The Basics of Inventory Financing
What is Inventory Financing?
Inventory financing is a financing option that can be structured as a loan or line of credit. As the name implies, you would be using your inventory as collateral for the loan. This gives lenders assurance that even if a borrower defaults on a loan, they can recoup losses through the collateral.
The lender will advance you a percentage of your inventory’s appraised value. This percentage can range between 50% and 80%, depending on the liquidation value of your inventory. The liquidity of your inventory determines the terms and conditions for inventory financing.
How Do You Get Inventory Financing?
Inventory financing lenders will often have high minimum loan amounts, making inventory financing less appealing if you are looking for a smaller and more easily repayable loan. To determine whether your business qualifies, lenders will look at your personal and business credit scores, your inventory management system, financial statements, inventory turnover, and of course, the value of your inventory itself.
Some lenders may also conduct due diligence, which entails an in-person survey of your inventory.
Why Use Inventory Financing?
One reason to use inventory financing is when you need to buy more inventory. When demand outpaces your available inventory, you can use inventory financing, which will give you immediate additional funds to place more orders so that you can keep up with demand. Seasonal businesses can use inventory financing to pre-emptively prepare for a busy season.
Companies also use inventory financing to unlock the capital tied up in inventory. The capital locked away in inventory can be used for marketing, research and development, and investing in new products.
Inventory financing is a popular financing option for small/medium-sized wholesalers and retailers, given that such businesses usually lack established financial history and collateral that traditional lenders would prefer that would allow them to secure a traditional loan.
Inventory financing replenishes your inventory, improves your cash flow, and enables you to purchase additional inventory to meet any increases in demand. It is a readily available, quick, and practical financing option.
Accel Business Funding has provided business loans and business lines of credit through asset-based lending, which includes inventory financing, and has funded many businesses for more than $380 million. When banks say NO, we say YES to funding in 24 hours!