Business

Inventory Financing: A Guide to Inventory Loans

Most companies experience times when they must tighten their financial belts. A sudden downturn in the economy or new government legislation can throw business operations for a financial loop.

Company owners must put their business in a position to maximize opportunity when it presents itself. This requires maintaining the sales pipeline, managing expenses, and reinvesting profits into the company.

A business opportunity can present itself out of the blue. If the funds to purchase more inventory aren’t available, it’s wise to find an alternative solution promptly. Inventory financing is one.

In 2019, research conducted by the United States Small Business Administration found that 99% of American firms are small businesses. Plus, they employ 47% of individuals in the private sector. 

A different survey found that 52% of small companies require more financing. However, when the economy runs sluggishly, banks are less likely to lend. Therefore, business owners must find different venues for obtaining financing. 

Let’s take a look at inventory financing and a guide to inventory loans.

What Is Inventory Financing?

Inventory financing is debt. The applicant receives a short-term loan or a line of credit. In the business world, several loans exist including:

  • Small business
  • Term
  • Personal

Business owners can also obtain credit cards or merchant cash advances.

When an owner obtains a loan, it’s important to apply for the correct type; they have strict guidelines. Owners who obtain inventory financing must use the funds to purchase inventory. 

If you need to finance new machine purchases, it’s better to apply for an equipment loan. 

Read more about inventory loans at Now Corp.

How Does a Business Apply?

To obtain an inventory loan, apply with an online lender. Although it’s a loan, industry insiders encourage business owners to apply through an online or non-bank lender. The process moves slowly with banks. 

One reason why the process moves slowly with banks is that they remain conservative in their lending practices. Since they service debt and customer deposits, banks must maintain a liquidity threshold daily.

When you apply for an inventory loan, start the process by finding a lender. Then, fill out the application. It’s possible to receive a decision promptly. 

Although the application process is short, business owners must keep meticulous inventory records. The information improves the applicant’s position. If the lender sees that the applicant maintains solid sales, it increases the lender’s confidence in the transaction. 

How Does It Work?

Business owners who receive approval will also receive a welcome packet detailing the loan’s bullet points. The packet outlines the financing terms such as interest rate, fees, and due date.

These loans finance inventory that the applicant does not plan to sell right away. From a lender’s perspective, this puts them at risk. A borrower’s ability to repay their debt depends on their sales. 

Lenders issue these loans because the inventory becomes collateral against the debt. If the borrower fails to repay the line of credit, the lender takes possession of the inventory.

Since the financing depends on goods, representatives from the lender might inspect the merchandise. They want to ensure that the applicants used the funds for the intended purpose too.

Is This the Right Option for My Company?

Inventory financing makes sense for retailers and wholesalers, especially small and mid-size companies. It allows them to keep things in stock before demand increases.

The holiday shopping season in the United States starts in November. Therefore, retailers and wholesalers must prepare beforehand. In addition, other shopping events occur such as back to school.

Inventory loans remain a good option for those who need the funds promptly. 

What Are the Benefits of Inventory Financing?

An inventory loan provides several benefits for business owners. It finances the purchase of goods for future sale. Thus, the company can stock up. 

The funds act as an infusion of capital. This improves the company’s cash flow. In addition, business owners don’t need to make sacrifices in other areas of their company.

When a retailer comes up short on funds, they often cut employee hours and positions. Obtaining an inventory loan means that current employees can keep their jobs.

Conclusion

Successful company owners must get creative sometimes. The road to success is rarely a straight line. Entrepreneurs must adapt to the business environment and think on their feet. Sometimes an inventory financing loan is a sound financing option. 

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