Your business just got a large order, and you need cash to purchase the goods in bulk. However, your current cash reserves are fully committed and you don’t have enough working capital to cover the purchase and the payment of associated expenses. Fortunately, inventory financing can help bridge this short-term cash flow gap by lending you money against the value of your existing inventory. This type of financing can be offered as a loan or a line of credit.
Using the items in your existing inventory as collateral, lenders will assess their worth and provide you with a loan amount that ranges from 20% to 65% of the total appraised value. This is typically more generous than the loan minimums required for small business loans, and a less stringent credit score requirement can make this type of financing attractive for newer or underperforming businesses.
This kind of financing can be obtained at banks and online lenders, although some prefer to work with established business relationships that can help them expedite the process of reviewing and funding applications. It is not as common as other types of business financing, such as a small business loan or a merchant cash advance, but it can be helpful for retailers and ecommerce companies who want to avoid the time and cost of procuring a large loan from a bank or an independent commercial finance company.
The biggest benefit of this type of financing is its ease and speed of application. Lenders review your inventory and may visit your office space or warehouse to examine the merchandise. They will also look at your current sales history and profit and loss statements to see how well your business is performing. Some lenders even require a projection or forecast of future sales, and these details are important for qualifying for the financing.
Another benefit of inventory financing is that you don’t need to pledge any personal or business assets as security, making it a good option for startups and smaller companies who have insufficient cash flow to obtain traditional business loans. Less-than-stellar personal credit isn’t usually a deal breaker for this kind of financing, and you can often get approved in just a few days after the lender performs due diligence on your inventory.
While this type of financing can be beneficial, it isn’t right for every business. Most companies that use this kind of financing have a physical retail or ecommerce storefront, and it’s hard to find lenders that will support service-based companies or those with no products at all. If you have other options for financing your inventory, consider them before pursuing this type of financing.