Inventory Financing For Small Businesses
Operating a product distribution business today is no easy task. Inventory financing can help a business keep up with shipping goods on demand while maintaining healthy cashflow.
Business today face a lot of inventory challenges. Consumers expect 2 day delivery and supply chain issues have increased lead times by as much as 5-10 times normal levels. These challenges have made operating inventory heavy businesses very cash intensive. If you don’t have the right inventory in stock you will have a hard time operating a profitable business.
Below we will discuss how inventory financing works, who can benefit from it, and where to find it for your business.
What is inventory financing
Inventory financing is a way to borrow cash against new or existing inventory. A lender will evaluate the value of your inventory and your ability to sell it over time. After this evaluation is completed the lender will determine an appropriate advance amount. Then, the cash is provided against the inventory as collateral. In some instances, the lender is paid back through a factoring company that is advancing against accounts receivable from the sale of the inventory.
A business can use this loan to fund payroll, operations, or even more inventory. While most lenders prefer lending against existing inventory that is already in your warehouse, some will also finance the production of new goods or inventory in transit.
The benefits of Inventory financing
- Improved cash flow
- Consistent working capital
- Some vendors will offer early pay discount when paying for supplies in advance
- Bulk discounts are available when buying in larger quantities
Different types of inventory financing
There are a few types of inventory financing that you can qualify for depending on the type of business you are operating. Below we list the available funding programs for inventory and the best use for each program.
Asset based lenders – Asset based lenders will usually look at a combination of inventory, accounts receivable and equipment. Traditional asset based lenders will usually provide inventory financing up to a percentage of current open accounts receivable. This format may be difficult for an inventory heavy business and direct to consumer companies.
Inventory only lenders – Some lenders will provide a line of credit against inventory only as collateral for the loan. Typically reserved for better quality inventory that maintains a high resale and liquidation value. The lender is paid back as inventory sells on a weekly or monthly basis.
Supply chain finance companies – Companies with healthy cash flow that need capital for quick turn goods, or raw materials can qualify for supply chain finance. A lender will purchase inventory or materials and you pay them back on specific payment terms. Purchase order financing falls under this category.
Factors – Some factors will entertain inventory financing as an over advance against the current open accounts receivable, and others will provide funding against inventory in addition to their factoring facility. Learn more about the two types of accounts receivable factoring(recourse vs non-recourse).
Purchase Order Financing – When a company has limited assets and cash flow, but has large purchase orders from credit worthy customers they can qualify for purchase order financing. Under this scenario a lender will finance the production or acquisition of presold inventory.
What types of businesses are eligible for Inventory Financing
There are many types of businesses that qualify for inventory financing. As long as a business holds consistent levels of quality inventory they can leverage that inventory for working capital. Below are some of the key types of businesses that finance their inventory.
- Ecommerce Companies
Inventory can be the lifeblood of your growing business. Without sufficient inventory levels sales will suffer and customers will go to your competitors. If you can benefit from increasing your on hand inventory, or have inventory to leverage for working capital then you should explore inventory financing for your business.