Inventory finance provides small and medium-sized businesses with loans to purchase inventory, securing the loan against the value of that inventory. Also called an inventory business loan, it provides working capital to maintain sufficient stock levels to meet customer demand. In this blog, we will talk about how inventory finance works and important considerations regarding these loans.
Access to working capital is crucial for businesses to operate efficiently, take on new business, and manage uneven cash flows. Inventory is often one of the largest and most liquid assets a business owns. Inventory finance allows maximizing this asset to unlock necessary working capital. The loan value is tied directly to inventory volumes and turnover rates. This specialized financing meets a key need for lean businesses working to accelerate sustainable growth.
What is inventory financing?
Inventory financing is a type of short-term working capital loan. The key feature of inventory financing that sets it apart is its distinct purpose. While traditional business loans may be used for multiple general business expenses, inventory financing is a dedicated line of credit for purchasing tangible goods for sale. Amounts borrowed are expected to be repaid quickly upon the sale of those specific inventory items.
Here are some of the key features of this type of loan:
Funds used to purchase inventory
Rather than waiting weeks for revenue from inventory sales to start flowing in, inventory financing accelerates access to capital when you need to make large wholesale stock orders. The loan provides immediate working funds that must, in turn, be used to increase your on-hand inventory volumes.
Inventory as collateral
To secure inventory loans, the products you purchase serve as collateral until sold. If sales underperform, the unsold stock can cover your obligation. Financing decisions evaluate both existing inventory value and expected turnover rates. Higher inventory turnover means faster repayment capacity.
How does inventory financing work?
Inventory financing provides access to dedicated working capital for wholesale inventory purchases based on the value of a company’s existing stock. Qualifying businesses first submit an inventory appraisal and records of historical inventory turnover rates. Financiers then assess lending limits aligned with the liquidation timeframes the current inventory supports.
Once approved for a credit line or loan, the business receives funds earmarked to place orders from manufacturers, distributors, or other suppliers to replenish inventory. The purchased products serve as collateral securing the financing until sold.
Throughout the process, open communication ensures both parties understand ongoing inventory volumes, sales rates, and lending capacity. As the borrower sells inventory, they repay the principal borrowed plus any agreed fees and interest. Timely repayments maintain the financing relationship while slower sales may require adjustments to align outstanding borrowing with inventory values.
Eligibility
To qualify for inventory financing, some key eligibility criteria commonly include:
Application process
Providers evaluate applications to assess borrowing needs against risk factors and determine suitable lending amounts. Submitting documents outlining the key requirements below allows financiers to promptly assess inventory financing requests.
Requirements:
- 1+ Years in Operation: Established companies with a trading history demonstrate market viability and reorder demand.
- Minimum Annual Revenue of $100,000: Sufficient scale to utilize inventory financing and reliably forecast stock turnover rates.
- Good Business Credit Standing: No major credit violations or non-payments in existing vendor and lender relationships
- Steady Sales History: Stable historical revenues indicate reliable ongoing demand to sell financed inventory
- No major credit violation: Good standing allows building cooperative inventory financing partnerships and growth
Meeting these criteria displays the capacity to utilize inventory business loans from capital venture firms and mutually benefit from the arrangement.
Benefits of Inventory Finance
Here are the benefits of inventory finance:
Can leverage the full potential of unsold inventory
Inventory is essential for companies that sell retail products but is often overlooked as collateral. Inventory financing lets you tap into current unsold stock value to fuel further inventory investments. This optimizes the use of one of the largest assets many operations own to accelerate cash access.
Unpaid invoices and low bank balances constrain many small businesses. But with robust procedures for monitoring and managing inventory, financing tied directly to stock values provides flexible capital in sync with operations. Growing companies can scale inventory financing in proportion to rising revenues.
Favorable Payment Options
Since repayment obligations align directly with inventory turnover into sales, financing allows matching cash outflow to inflow timing. Payments only become due as the collateral items sell. This means avoiding lump sum payment shocks ill-suited to the inherent unevenness of retail revenues over weeks and months.
Providers understand this seasonality because inventory movement analytics underpin risk analysis. Customized inventory lending products cater to industries with higher peaks like importers ahead of holidays or agriculture throughput seasons.
Preparation for Busy Season
Forecasting sales demand and then purchasing sufficient inventory is crucial yet challenging, especially for smaller firms lacking data analytics. Inventory financing helps smooth uneven cash flows to build stocks when needed, not just when excess working capital exists.
This helps mitigate lost sales from stock-outs during forecasting errors or suppliers with minimum order quantities. With capital secured in advance, businesses can plan and pace inventory growth aligned with sales expectations.
Conclusion
Looking for inventory finance? Choose Avon River Ventures. At Avon River Ventures, we specialize in inventory business loans and working capital solutions. Our customized financing helps unlock cash from your existing inventory assets.
This allows you to have the right stock on hand to meet customer demand without long wait times. We understand how difficult it gets for any business to access adequate retail inventory financing. We take pride in our due diligence, underwriting, and appraisal.
Our process could be as short as 3-6 weeks from submission of the required documents to appraisal and disbursement of the capital as a trusted venture firm. We also provide asset-based lending, invoice factoring, and more! Contact us today!
FAQs
What types of companies use inventory finance?
Inventory finance helps companies that manufacture, import, distribute, or retail sell physical goods that must be stocked. It provides working capital based on the value of unsold inventory assets. Companies with some or all these activities benefit from tapping this funding source.
How does the inventory finance process work?
The financing is secured against the inventory you purchase with the loan. Approved providers appraise the current value and turnover rates of your stock-on-hand to approve lending amounts. You receive the working capital quickly after completing paperwork and setting up mechanisms to repay as inventory is sold.
How is inventory finance different from factoring?
Invoice factoring unlocks money owed for inventory that you already sold to customers. Inventory finance instead lets you purchase and hold optimal unsold stock levels to sustain smooth operations and meet demand. Factoring and inventory finance meet related working capital needs.