Financial trouble can happen to any business. Due to a lack of funds during financial troubles, companies need financial help to do business. In such a situation, inventory financing is helpful for companies.
Businesses face seasonal economic fluctuation occasionally and require money to get the extra inventory per the demand. With inventory financing, companies can opt for loans as a revolving line of credit to balance adequate cash flow.
In this blog, you will learn about how inventory financing works, the pros and cons of financing the inventory, and how to check its eligibility criteria. With the right financial help, businesses can easily reach desired goals and sustain growth.
What Is Inventory Financing?
Inventory financing, also known as warehouse financing, is helpful for companies that require short-term loans. It is a revolving line of credit that a business can use to buy products or raw materials. These products are also the security for the loan. These loans effectively balance the cash flow and achieve a higher sales target.
Inventory financing allows businesses to borrow money by using inventory products as a guarantee. Lenders estimate the sales and offer loan amounts with a planned repayment schedule. It is an asset-based loan facility that can help businesses with large inventories as a form of credit to meet demand. The lenders either get paid by the company according to scheduled repayment plans or after selling the security.
How Inventory Financing Works?
Inventory financing is a loan a business takes during a particular financial situation to fulfill demand. Once the lender has calculated the loan amount as per sales value and schedules a repayment plan, the company will get inventory for selling once the loan is repaid on time.
If the company fails to repay the loan on time, the lender may sell the inventory to obtain the amount. The value of a loan varies depending on the industry and financial situation of the business. Due to factors like depreciation, most lenders tend not to pay the total value of inventory upfront.
The loan is mainly dependent on the market situation. The more demand for the product, the better value the business can obtain for a loan. This method of inventory financing is helpful for many mid-sized retailers and wholesalers, especially those with large inventory at hand. Also, banks view such loans as unsecured, demanding higher interest rates.
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Special Considerations in Inventory Financing
Most banks and their teams consider inventory financing as an unsecured loan type. If a business fails to repay loans, the banks are left with a large amount of inventory, which may or may not have demand in the market. Also, inventory goods are prone to theft, loss, and lesser value in recession times.
The other factor in financing an inventory is depreciation. Inventory goods lose their market value over time. The business owners might repay the loan, but they might need to obtain an excellent upfront cost for inventory with decreasing prices. With the rise in unemployment and recession, consumer goods lose demand and value.
Read Also: What Is Sales and Inventory Management System?
Advantages and Disadvantages of Inventory Financing
There are a variety of advantages related to inventory financing. Some common pros are listed below.
Pros
- Small business owners can take a loan without putting personal belongings as a guarantee. Lenders offer loans without depending on history or credit ratings.
- With better credit access, businesses can produce and sell more products. Business owners can utilize their generated assets for smoother operations and do not need personal assets for professional usage.
- Businesses new to the industry can also take up loans by using inventory. It helps new business owners to access better credit and expand their business more effectively.
- Companies can sell more products and earn profits for a more extended period with better credit access.
- Inventory financing allows businesses to manage cash flow and meet short-term financial needs.
Cons
With the advantages, there are also some disadvantages related to inventory financing. Some common cons are listed below.
- Business owners new to the industry need to estimate the demand correctly and get into a debt loop in an attempt to establish a business. Attempting to take credit without previous repayment can burden future goals and opportunities for companies.
- Sometimes, the lender might not pay the total inventory value due to risk or market demand decrease. With limited access to credit, some businesses need help to fulfill the required production.
- Fees and interest rates are always tricky for businesses to repay. Sometimes, due to the non-patent of loans, companies have to pay additional interest rates or charges as fines. The borrowing costs are high, and newer established businesses cannot sustain profits with higher interest rates.
- Repayment of loans can become a burden for struggling or newly established companies. Additional charges and fines also increase the problem and delay loan repayment.
- Depending too heavily on inventory financing can lead to the risk of overstocking, tying up valuable capital in excess inventory that may become outdated or devalued, negatively affecting profits.
Types of Inventory Financing
Most lenders offer companies two types of inventory financing options. The kind of inventory financing option depends on the operations and production process. Both types have different interest rates and differ for other businesses. These types are:
Inventory Loan
It is a loan equal to the total inventory value as security. It is similar to any other loan, and the company pays back each installment monthly or at once after inventory is sold. It is a fixed amount of money that a company borrows.
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Line of Credit
It is a revolving line of credit that is different from a loan. It is a situation in which a business takes money at regular intervals as long as they repay the money and fulfill all terms and conditions of the contract.
What Is the Eligibility Criteria for Inventory Financing?
The eligibility criteria for inventory planning include the following:
- The age of the borrower should be 18 years and above.
- The minimum operation years for business should be at least one.
- Applicants should be Indian citizens with no credit default.
- A good credit score is an advantage.
- The lenders also decide the minimum annual turnover, depending on the industry.
How To Apply For Inventory Financing?
Businesses can take inventory finance from any available lender, just like other loans or lines of credit. Also, financial institutions, including private and public sector banks and NBFCs or Non-Banking Financial Companies, offer inventory finance to businesses. Companies can check and compare various lenders to take advantage of minimum interest rates and maximum value for their inventory from an authorized record.
Enhance your Inventory Financing With TranZact
TranZact helps businesses to identify and manage inventory funding easily. With Tranzact, companies can achieve better value for inventory with minimum interest rates and the right strategy to avail better line of credit and smooth financing process and minimize any issues. The business new to the industry can also benefit from our specialized services and can achieve better sales outcomes.
FAQs on Inventory Financing
1. What are the costs involved in inventory financing?
The costs involved in inventory financing include:
- The loan amount.
- The inventory valuations.
- Interest on the loan amount.
- The decreasing value of goods.
All these costs are time-dependent, and the value of goods and services decreases with time. The interest rate is also based on a depreciating factor. The faster the value depreciates, the more interest the lender will demand.
2. What are the features of inventory financing?
Inventory financing is an asset-based loan option using products and materials in the inventory as a guarantee for the loan taken. The loan value is either equivalent or less than the inventory value. It can help businesses to use this loan as a line of credit to expand business without using personal assets.
3. What types of businesses benefit from Inventory Financing?
Small and privately owned businesses mostly use inventory financing to expand their business. It is also used by manufacturers and wholesalers with large inventories, which they can use as security. This type of financing also helps newly established companies with little network or sales to take loans from banks or other lenders.
