As a business owner, it is common to experience a shortage of working capital. This could result from late invoice payments, unplanned expenses like equipment breakdown, or several other circumstances beyond your control. If you find yourself in this tight financial spot, it’s only natural to consider getting a loan.
Inventory financing is one of the most popular loan options for small business owners, but there are many entrepreneurs who aren’t familiar with the process. At this point, you might begin to wonder, “What is inventory financing? Can I get a loan on inventory?” Well, the answer is yes, and you can potentially take your business to the next level by leveraging a financing option of this caliber.
Read on to get answers to the questions you may have on inventory financing and, more importantly, whether it’s a suitable avenue for your business.
What is an Inventory Loan?
An inventory loan is an asset-based loan granted to business owners based on the value of their inventory. Inventory financing is used mainly by businesses with consistently large quantities of inventory, such as wholesalers, retailers, and even restaurants.
The lender grants you a loan for a percentage of the inventory’s value, with the inventory acting as collateral. Inventory loans are commonly used for purchasing more stock, but the business owner can choose to spend it on other business expenses. If you have a short-term cash flow gap, or you want to stock up for a peak season, and you’re asking, “can I get a loan on inventory?’ You can, and it might be what you need to grow and outpace your competition.
How Do You Borrow Money Against Inventory?
When you apply for inventory financing, the lender provides you the capital as a term loan or a line of credit. The way this type of financing works will depend on how the product is structured.
Similar to real estate or equipment loans, inventory financing lenders do not give loans that are equal to the full value of the inventory you’re going to purchase. In most cases, they will finance about 50% to 80% of the inventory’s appraised liquidation value, which is often lower than the market value of the merchandise. The lender, seeking to protect themselves from a potential default, is assured that even if your business is unable to pay the loan, they’ll still be appropriately compensated.
Inventory Loans vs. Inventory Lines of Credit
Inventory financing comes in two primary forms: inventory loans and inventory lines of credit. Both types of financing use your current inventory as collateral, but how they are structured could have a different impact on your business finances.
An inventory loan is quite similar to a traditional small business loan, but it’s based on your inventory’s value. The loan is paid back to the lender in monthly installments over a fixed period or in a lump sum after the sale of the inventory. Once you’ve paid the loan in full, you can apply for another inventory loan should you require more financing.
On the other hand, an inventory line of credit gives you access to a set amount of money that you can use whenever you need it. This means you will only pay back what you have borrowed, plus interest. Credit lines are typically revolving in nature, which means that after you pay what you owe, you’re given access to the maximum approved amount again, and you won’t have to keep reapplying for funding. Inventory lines of credit are more flexible than term loans because of their revolving nature, making them a great option for an entrepreneur who wants to stay one step ahead of the latest challenge.
Pros and Cons of Getting a Loan Against Your Inventory
If you’re not sure if inventory financing is the right move for your business, take a quick look at the pros and cons to help you make the right decision.
Pros of Inventory Financing
Using inventory financing comes with several benefits, including:
- Increases Your Sales Volume: The greatest benefit to using an inventory loan to fund your business expenses is you can stock your shelves and keep up with customer demand. In addition, being able to provide your customers with the products they need, especially during peak season, significantly increases your sales and helps to boost business growth.
- Low Risk Involved: Inventory financing saves you from the risk of using your home or personal property as collateral or even signing a personal guarantee. The inventory itself is the collateral for the loan, so you won’t have to risk your personal assets to secure the funds you need to grow.
- Simple Application Process: Applying for inventory financing is a fast, hassle-free process, especially if your inventory records are well organized. If you have all your documents in order, applying for the loan is super quick and easy, especially with online lenders.
Cons of Inventory Financing
As with any other form of financing, inventory financing has drawbacks.
- High-Interest Rates: The interest rates for this financing option are typically higher than its alternatives, especially for businesses with a lower credit score or an abridged time in business. Since you are not using other assets to secure the loan, the cost of borrowing is, in turn, much higher.
- Lower Loan Amounts: Inventory financing lenders offer only a percentage of the total value of the inventory you’re looking to purchase, which means the amount you’ll get is significantly lower than what you’d be able to secure through other business financing alternatives.
- It Can be Difficult to Qualify For: Inventory financing is typically more accessible than traditional bank loans, but it does not mean it’s easy to qualify for. Sometimes, it may be difficult to sell the inventory so the lender is taking on some risk. For this reason, some lenders are hesitant to provide inventory loans or lines of credit that use inventory as collateral.
Should You Use an Inventory Loan for Your Business?
Even if you can qualify for a loan on inventory, another question is whether you should get this type of loan. To decide this, simply weigh the pros and the cons, and consider whether the upsides outweigh the downsides. Keep in mind that you can use inventory financing to cover cash flow gaps, capitalize on supplier discounts, or stock products in preparation for a busy season.
Alternatives to Inventory Loans
Inventory financing is just one type of financing for inventory purchases. If you’d like to try other funding options, you can consider one of the following:
Business Lines of Credit
A business line of credit works like a business credit card. The lender gives you access to capital up to a given amount. You can use this capital as needed to pay for business expenses, like purchasing more inventories, and you only pay interest on the amount you use.
Equipment financing is a type of loan that provides businesses with the funds to lease or purchase the equipment necessary for operation and growth. With equipment financing, you can lease virtually any equipment, from air conditioning and IT equipment to vehicles and heavy machinery.
Merchant Cash Advances
A merchant cash advance is perfect for businesses with substantial and consistent credit card sales. Merchant cash advances offer you funds in exchange for a given percentage of your business’s daily credit card revenue. The financing company then draws daily repayments from your customers’ credit and debit card purchases.
Are you ready to apply for inventory financing? National Business Capital has got you covered. You can get the best rates in inventory financing and alternative business financing options. Their team leverages a 75+ lender marketplace to match you with a reputable lender for small business loans, business lines of credit, and equipment financing.
All National Business Capital financing options are tailored to meet your business needs and help you grow your business. Visit their website today to learn more about their loan offerings. Or, if you’re ready to get started, fill out their simple online application. Don’t worry: There’s zero impact on your credit score!