Inventory management is a key part of any business.
Get inventory calculations wrong and all manner of cash flow problems can occur.
The United States has some improving to do in this realm. For instance,is currently tied up in inventory and accounts payable and receivable.
There are all sorts of potential inventory hurdles for businesses to navigate. Inventory shortages, surpluses, and insufficient cash to purchase new stock are a few of them.
Thankfully, inventory financing is one effective method of avoiding problems.
But what actually is this vital part of successful commerce, and how does it work?
Keep reading for a complete guide to inventory finance.
What is Inventory Financing?
Let’s begin with a definition.
As you might expect, inventory financing is a type of loan taken out by business owners to purchase inventory. That might involve a short term loan or a revolving line of credit.
For example, an e-commerce company is running low on capital but needs to prepare for the season ahead. The owner applies for an inventory loan to cover the upfront costs and purchase the necessary stock.
Similar to a mortgage, they’ll repay the loan in line with a fixed schedule, with interest on top. If they can’t afford to repay the loan, then the inventory (new and/or old) is used as collateral.
The newly purchased inventory belongs to the business owner. However, the lender has a right to seize and repossess it when repayments are defaulted on.
Can Anyone Apply?
As we’ve seen, this type of debt is suited to businesses that sell physical products.
Toy stores, clothes retailers, sports shops, printing companies…You get the idea. Whenever tangible items are available for sale, inventory financing is a viable option.
Companies that deal with digital products, or services, wouldn’t suit this financing option. Why? Because there are no actual items available for purchase. Similar loans may be available. However, the money isn’t intended for items that literally stock the shelves.
As a result, inventory financing wouldn’t be suitable.
Equally, loans are usually allocated on the basis of past financial records. Consequently, new businesses with less than a fiscal year in operation are likely to be ineligible. They simply don’t have enough financial records to back their application. Companies with upwards of three years in operation stand a better chance.
Benefits of Inventory Financing
Now let’s turn to some of the benefits provided by this type of debt.
Handle Slow Selling Inventory
Sometimes products sell slower than expected.
For one reason or another, downturns in business can make it harder to generate enough revenue. However, expenses continue as normal. Suppliers expect a payment, rent must be paid, there’s payroll to cover, plus all utilities and bills.
Likewise, suppliers sometimes demand payment before products have a chance to sell. Whether inventory is slow selling or not, business owners may need to pay their invoices quicker than they can move.
Cash flow problems can cripple a business. Inventory financing can cover the necessary costs and leave sufficient capital to purchase new inventory when it’s required.
Manage Seasonal Changes
Business can literally change with the weather.
The off-season can result in major downturns in business. As we’ve just noted, that can create challenging cash flow situations. Likewise, last season’s stock may not have sold out. A financial shortfall can arise that makes it difficult to purchase enough stock for the season ahead.
The financial implications of seasonal fluctuations in demand can be mitigated through inventory finance loans.
There’s nothing more frustrating for businesses than when demand outweighs supply.
Companies commonly face challenges in terms of sales. When the tide turns and products are flying off the shelves, it’s essential to have enough stock in place. Don’t, and potential sales will be lost; customer dissatisfaction can mount.
Inventory financing can help the business handle higher sales volumes. They may need additional funds to prepare enough inventory for the season ahead. Spending money upfront may be a risk. But the ability to meet demand means more sales. And that’s always better for business.
Cons to Consider
There are some downsides to know about too.
Difficult to Access
Inventory financing isn’t the easiest form of lending solution to secure.
Now, it’s true that small businesses are likely to secure it more easily than traditional bank loans. However, many lenders remain reluctant to provide the loan. After all, their collateral is the inventory that gets purchased.
If a business can’t sell it, then they probably won’t be able to either. They want to make sure there’s the ability to easily regain the money they’ve provided.
Higher Interest Rates
Lenders of inventory finance put themselves at greater risk than traditional loan companies.
The interest rates see an increase as a result. That can be bad news for you. The finance can come with a hefty price tag. Businesses must check the interest rates to ensure they can afford the repayments.
Time-Consuming Approval Process
Businesses need to give themselves sufficient time to apply for these financing options.
Often, it can take a considerable while for funding to be approved. That’s bad news for companies that need new inventory ASAP.
Time to Wrap Up
There you have it: everything you need to know about inventory financings and how it works.
Effective management of inventory is often a vital component of a successful business. Inventory mistakes can have all sorts of negative repercussions. Having enough capital for inventory expenses is one particularly common obstacle to avoid.
As we’ve seen, this is where inventory financing comes in handy. When companies are short on cash, and in need of stock, this can be a vital source of credit to call upon.
Hopefully, the information in this article has highlighted everything you need to know about it!
Are you in need of extra capital to cover inventory costs? Contact us today to see how we can help.