If you are looking at taking out a loan to fund some capital for your inventory, you are among the millions of American business owners doing the same thing. The United States Small Business Administration Office indicates that 73 percent of American-based firms used financing last year.
One of those means of financing is inventory loans. Before you apply for credit, discover what’s involved in taking out inventory loans and be prepared to succeed before you sign the dotted line.
What Are Inventory Loans?
Inventory loans are exactly what they sound like, and typically involve a line of credit or revolving financing that covers your inventory. It is a more secure form of a loan than many other business loans because your inventory becomes your collateral in many cases.
These types of loans are useful for any company no matter the size. You may have the capital for everything you need to win in business, but come up short when it comes to putting a product on the shelf.
If so, the inventory loan process is the perfect kind of bridge financing you need. There are many benefits to inventory loans. They allow you to provide product for fluctuating seasons or holidays and allow your sales volumes to increase.
The simple math is you pay a small number for the product, and then mark it up for your own profits. You can then pay off your inventory loan, and have a little extra for yourself.
Inventory loans are especially helpful to newer business owners that don’t already have an established relationship with vendors. Many vendors do not require payment for 30 or 60 days after orders.
But this may not always be the case for new companies.
Inventory loans help you to stay afloat and build your reputation with both your customers and your suppliers.
Are Inventory Loans Easy to Get in Recessions?
The simple answer to this question is yes.
While the United States economy appears to be in some growth, there is also a sense of volatility in the lending market. The lending market has not yet fully recovered from the real estate bubble burst of 2007 and 2008.
But at the same time, since a new Administration, the stock markets have crashed multiple times. As well, the government has shut down for historically record lengths, and a historically record-setting number of times under the new Administration.
When the government shuts down, the Small Business Administration (SBA) office pauses lending.
When stock markets crash, banks stop lending.
But you still need to make money and move product off the shelves.
A slower economy during a time when government shutdowns appear to be the norm rather than the exception should not dissuade you from considering taking out inventory loans. The Small Business Administration office halts the loan process during government shutdowns, but there are still millions of businesses getting loans elsewhere.
So yes, you can still get inventory loans even when the economy appears volatile, and even when the SBA is in shutdown. And you can even get them quickly.
Krista Morgan, CEO of P2B Investor told “Small Business Trends” that in bear markets, traditional lenders are “risk-averse” but that you can still get loans through non-traditional lending.
In some ways, those loans are even easier to get than traditional loans, if you are prepared. Before you apply, be sure that you sort through lending solutions to choose the best solutions for your business.
Kinds of Inventory Financing
There are a number of ways you can get financing of your product, with some already discussed.
First, there are the traditional lending options. In business today, banks are a traditional option, and so is the SBA.
The SBA doesn’t actually give you the money though. They pre-qualify you and send you to traditional lenders.
So if the government is shut down or having problems, there are still other means of inventory financing.
Vendor financing is also very popular and works well with established businesses with strong relationships with vendors.
If that is not you, then an asset-based lender may be the next option. This is a lender that provides financing using your existing assets or your potential inventory as an asset.
It’s kind of like putting a mortgage on your business or leasing a car. You get the financing, but if you don’t pay it back, the lender takes the product back.
Is Inventory Financing Right for You?
Today’s type of business is evolving as quickly as the technological landscape. Brick and mortar businesses aren’t the only kinds on the market.
Brick and mortar businesses are an ideal business for inventory financing, as they need product on the shelves today.
But they aren’t the only types of business that need inventory loans.
Businesses running an e-commerce website or a drop-shipping business also need inventory. You don’t always need inventory for these businesses, but it helps and certainly improves your profit margin.
Wholesale businesses also need a product. And if you are a business that provides product to brick and mortar stores, you also need inventory to be able to sell inventory.
These are just a few of the examples of types of businesses that need inventory financing at some point in their business.
Many of these businesses will use their own capital to buy inventory without any financing at all. But if you want your business to grow, expanding your product line or inventory is the first way to try doing so.
Best Buy, for example, has multiple suppliers, as do big box companies like Walmart or Sam’s Club. None of these businesses would be in existence today if they did not at some point get some form of inventory financing.
It’s great to want to try and do it on your own. But why, if you can expand your business without having to put your own capital in?
And why wait when progressive loans are available within 48 hours in some cases?
Can Your Business Handle Inventory Loans?
