What is an Inventory Loan?
An inventory loan is a type of small-term business loan that companies offer to retailers so that they can easily buy stock. The loan is secured against the store, which is used as collateral in the case when the stock is not sold.
An inventory loan is beneficial for the business that pays their supplier for the stock they will store before being sold to their customers. Thus, it can help the company to achieve higher sales volumes.
While the retailers have enough capital to cover their stock orders, sometimes they don’t have enough capital to cover the stock they need, or maybe they find a deal that requires more than their currency has available.
Therefore, a retailer can apply for an Inventory loan if they think that it will be to sell all of their stock before the invoice for that stock is due for the payment. Primarily, the retailer uses these loans on events such as Christmas, when the retailer sells a large volume of stock.
How does an Inventory Loan Work?
An inventory loan is a type of asset-based financing. Businesses turn to online lenders to buy the material to manufacture the products they need to sell in the market.
This kind of finance is primarily common for small to mid-size businesses, wholesalers, and retailers, especially those with a large amount of available stock.
Because they are generally private organizations, they cannot raise money by issuing new rounds of stock and by bonds. Companies use all or a part of their existing stock or material they purchase as collateral for the loan.
There is no doubt that inventory financing allows businesses to purchase inventory to run their business smoothly and efficiently. So, below are the reasons why should the company should rely on this kind of loan:
- Updating products lines
- Keep their cash flow steady through slow and busy seasons
- Responding to customer’s demand
- Increase the supplies of inventory
Types of Inventory Financing
Lenders provide the business with two different kinds of inventory financing. But, the option that the company chooses is dependent on the type of business operations. Moreover, the interest rate and the fee depend on the type of business and the lender.
So, there are two main types of inventory financing; an inventory loan and a line of credit.
Both types of loans are secured because they leverage your inventory as collateral. Therefore, these types of loans mean different things for the future of your business financing.
This is also known as term loans, and this type of financing is based on the total value of the organization’s inventory. Like a traditional loan, the lender issues the company a specific amount of money. The company will agree to make fixed payments every month or pay the loan off once they sell the inventory.
Line of Credit
The line of credit provides the company with revolving credit, and it gives them easy access to credit as long as they make regular monthly payments to satisfy the terms and conditions of the contract.
If I put it in simple words, then it means that an inventory line of credit can provide you with extra money on an ongoing and as you need. Many business owners prefer this line of credit because they can handle any unforeseeable expenses that may come up.
Advantages and Disadvantages of Inventory Loans
There are a variety of reasons why businesses want inventory financing. But, as there are a lot of advantages, it also comes up with some downsides. So, let’s get into it and explore them.
When companies turn to lenders for inventory finance, they don’t have to rely on their business or personal credit rating or history. Similarly, smaller business owners don’t have to put up their business or personal assets to secure financing.
Accessing the credit allows the companies to sell more products to their consumers over a long period. Without this financing, business holders may need to rely on their income or personal asset to make the purchases they need to keep their business running smoothly.
The best thing about these loans is that you don’t need to have an established business to get this loan. Most lenders only require companies to be in the market and run their business for a maximum of six months to a year to qualify. Thus, this allows the newer business owners to access credit instantly.
The startup business may be struggling with debt because they are trying to establish themselves. So, getting inventory can add more to their liabilities. The outcome of this is that these companies may not have the proper means to repay, leading to restrictions on future credit and a burden on current finances.
In some cases, lenders may not issue the total amount that the borrower requires for their business to purchase inventory. This is the case for some new companies that have a more challenging time securing the amount of money they need to keep their operations running.
But, the cost of this can be high. Interest rates and fees may be much higher for the business that is in their struggling duration. Thus, having more charges for this can stress the companies.
So, you can check the details and the advantages of this loan before applying for them.
How to Apply for Inventory Financing?
If you are interested and want to apply for inventory financing, these steps will help you.
You can apply for inventory financing through a traditional bank, a credit union, or an online lender. Inventory loans can be recurring; therefore, it is essential to do your due diligence and find the best company for your business.
Inventory loans for small businesses hinge on the value of the inventory and its sale shortly. During the application process, lenders will want to see the documents that prove that you have excellent inventory turnover. These include;
- Balance sheet
- Sales projections
- Cash flow statement
- Solid business plan
Hence, the lenders will also want to see that you have an excellent inventory management system, so they don’t have to worry that you are buying more inventory than you need and can sell.
To sum up all the discussion, we can say that loans are helpful for the business, and they can help you make your business grow and expand. But, it would help if you look for a well-established company that can give you the loan. Therefore, BitX Funding is one of the best companies with many financial experts who provide you with Inventory loans.