Inventory financing is a type of short-term borrowing option that business owners use to purchase the inventory. Normally, the inventory you buy or any existing inventory the business serves as collateral for the loan. If you end up in default, those assets would be turned over to the lender in lieu of the payment.
Home Loans For Business can feature short or long payoff periods, but when they are used for inventory purchases, a short term is the norm. Depending upon the lender, this type of loan term ranges from three months to three years.
As the name suggests, inventory finance is suited to businesses that sell a tangible product. If your business is purely service-based, an inventory loan wouldn’t be a viable option for meeting the cash flow needs as you have no physical product. Wholesalers, retailers and specialty shops are the examples of businesses that use inventory financing to keep their shelves stocked.
The short term finance is widely used for purchasing of inventory because of the following reasons:
• Strong Sales Record
Lenders want to see that you have a regular stream of revenue coming in from the product sales. Demonstrating consistent sales show the lenders that you are financially capable of repaying the loan.
• Inventory Turns Are Relatively Very Quick
Moving Inventory and Stock Finance in and out of your business at a rapid pace is a good thing, not only for you but for your lender as well. You both have the reassurance that rather than collecting dust, you can sell your stock and keep your revenue numbers steady.
• Provide You with Good Deals
Buying products in bulk can save money for your business, especially if the seller offers a discount on how large your order is. If you run into a great deal on something, but you don’t want to drain your business account, use a term loan to grab the extra inventory and don’t miss it out. Getting products at a reduced price can help to increase your profits when you eventually sell what you have purchased.
The Challenges of Inventory Financing
While inventory financing may appear attractive for the business owners, lenders identify pitfalls to inventory financing and often consider this a form of unsecured loan. You get the funds with the expectation that you can sell the merchandise within the prescribed payment period.
By giving the amount the lenders assume that certain products will not be eligible for financing. Businesses whose products are eligible might face a high cost to finance because of the assumed risk. Lenders need regular reports on the values of some inventory to make sure that it can be sold at a price that is adequate enough for the repayment of loan.
Inventory financing is a good short-term loan option for a business expecting to surge in demand, but be sure to evaluate other options before settling for a loan that is less than optimal for your business. A business line of credit from a vendor or a bank, with which you have a solid relationship, is less expensive and easier to obtain.
Get in contact with Global Capital Business Finance, if you want to know more about Inventory and Stock Finance. They allow the businesses to use its inventory as collateral to obtain a short term loan. This gives your business the ability to raise the capital or fund the purchases of new inventory against existing inventory to optimize cash flow.
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