When it comes to determining whether or not you should apply for inventory financing, the first questions are: Do you need it, and are you ready for it?
You don’t want to apply for inventory financing just because you need some cash right now. That’s not always how it works.
Some forms of inventory financing don’t even come in the form of cash or credit lines, you simply get invoiced for product and have to pay as you go.
So the first way to determine you are ready for inventory financing is by having a look at your sales record. If you have good revenue, you have a stronger position when applying for an inventory loan.
One general rule of thumb on that is to have at least $200,000 in annual revenue before you apply for an inventory loan. You need to be able to show your lenders you will be able to pay it back.
This is a general amount and certainly no hard and fast rule, but it’s the number you want to have before your expenses factor in.
But even if you don’t have this magic number, having an inventory that moves fast is another good way to determine you are ready for inventory financing.
Being able to tell a lender that your shelves empty quickly is good news for them. But at the same time, you don’t want to be stuck with empty shelves constantly.
It doesn’t look good when a customer comes into the store and…there’s nothing to buy.
If you move inventory quickly, have a healthy shelf line, or a good annual revenue, you have many of the things lenders look for to determine you are ready for an inventory loan.
Other Reasons to Get Inventory Loans
Having a business that is financially prepared to take on an inventory loan is a great first step in applying for one. But these aren’t the only reasons you want to get inventory loans.
Sometimes a business sees a product at a wholesaler that they can not resist. It may be a trending product or something that accompanies a trending product, but you don’t have the capital to get it just yet.
Let’s say you run a technology shop and the new iPhone just came out, and you see iPhone covers that your competition isn’t selling yet. That might be a reason to get an inventory loan.
Finding deals you can’t resist is a very big reason many businesses get an inventory line of credit or financing.
Another reason might be seasonal inventory. Let’s say it’s your first holiday season setting up shop, and you have no idea what to expect.
The smart thing to do would be to overstock through a vendor that will take back any unsold items and credit you for it later.
But you may need capital for that. To do so, you’ll need an inventory loan.
For just as many kinds of businesses there are, there are reasons to get inventory loans. Your business is unique and so are your needs.
Never be afraid to at least ask if you qualify.
Are There Reasons Not to Apply?
There are always reasons not to apply for inventory financing or any kind of small business loan for that matter.
The biggest reason is that every loan or line of credit is a risk.
Most inventory loans come at higher interest rates because the lender is also taking a risk. Even a business that is doing well can not guarantee they will sell all of the product.
So you are going to see higher rates on inventory loans, and that’s another big risk for you. If you can work out a longer repayment term on the loan, you may be able to wiggle that interest rate down a bit.
But there is little wiggle room at the banks or SBA. Even non-traditional lenders will have set rates.
You may also be taking on a personal guarantee risk if you are not careful. This means that not only will the lender ask you to use your product as collateral, but they may make your personal credit liable if you can not pay back the loan.
Most of these factors come into play with banks and traditional lenders. You may even experience a lengthy business in-house audit of financing before they even think about saying yes to you.
These are called due diligence factors, and the bank will charge you for that.
You aren’t likely to see these costs in non-traditional lenders.
But you still need to be ready.
Getting Ready for Inventory Financing
The first thing to do when planning for an inventory loan application is to learn your credit score. Learn the credit scores business owners need to know about before you apply and check your personal credit score.
You don’t need perfect credit, sometimes even a score of 580 or above is enough.
Then you need to gather all of your relevant financial documentation. Put your personal and business tax returns together, and put together your profit and loss statement.
You will also need a list of the inventory you already have, and what it costs you. Having all available purchase orders on hand is helpful.
Having a list of the items you want to buy with the loan is also helpful, as is knowing their costs.
Think like a lender before you apply for your loan. What questions would you ask someone wanting to buy a lot of inventory? Have those questions answered before you begin the process.
When it comes to expanding your business or putting your company in a position for growth, you need inventory and capital. You are in good company as well, as the United States Census Bureau reports that only 1 percent of businesses that needed capital in 2015 were unable to expand due to lack of funding.
The Federal Reserve notes that as many as 82 percent of companies with employees were approved for funding in 2015. But all of that 82 percent may not have received all of the funding they requested.
That doesn’t have to be you.
You can be among the companies that get all of the inventory funding you need by being prepared. Apply for your inventory loans now, and let us buy your inventory for you today to ease some of your capital burdens.