Warehouse worker checking the inventory

Inventory Financing: What it Means and How It Works

Inventory financing is a form of asset-based financing.  This financing keeps businesses growing by providing the funds needed to purchase inventory for future sales.  The value of the inventory is then used as collateral to secure the loan.

What is an inventory loan?

An Inventory Asset Loan is a loan used to purchase inventory, which is secured by the value of inventory being purchased. This means that personal and business credit scores are not as important in the underwriting process as the nature of the inventory itself. In order to secure the loan, the value of the inventory will need to bring insufficient income to repay the loan. During the application process, companies will need to show through previous inventory records, that the new inventory will bring in more revenue than the value of the loan.

Because inventory loans are secured by the inventory, they are perfect for business owners who have been denied a conventional loan due to credit history. In addition, they are ideal for companies that are looking to achieve higher sales volume and avoid putting personal property up as collateral.

How do Inventory loans work?

After a company is approved for an inventory loan they can receive funding for up to 90% of the cost of the inventory.  However, there are strict requirements that must be met. These requirements include the client provides, a) proof that the inventory will bring in more revenue than the cost of the loan, b) a detailed description of the inventory, and c) a history of prior on-time credit repayment.

The loans will have a minimum monthly payback with interest, which if not met, can result in the loss of inventory. In addition, they cannot be used for the purchase of property for its potential future value. This means that inventory or products cannot be bought and held onto in the hope of increased value. Each piece of inventory must be attempted to be sold.  

Who is right for an inventory loan?

The best candidates for inventory loans are business that is in industries that are product-focused. These can include retail, wholesale, manufacturing, food service, or distribution sectors.

Other minimum borrowing requirements vary by lender and will need to be confirmed during the underwriting process. In order to get the best loan rates possible, and to ensure approval for a loan, be sure to keep detailed records of orders and sales that illustrate how much revenue the inventory will produce.  Successful companies will be more likely to be approved, however, a company with a complete sales history available with their application will greatly improve their chances.

Inventory loans are not for everyone. They can be difficult to obtain because of lender requirements. However, if a company has kept good records, and is looking to increase its sales capacity, then an inventory loan can be a perfect solution. Our brokers can help you establish if an inventory loan is right for you.

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