Experiencing financial runouts is challenging to deal with, especially for business owners or entrepreneurs; in cases where they are stuck dealing with a financial crisis, they might want to make use of their inventory or account receivables as collateral to achieve a secured loan, so they meet their financial needs along with the company’s objectives.
Similarly, irrespective of whether you are an entrepreneur, run a multinational corporation or are simply planning to start a business on your own, you will require financial assistance at some point to meet your business needs since it is a significant investment. Every business plan, regardless of scale (small or large), requires a sufficient amount of funding to stay in the market for the long term.
This funding can come from any legally reputable source, including your savings, any equity, asking recognized organisation’s for investors who are willing to contribute their money or shares in your company or taking out a loan from any bank or financial institution, which is why a short-term personal loan is taken out to meet a short-term personal or business capital requirement. Because it is a form of credit, it entails repaying the principal amount plus interest by a specified due date, which is usually one year after the loan is obtained.
When thinking about short-term financing options, we typically think of something which possibly supports us in our financing to increase the cash flow and later result in reinvesting that into business and then grow the business faster in the future. One such option is inventory financing. Let’s dig deeper into the aspects of inventory financing and its uses.
What is Inventory Financing?
Let’s know more about what makes inventory financing worth considering for business plans and its working capital and process?
Good business is all about making intelligent choices, firm decisions for the betterment of the company, and maximising the utilisation of resources whether it’s the type of product or service you want to sell or the supplier you want to buy from, it’s all part of the decision-making process in running a good business to make better margins and maintain good relationships with the customers at the same time.
For this, most entrepreneurs, startups, or firms prefer taking debts. But many retailers, manufacturers, and dealers prefer inventory financing to take care of their emergency business needs. Since it provides immediate access to funds. The term “inventory financing” refers to a short-term loan or revolving line of credit obtained by a business to purchase things to resell later. These items are useful as collateral for the loan.
This financial solution helps small or large-scale enterprises in improving cash flow, expanding sales and operation, growing capital, and preparing for the worst that might appear in future years.
With the help of this asset-based financing, lenders help businesses buy the resources they need to make products they plan to sell later. Regardless of the scale production and establishment of the company, retailers or wholesalers, those with a substantial volume of available inventory frequently use this type of financing. They usually lack the necessary financial history and assets to obtain institutional financing.
Types of Inventory Financing:
There are two sorts of financing schemes that a business might apply for, depending on its service, nature, and products.
1. Inventory loan: This is primarily appropriate when a company needs money quickly and wants to use the resale value of its inventory as collateral. Borrowers can get this type of loan one time. This is similar to a traditional loan where the lender grants the borrower a sufficiently specific amount of money for an agreed period.
2. Line of credit: Businesses choose the inventory line of credit because it can cover unexpected expenses that arise after receiving the funds. Here, the lender gives the borrower extra cash regularly as per the requirement. By allowing regular access to credit, to make regular checks on monthly payments and have clarity and satisfaction regarding terms and conditions which they agreed upon.
Advantages of Inventory Financing
- Companies that need to pay their suppliers for merchandise warehoused before selling to customers can employ inventory financing.
- It’s essential for smoothing out the financial effects of seasonal cash flow changes
- It can assist a company in reaching bigger sales volumes by allowing it to buy extra inventory on demand. Businesses who have an extensive list but are unable to obtain standard bank loans can also use inventory financing to obtain funds at a reduced rate
- Through inventory financing, a company can obtain liquid cash to cover non-inventory-related expenses. For instance, if a merchant gets funds through this method, they can use the inventory as long as the payments are made on time. If the company fails to make timely payments, the lender has complete authority to take the inventory in question, as well as any other inventory of the comparable value.
- You can get approval for a line of credit for an inventory value of 50%
- Rates are usually 5 to 15% depending on the type of inventory
- You get speedy funding in three weeks or less.
- Financing is generally collateralised by the list it is used to purchase.
Apart from these fair benefits of inventory financing, there exist some disadvantages as well, which are important to have knowledge about for both the borrower and the lender.
- Although many businesses do not depend on their own or the employee’s credit histories or assets to qualify, they may be burdened by additional debt. They rely on consistent ash flow, updated product lines, and enhanced inventories to respond to the high-demand occurrences.
- Also, repayment will be a challenge for the new and struggling businesses because of a lack of experience and revenues, failing to, which might also not allow more unique businesses to access credit instantly in the future as well.
In this regard, Buddy Loan will be a great help to assist you with such short-term asset-based loans and inventory financing so you can choose the necessary option with a better understanding.
Do You Know The Inventory Financing Eligibility?
- The company should have been in operation for at least a year.
- The applicant’s business must have a good turnover and credit history.
- The borrower should offer a business sales record showing that inventory is consistently converted to cash.
- If a company’s stock is vast and has a high demand and turnover, it may be qualified for Inventory Financing.
- The business must be profitable and have a consistent sales history to qualify for a loan through this financial solution.
- If a company has a well-established product and little debt, there’s a good possibility the concerned merchant will be able to get a loan to finance their inventory.
- The business has accurate records on sales and invoices, which can make the business performance look well presented, sustained, and consistent.
- The company and the premises should be presentable if there are any sudden visits by the lenders to mark a decent impression.
Documents Required For Inventory Financing
Check out all the necessary information regarding the documentation required:
- Applicant’s Driving license.
- A balance sheet of the associated business
- Registered application copy
- Registration Information of the Company
- Profit and Loss documents of the Business
- Income Tax Return Details
- Collateral Documents with signature and declarations.
- Two copies of the company’s sale Invoices
A short-term asset-based loan or inventory financing is progressively an excellent option for a short-term goal these days. Having numerous platforms for quick cash achieving options in the competition, inventory financing is making rapid growth and improved profitability. However, seeking guidance from authorised experts will be helpful before considering such a loan. Keeping this as a priority, Buddy Loan is one such valuable financial platform where you find solutions to all your banking required services and help you to get a fair idea of planning your expenses, which can result in obtaining the necessary funds you are looking for.