Keeping up with customer demand is crucial for your business. If you need to purchase more inventory, acquiring a loan may be necessary. You can leverage the products you already have into a line of credit that can be used to keep your customers happy. Inventory financing is a good option if you need to raise capital quickly. Here’s what you need to know about the process and what inventory financing rates may be involved.
What is Inventory Financing?
Inventory financing is a short term loan or line of credit made to a company so they can purchase products to sell. Small business owners can have a hard time acquiring the loans they need. In fact, big banks have only approved approximately 26.9% of business loans. Banks are often saddled with non-performing loans and substantial government regulations. There are many alternative lenders that are willing to provide loans by placing a lien on inventory.
Inventory financing can be beneficial to quite a few industries. For example, the fashion industry can use this type of lending to purchase more clothing as trends change each season. Some lenders focus on serving the automotive industries. These loans are also stable for restaurant funding. Inventory financing is also ideal for businesses that do not want to risk putting up physical assets as collateral.
How Does Inventory Financing Work?
After securing the line of credit or loan, the business owner can still sell any inventory owned. The money generated from the sales of these items is then used to repay the loan. If products cannot be sold, the lender assumes the risk. If the borrower defaults on the loan or misses a payment, the lender will recoup their investment by taking possession of the inventory.
Inventory financing companies will generally only finance around 50% to 80% of the inventory’s value. This value is not based on the retail price of the products. The calculation is usually based on the liquidation value. Business owners will have to determine whether or not this amount will be suitable enough to meet their needs. There is also a lengthy application process involved for financing inventory.
Inventory Financing Rates
Inventory financing rates will vary based on a few factors. These factors include things like the type and history of the business, the company’s credit score, and the size of the loan itself. Each alternative lender has its own specific formula on how these rates are determined. These rates are typically higher than the prime lending rate. Business owners can see rates of more than 20%. To get the best rate possible, you will need to do your homework and compare several lending offers.
Inventory financing is a good solution for small businesses who need to get money quickly to meet customer demands. Business owners who are having a hard time getting a bank loan may want to consider seeking out this alternative. Even though inventory rates are higher, they can still help in acquiring the additional products needed. </p