One of the most important things when running a business is having access to financing whenever necessary. Inventory financing is one option that business owners can apply for when they need to meet seasonal demands or simply improve cash flow. It allows businesses with a high turnover rate, but need additional cash to replenish stocks to sell to their customers.
Without proper cash flow management, any type of business could easily go bankrupt. Applying for small business loans is a critical decision for every small business owner. However, it’s an investment worth making, especially if your business is facing cash flow issues. Borrowing money and paying it back with the interest may just be the solution that business owners need to avoid mismanagement issues.
If you’re planning to apply for inventory loans for your business, here are some facts you need to know about it:
- It’s a Secured Loan
Inventory financing is a secured business loan that lets companies borrow money from lenders and use their inventory as leverage. You don’t have pledge any of your personal or business assets since the inventory you’re looking to purchase acts as a guarantee for the loan. One of the main requirements to qualify for an inventory loan is that the business should have a high turn-over rate.
- High Turn-Over Rate is an Important Requirement
Lenders have to make sure that your inventory is sellable enough to qualify as repayment. This is usually seen through the inventory turnover rates. If it’s low, this usually reflects poor sales performance of your inventory which likely results to poor cash flow. On the other hand, high inventory turnover rates mean that the products you acquire can sell fast and generate revenues quickly. As proof, companies are required to submit financial statements so lenders would determine the turnover rate of their inventory.
- You Can Use the Borrowed Funds to Cover Other Operational Costs
The movement of cash in businesses is always unpredictable. At any time, businesses could be faced with late-paying customers or other unexpected business expenses. Whatever the reason, inventory financing can be used to cover the costs of situations, like:
- Unexpected bulk order of goods from customers that you otherwise can’t afford without back-up financing.
- Making up for the costs of off-season expenses.
- Stocking up to get ready for the peak season of your business.
- Additional financing for day to day operations because cash is tied up in inventory.
- Restocking on additional inventory to meet future market demands.
- Paying suppliers who are unable to offer extended periods for the payment of ordered inventory.
- A reliable financing option that allows business owners to take advantage of growth opportunities as they come along.
- It Needs an Efficient Inventory Management System in Place
Lenders need to know if the items in your inventory are marketable. This is why they often require business owners to provide up-to-date records of their inventory’s value, sales status, and age. It’s important to set-up an efficient inventory management system so they could track their inventory status. With an inventory management system in place, you’ll be able to know how fast or slow an item is selling.
- Payment Terms Can Vary from One Lender to Another
Payment terms for inventory financing can vary from lender to lender. Some lenders give you six months to repay the loan while others may give you a year or more. The interest rate for your inventory loan also depends on several factors including business credit score, collateral, and your time in the business.
- It Works Best with Invoice Factoring
Did you know that you can use inventory financing and invoice factoring together? In this way, you can use your company’s assets to access additional cash that benefits your business. With invoice factoring and inventory financing, you don’t only get to use your inventory as collateral, but you can also leverage your accounts receivable. Once your inventory is sold, the loan you took out will then be paid through the paid invoices.
- It’s More Difficult to Access than Other Loans
Inventory loans are usually more difficult to obtain compared to other financing options. After all, they’re relying on the sale of their client’s inventory to get their money back. If the business can’t sell the items, then lenders wouldn’t want to repossess those items either. But with enough documentation to prove a good sales performance, lending companies would be more flexible and willing to finance their client’s business.
Are You Ready to Apply for Inventory Financing for Your Small Business?
There are a lot of small business loan options for all types of businesses out there. Inventory financing, for one, is a good choice for wholesale or retail businesses as well as other businesses that deal with a huge amount of orders every day.