financialtreat – will explain about What is inventory finance and how does it work? which you will get in the following article. Let’s look at this article carefully!
When you need small business financing, utilizing your inventory can be a viable option. This kind of funding allows you to buy much-needed inventory by using the items you want to buy as collateral. Therefore, it is necessary to know about inventory finance and how it works.
Small business loan inventory can be convenient if you need to unlock capital tied up in inventory or if you’re struggling to meet customer demand. But how do you get inventory finance, and what are the pros and cons? This guide will explain everything you need to know about inventory finance, how it works, and how to use it to your advantage.
What is inventory finance?
Inventory finance is a type of short-term small business funding that has one goal: to help you buy inventory for your business.
Small businesses are turning to inventory finance for:
- Making up for short-term cash shortfalls
- Preparing and stockpiling inventory for the busy season
- Expand the product line
- Unlock inventory-bound capital
- Secure down payments to meet customer demand (and increase sales).
With other small business loans, you may need to offer property or assets as collateral. Your lender uses this collateral as security if you default on the loan.
Inventory finance loans do not require you to offer a home, car, or appliance as collateral. Instead, the inventory you plan to purchase secures the loan. If you are unable to make payments, the lender may confiscate the shares you have not sold to cover the amount you owe on the loan.
Inventory Finance Rates and Requirements
Interest rates, fees, and terms of payment for inventory finance may vary among different lenders and funding companies. But in general, you can expect requirements in this range when looking for inventory loans:
- Loan amount: up to 100% of the liquidation value of the inventory (although lenders typically finance between 50% and 80%).
- Payment terms: Up to 36 months, but three to 12 months are the most common.
- Annual percentage rate (APR): 4% to 99%, depending on lender, loan terms, and creditworthiness
- Cost: Lenders may require an appraisal fee to determine inventory value, an origination fee, or a prepayment penalty.
The good news is that many lenders offer inventory finance, either in the form of business term loans or business lines of credit. The more loan options you compare, the better your chances are of finding an inventory loan with the best terms available for your situation.
What Is the Process of Inventory Financing?
There are two ways inventory finance can work. You can get a term loan from a bank or online lender to buy inventory, or you can get a line of credit. The difference is that a term loan provides the full amount of money upfront, which you usually repay in a fixed monthly payment over a predetermined period.
A line of credit can be drawn as needed to purchase inventory. Unlike a term loan, you only pay interest on the portion of the credit limit you use. And, assuming the line of credit “rotates,” once you pay off your debt, your credit line returns to the initially agreed amount.
Here’s an example of how it works: Say that you need to buy $500,000 in inventory to prepare your business for your peak season. You apply for financing with an online lender who determines that the liquidation value of the asset is $350,000. The lender then agrees to lend you 80% of that amount, which would amount to $280,000 with a fixed interest rate of 17%.
Let’s say you use the full $280,000. With a payment term of 12 monthly payments, you will have to pay back $327,600 ($280,000 plus $47,600 in interest) in total. That makes it $27,300 per month.
After 12 months, you pay back what you borrowed in full. You have full access to another $280,000 and can use your credit limit to purchase inventory as needed.
Let’s say you get a better deal by buying inventory in bulk, so you decide to withdraw $50,000 from 50,000. You still have access to the remaining $230,000, and once you pay back the $50,000 you used (plus interest), your credit limit will come back to $280,000.
With both types of financing, the inventory you buy serves as collateral for the loan. The amount you can borrow depends on the lender. For example, you may be able to borrow up to 100% of the liquidation value of inventory from Lender A.
However, Lender B may only allow you to borrow up to 70% of the liquidation value. It is common for lenders to ask for a professional appraisal to find out how much your inventory would be worth if you sold it.
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Pros and Cons of Inventory Finance
Like any other type of small business financing, it is important to consider the advantages and disadvantages of an inventory loan. Weighing the pros and cons can help you decide if it’s the right type of financing to meet your inventory buying needs.
- When you use inventory as collateral for a loan, you don’t have to put up business or personal assets.
- Loan funding is generally quick once you’ve been approved.
- Personal credit that is less than a star is not necessarily a deal-breaker for approval.
- Most of the time, you only need one year (and sometimes only six months) of business to qualify.
- You can move quickly to buy inventory when discounts or bargains come.
- Finance for inventory can help you save up for the busy season so you don’t lose sales.
- You can free up cash tied up in the inventory.
- You most likely won’t be able to borrow the full amount required to purchase inventory.
- Inventory financing usually requires more research than any other business loan to figure out how much the inventory is worth if it were sold. This can take time and cost money.
- Some lenders may ask you to borrow a minimum amount (in some cases, as much as $500,000).
- Interest rates are usually higher compared to other small business financing options.
- Your lender may want regular inventory and sales checks, which are usually done by third-party auditors.
- In addition, keep in mind that you can only use inventory loans to purchase inventory. Conversely, if you get a regular term loan or line of credit, you can use the money for inventory or any other purpose for your business.
Well, those are some reviews that discuss inventory finance and how it works. With the discussion of this article, hopefully it will be useful and can be used as a reference.