnaround inventory for a cheap price, for instance. However, some loans might be easy to renew for repeat borrowing needs.
Inventory Lines Of Credit
A credit line is a common loan structure for inventory financing and it is more desirable for ongoing access to capital for inventory purchases. With an inventory-secured line of credit, the company owner receives a credit line based on the value of their inventory, repays it as being the inventory is sold, and borrows more funds when needed and also the limit is replenished. The borrower only has to pay for interest around the money they withdraw, plus every other associated fees.
Rather than one-time inventory purchases, a listing line of credit can be useful for regular inventory replenishment needs because of cyclical income issues, e.g., for a business which has slower sales certain times of the season.
Note that before you decide to use a listing financing lender for any credit line, you may want to try to negotiate a credit line together with your vendors directly.
Accounts Receivable & Inventory Financing
Accounts receivable and inventory financing (ARIF) happens when a / r financing and inventory financing are used together. Businesses that frequently have a lot of cash tangled up in both invoices and inventory may be able to leverage these two assets as collateral to secure financing.
Accounts receivable financing—also known as invoice financing—is really a loan based on the value of your business’s unpaid invoices. You’ll usually obtain a line of credit based on the value of your receivables (invoices). Because A/R financing and inventory financing are generally asset-based loans, they function similarly and could be used together to secure a loan or line of credit. As with inventory financing, with AR financing you’ll only receive 70-80% from the value of your unsold invoices; this really is to account for the truth that some of those invoices may never be settled.
Invoice factoring is something slightly different, while you actually sell your unpaid invoices to some factoring company, but can also be employed to leverage outstanding invoices to pay for inventory.
Purchase Order Financing
Purchase order financing could be a useful method for B2B companies to finance certain types of inventory purchases. Using this type of financing, you obtain an advance to buy the inventory you have to deliver on large purchase orders. PO financing works well for firms that resell finished goods and need to fulfill orders of these goods. The way this works is that you simply get a purchase order from the reliable (creditworthy) customer. The PO financial institution will front you the capital to pay for your suppliers for that inventory needed to fulfill that order.
PO financing is similar to invoice factoring, except with PO financing you’re getting a loan to satisfy an order; invoice factoring is a loan based on completed orders.
Expected Rates & Terms For Inventory Financing
Rates and terms for inventory financing, of course, vary with respect to the lender and the kind of inventory financing you’re trying to get. But some things are true of inventory financing and asset-based lenders in general :
- Loan minimums are high (usually $500K+)
- You are only able to be accepted for 70% to 80% from the assessed value of the inventory you’re purchasing
- The value of your present inventory must be at least two times the total amount you’re asking to borrow
- Interest rates are typically in the high teens
- Repayment terms are short (as much as A few months)
- Time to funding may be so long as 30 days
- The lender may do an on-site inspection of your inventory as well as your inventory management system, and you'll have to pay the associated inspection costs
- If you fail to repay the inventory loan or line of credit promptly, your inventory will be repossessed
If these terms don’t seem like they would make sense for your business, you may be better served by an online inventory loan, which is more appropriate for small enterprises.
When Inventory Financing Is A Good Choice For Your Business Funding Needs
As mentioned, inventory financing can be suitable for manufacturing and distribution companies. In some instances, it could also suitable for large retailers. Consider whether the following pertains to your company:
- You possess a large company that deals with tangible goods (usually B2B)
- You have to borrow a minimum of $500K and have at least $1 million in current inventory
- Your sales are outpacing your revenues
- You are unable to get higher lines of credit out of your suppliers
- You have outstanding purchase orders you have to fulfill
- You have an efficient inventory management system
- You’ve exhausted other possibilities for financing (such as a line of credit with your vendor or a conventional business loan)
Compared to a standard business loan, inventory financing is more expensive but is generally easier to obtain, so long as you possess a larger, established business and your inventory is selling quickly. You don't necessarily must have good credit, but you will need to demonstrate a powerful sales record that indicates you'll be able to easily sell the inventory you are purchasing. You'll generally have the ability to borrow as much as 50% of the worth of your current inventory.
When To Avoid Inventory Financing
If you have a newer business without a demonstrable sales history, or your current inventory is losing value and not selling, it’s unlikely that the inventory financial institution could be thinking about lending for you. This type of financing also isn’t suited for startups or smaller business-to-consumer companies such as independent retailers that just need to purchase $50,000 price of inventory. In those cases, you’d need to be with an online inventory loan, such as a short-term working capital loan or business line of credit.
Even if you do be eligible for a inventory financing from an asset-based lender, you may still wish to avoid this type of financing if there’s a chance you can qualify for a much better loan, such as an SBA 7(a) loan. It is because inventory financing loans are more expensive than traditional loans.
Is Inventory Financing Right For You? How To Find A listing Financing Company
So, you’ve decided that inventory financing is a good choice for your business, and also you need to find lodge logic to utilize. Due to the a large amount of money involved, the complex nature of asset-based loans, and all the due diligence involved with securing inventory financing, you will probably want to find financing specialist who are able to guide you to navigate your inventory financing options and discover a suitable lender for your company. There's also online loan matchmaking services for example Lendio that you may have the ability to use to secure inventory financing.
One inventory financing option you might like to consider is P2Binvestor, because this lender has earned a 5-star review due to its easy application process and competitive terms and costs.
Don’t Think Inventory Financing Is appropriate? Learn About Other kinds of Small company Financing
Perhaps you’ve realized inventory financing isn’t best for you since you run a B2C business and/or you have more sensible financing needs. I’d like to point you toward some other loan resources that might be a much better fit:
- 6 Small company Loan Choices for Purchasing Inventory
- Types Of Small Business Loans
- 14 Types Of Alternative Financing For Small Businesses
- The Best Small company Loans For 2022
- SBA Loan Requirements
- Business Credit line Comparison
- Invoice Factoring Comparison
If you’re looking for specific lenders that could offer smaller amounts of capital to buy inventory, BlueVine and OnDeck are a handful of our top chioces in the small company space. I encourage you to definitely read those reviews and find out if their lending products could work for you. So that as with invoice financing loans, there are also other kinds of loans on online loan marketplaces including Lendio.
Need more help? Let me know in the comments and I’ll see if I can show you in the right direction.
