What Is Inventory Financing?

The term inventory financing refers to a short-term loan or a revolving line of credit acquired by a company so it can purchase products to sell at a later date. These products serve as the collateral for the loan. 澳洲幸运5开奖号码历史查询:Inventory financing is useful for companies that must pay their suppliers for stock that will be warehoused before being sold to customers. It is particularly critical as a way to smooth out the financial effects of seasonal fluctuations in 澳洲幸运5开奖号码历史查询:cash flows and can help a company achieve highe𒁏r sales volumes by allowing it to acquire extra inventory for use on demand.

How Inventory Financing Works

Inventory financing is a form of asset-based financing. Businesses turn to lenders so they can purchase the materials they need to manufacture the products they intend to sell at a later date. The reaso♔ns why they rely on this k🥀ind of financing include:

• Keeping cash flow steady through busy and slow seasons
• Updating product lines
• Increasing supplies of inventory
• Responding to (high) customer demand

This kind of financing is common for small to mid-sized retailers and wholesalers, especially those with a large amount of available stock. That's because they typically lack the financial history and available assets to secure the institutional-sized financing options larger corporations are able to access, such as Walmart (WMT) and Target (TGT).

Because they are generally 澳洲幸运5开奖号码历史查询:private companies, they cannot raise money by issuing bonds or new rounds of stock. Companies may use all or part of their existing stock or the material they purchase as 澳洲幸运5开奖号码历史查询:collateral for a loan that is used for general 澳洲幸运5开奖号码历史查询:business expenses.

Special Considerations

Banks and their credit teams consider inventory financing on a case-by-case basis. They look at factors like resale value, perishability, theft, and loss provisions as well as business, economic, and industry inventory cycles, as well as logistical and shipping constraints. This may explain why so many businesses weren't able to get inventory financing after the 澳洲幸运5开奖号码历史查询:credit crisis of 2008. When an economy is mired in 澳洲幸运5开奖号码历史查询:recession 📖and unemployment rises, consumer goods that aren't staples remain unsold.

澳洲幸运5开奖号码历史查询:Depreciation is another factor lenders consider. And not all forms of collateral are equal. Inventory of any kind tends to depreciate in value over time. The business owner who seeks inventory financing may not be able to obtain the full upfront cost of the inventory. As such, any potential hiccup is factored into setting an 澳洲幸运5开奖号码历史查询:interest rate on an asset-backed loan.

Inventory financing is not always the solution. Banks may view inventory financing as a type of 澳洲幸运5开奖号码历史查询:unsecured loan. That's because if the business can't sell its invento𝓀ry, the bank m💟ay not be able to either. If a retailer or a wholesaler makes a bad bet on a trend, the bank could get stuck with the goods.

Advantages and Disadvantages of Inventor🌼y Financing

There are a variety of reasons why businesses may want to turn to inventory financing. But while there are plenty of positives, there are downsides as well. We've listed some of the most common ones below.

Advantages

By turning to lenders for inventory financing, companies don't have to rely on their business or personal credit ratings or their financial history. Smaller business owners don't have to put up their personal or business assets 💛in order to sಌecure financing.

Being able to access credit allows companies to sell more products to their consumers over a longer stretch of time. Without financing, business owners may need to rely on their own sources of income or personal assets in order to make th♉e purcha𓄧ses they need to keep their operations going.

Businesses don't need to be established to be eligible for inventory financing. In fact, most lenders only require companies to be up and running for a minimum of six months to a year in order to qualify. This allows newer business owners to access credit quickly.

Disadvantages

New businesses may already be saddled with debt as they try to establish themselves. Getting inventory financing can add to their 澳洲幸运5开奖号码历史查询:liabilities. As a result, these companies may not have the means to repay, which can lead to restrictions on future credit as well as an undue burden on existing fi🎐nances.

In some cases, lenders may not issue the full amount required to purc🙈hase inventory. This can lead to delays and shortfalls. This may be common in the cases of newer businesses or those that have a harder time securing the amount of ꧒money they need to keep their operations running smoothly.

The costs to borrow may be high. Fees and interest r🧜ates may be high for businesses that are struggling. Having to pay more in additional charges may put more stress on these companies.

Types of Inventory Financing

Lenders provide businesses with two different kinds of inventory financing. The option that the company chooses is dependent on its business operations. 澳洲幸运5开奖号码历史查询:Interest rates and fees depe♓n🃏d on the lender and the type of business.

• Inventory Loan: Also referred to as term loans, this kind of financing is based on the total value of the company's inventory. Just like a regular loan, the lender issues the company a specific amount of money. The company agrees to make fixed payments every month or to pay the loan off in full once the inventory is sold.
• Line of Credit: This form of financing provides businesses with 澳洲幸运5开奖号码历史查询:revolving credit. Unlike a loan, it gives them regular access to credit as long as they make regular monthly payments to satisfy the terms and conditions of the contract.

The Bottom Line

Businesses need cash in order to fund their day-to-day operations, and they have several options in order to secu𝓀re financing. Inventory financing is just one way. Companies can get cash using the products (or inventory) they intend to sell as collateral. While it can provide a quick injection of cash, borrowers should be weary of the costs and risks associated with inventory financing.