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What is Inventory Financing and How Does It Work?

Inventory Financing is a short-term loan availed against stock-in-hand or inventory. In this process, the business uses its inventory as collateral to receive financial aid. The lender provides the loan with inventory loan rates of your inventory value, in this way the inventory itself serves as collateral for the loan. 

Inventory here serves as a type of collateral for the loan, making it the loans secured by inventory.

Inventory Financing Procedure

How the Inventory Financing Procedure Works?

At the time of the approval process of the inventory financing loan, the lenders set a payment schedule to follow. For hassle-free selling and utilization of the inventories, you have to make on-time and full payments to the inventory financing lenders.

 

But before offering the loan, the specialty financing company ensures that the concerned business inventory has a good resale value in the market. Therefore, this type of financing scheme is not suitable for companies that are new in the market or don’t have any tangible products in their inventory.

Since a company’s inventory is used to avail a loan, the borrower can work with the inventory according to their convenience as long as the terms of the loan are met. If a merchant fails to repay the loan on time, the lender can repossess the company’s inventory that a company has purchased for repayment. The lender can sell that inventory to recover the lent capital and also has full authority to seize any other inventory of similar value.

Not to face these situations, inventory financing allows businesses to tap into their inventory even though it hasn’t been sold.

Businesses That Can Use Inventory Financing

Manufacturing companies that have raw materials instead of ready-to-purchase goods, can also get inventory funding on these raw materials.

Medium-sized and small businesses and wholesalers are the most preferable businesses to use inventory financing. Also, inventory financing works best for the burgeoning businesses that need to pay their suppliers before the time they take to sell the inventory.

After gaining knowledge about what is inventory financing and its procedure, now let’s move on to how it actually works.

Use Inventory Financing

How does Inventory Financing Works?

After learning about inventory financing and its suitable businesses, let’s discuss how this works. Inventory financing can easily be availed by checking, comparing and then picking loan deals from available inventory financing lenders offering this type of loan. Here are some points that will give you an idea about how it works after all. 

 

Research for Loans: 

You must look for loans that meet your choices like payback structure, financing amount, company requirements, and price.

Apply for the loan: 

The application process revolves around data. It can be specific to the lender but to run a streamlined process, one should get ready.

Get funds for the inventory: 

Most inventory financers will deposit the cash directly to your bank account, but some lenders will pay your manufactures instead.

Payback the loan: 

It depends on the loan agreement. You should follow and pay it without any payment delays. Note the following points in the case of Payback,

Good Credit Record – The customer should come out clear with all previous payables. The customer should have a good credit score to get inventory finance.

Inventory Value – The customer should provide the bank with a list of inventory they are willing to purchase with its value. The customers may need to explain the inventory valuation method to evaluate the things. For that, you can use methods like:

  • LIFO- Last In First Out Accounting
  • FIFO- First In First Out Inventory
  • Weighted Average/ Average Cost

Business Plan: 

A thorough business plan is required to provide an overview of the plans of using the proceedings of the loan and how customers are going to pay it back. Based on the business plan, the bank will decide the amount to sanction as an inventory loan.

While the customer’s inventory is waiting for the sales, the customer can keep a track of it to make sure that the inventory is in good repair and shape. The lender also has the leverage to inspect the inventory to make sure that it has retained its value. Now you are armed with knowledge about inventory financing and how it works. It’s time to gather up and see what’s next for you.

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