What Is Inventory Financing And How to Get It Right?
What is Inventory Financing & How it benefits your business? Read out our guide to know about inventory financing, its advantages & disadvantages in detail!
Financial crises can occur at any time. However, such situations can be challenging if you do not have enough assets to qualify for a regular loan. Leveraging your inventory may be viable for business owners facing such financial difficulties.
Inventory financing makes sense when you are struggling to meet customer demand or need to unlock capital tied up in inventory. This guide explains everything you need to know about inventory financing and its advantages and disadvantages.
What Is Inventory Financing, And How Does It Work?
Inventory financing allows you to borrow against some or all of your inventory. Lenders will estimate the sales value of your products, provide a loan amount based on that value, and establish a repayment schedule. You will receive your inventory back for sale if you repay the loan on time and in full. Upon failure to meet the loan obligations, your lender may sell your stock to retrieve their money.
Depending on the lender, loan specifications vary. But, most lenders will offer up to 90% of the inventory's market value as a loan. Note that the terms a financial institution offers will be influenced by your industry, market value of inventory, credit history, and financial situation.
Pros And Cons Of Inventory Financing
By weighing the pros and cons of inventory loans, you can determine whether this type of financing is right for you.
• This credit plan allows businesses to retrieve funds locked in inventory and acquire more cash. A company can use this money to improve sales or expand existing operations.
• This scheme can help seasonal businesses accumulate inventory when sales are slow. For example, a seasonal business, such as a holiday decor manufacturer or a sweater maker, can benefit from inventory financing to help tide them over during slow times.
• Small and medium-sized businesses that cannot obtain a traditional loan can easily use inventory financing, even if it has a higher interest rate than a conventional loan.
• As inventory financing does not restrict the use of funds, you can use it to meet a wide range of short-term expenses, from rent payments to stockpiling supplies.
• Inventory financing is not available to service-oriented businesses. You must pledge tangible stock as collateral.
• Inventory loans typically have higher interest rates than other types of financing.
• It cannot fund long-term needs, such as growth and expansion.
• If you want to qualify for financing, your business should have a solid financial history and a good credit rating.
Eligibility Criteria For Inventory Financing
To secure a loan through this scheme, your business should:
• Be based in India
• Be operating for at least one year
• Provide evidence that the inventory is regularly converted into cash by the business
• Have a good business credit profile and a decent turnover
• Maintain complete records for high-value, tangible inventory
How To Apply For Inventory Financing?
Several lenders offer inventory financing, including traditional banks, credit unions, and online lenders. Applicants must submit a completed application form and documents for verification, including inventory information.
A lender will review your application as soon as you submit it. Inventory evaluation and a due diligence period are part of the process. Upon the lender's satisfaction, they will present their terms. Once you accept these terms and pledge your inventory as collateral, you will get your loan.
Avail Gold Loans As An Alternative To Inventory Financing
Do you want to avoid an inventory loan? A gold loan can be a great business financing alternative. Through IIFL Gold loan, you can gain instant access to money based on the value of your gold. In addition to being customer-oriented, the loan process is fast, making the loan application process hassle-free and time-saving.
IIFL gold loans are the best business loans that provide hassle-free short-term funding to keep your business running smoothly, so you can overcome inventory financing disadvantages.
Frequently Asked Questions
Q1. When financing inventory, what are the costs involved?
Ans. When you choose inventory financing, you will incur the following costs:
• Loan application/origination fees
• Appraisal fees
• Early repayment fees
• Late fees
Q2. What are the types of inventory financing?
Ans. The two types of inventory financing include:
Inventory Loan: This is a loan based on the value of the business inventory, whereby the lender provides the amount immediately.
Inventory Line of Credit: Here, borrowers can withdraw cash depending on the lender's credit limit, but they cannot exceed the maximum limit sanctioned by the lender. The interest rate only applies to the amount used out of the total sanctioned amount.