Inventory financing can be a great option for businesses that don’t have the cash to invest in new products or to keep up with seasonal sales demands. This type of financing is based on your actual inventory and can function as either a business term loan or as a revolving line of credit that you can draw from whenever you need funds. The amount you can borrow depends on the value of your inventory and will usually range from 20% to 65%. Because of the high risk associated with this type of lending, lenders typically charge higher interest rates to compensate for the increased likelihood of default.
The advantage of inventory financing is that it doesn’t typically require personal collateral or a credit check. This allows startups and small- to medium-sized businesses that have poor personal credit histories or limited financial history to qualify for the funding. This also means you don’t have to put up your business or personal assets as collateral in case the loan doesn’t work out. This is especially important for entrepreneurs who are just starting out or who have had a tough time getting traditional loans from banks.
Unlike other types of loans, the financing company will only be able to liquidate your inventory if you default. That is why it’s vital to make sure you only borrow what you can afford to lose if the loan isn’t paid back. If you aren’t able to sell your inventory for the amount it’s worth, you may be required to pay a fee or penalty.
The eligibility requirements for inventory financing vary by lender, but in general you can expect to have to provide a business plan detailing your revenue projections and the amount of money you need to purchase and stockpile inventory. Lenders will also want to know what kind of resale demand you have for the types of inventory you are planning to buy.
You can find inventory financing from a variety of different lenders, including traditional banks, credit unions and online lenders. You should compare the fees and rates each offers before making a decision. You’ll also want to check if there are any prepayment penalties or late fees that would add up over the course of the loan. Also, don’t forget to research the customer service satisfaction levels of each financing company you consider. You’ll want to ensure they are responsive and helpful when you need them the most.