Inventory Financing from a Direct Lender
Learn everything you need to know about inventory financing and merchandise loans. if your business needs additional capital to purchase inventory, apply online and get pre-qualified in minutes
Ultimate Guide To Inventory Loans and Inventory Financing
Inventory is the driving force of any retail business. It keeps your business running, ensuring your customers are satisfied and happy. However, even the most successful and highly profitable companies need extra funding to finance their business.
Suppose your business needs some extra funds to purchase inventory, or you have unsold inventory in your warehouse but need more. In either case, inventory loans and inventory financing can help you access the money you need.
But what is an inventory loan? How can your business benefit from inventory loans, and what are the different types of inventory loans? This guide provides everything you need to know about inventory loans and inventory financing.
What Is Inventory Financing?
Inventory financing refers to a short-term asset-based loan or inventory line of credit a business can use to purchase more inventory. Inventory loans are offered to businesses with physical business assets. Inventory financing also helps your business maintain consistent cash flow and working capital.
The inventory of your business serves as collateral that a lender can seize if you default on the inventory loan. Typically, inventory loans are based on a percentage of your inventory’s value, usually 20% to 65%.
Inventory financing prepares you for those seasonal business fluctuations and allows you to stockpile for your busy seasons to fulfill large purchases. For example, let’s say you operate a wholesale beauty products shop serving various retailers. As a wholesaler, you have to stockpile your inventory so your customers can promptly access the products they need.
During holidays, sales shoot up dramatically, so you need to purchase twice as much inventory to ensure your customers are well cared for. But amidst all the daily hassles of running the business, how can you make extra inventory purchases while maintaining healthy cash flow?
In such a situation, inventory financing comes in handy for purchasing inventory to ensure you have enough to meet the demands of your customers.
The extra inventory you need to cover the spike in sales during the holidays will cost you $800,000. You may find an inventory financing lender who extends a line of credit to you at 50% of the inventory’s value. The lender offers you $400,000 to finance inventory purchases and other business expenses. After the holiday sales, you can then use the revenue generated to pay back the lender.
Due to the cash availability and flexible inventory loans offer, it’s an ideal option for seasonal businesses with ample physical resources. However, when applying for inventory financing, lenders place more weight on the value of the inventory.
This makes it easier to qualify for than other small business loans. However, while this financing option is a great way to purchase more inventory, there are several critical things to keep in mind:
- Inventory financing lenders might not be willing to finance your business if your inventory has a low turnover.
- You may be charged higher interest rates since lenders view inventory financing as riskier.
- More risk-averse lenders such as banks are less likely to offer you inventory financing.
- Since the inventory value can depreciate over time due to factors such as inflation, during the application the lenders calculate your inventory loan using the inventory’s liquidation value, which in most cases is always lower than the current buying price.
How Can Your Business Benefit From Inventory Loans?
Some of the advantages Now that you know what inventory financing entails, it’s essential to look at how your business can benefit from an inventory loan. Like any other financial decision, when considering an inventory loan, it’s crucial to weigh the pros and cons to know whether it’s the correct type of financing. Here are the advantages and disadvantages of taking out inventory loans.
Advantages of Inventory Financing
Some of the advantages of inventory financing include:
No Need for Personal Collateral
Before qualifying for a secured small business loan from most financial institutions and credit unions, you must place personal assets like a home, car, or any valuable item as collateral. Then, if you default on the loan payment, the lender can seize the item to recover the debt.
With inventory financing, you don’t need personal collateral. Instead, the inventory you purchase can be used as collateral. Then, even if the sales take a dip, the lender will only seize the inventory purchased with the loan, but your car and home won’t be impacted.
Helps Meet Customer Demand
Nothing is as frustrating (although positive) for a business as when demand exceeds supply. During peak business seasons such as the holidays, the demand gets high, making your inventory run critically low. Without enough inventory, potential sales will be lost, and customer dissatisfaction will mount.
And as a business trying to build its reputation, disappointing and losing potential customers is the last thing you want to do. Inventory financing loans will help your business handle high product demands by providing you with additional funds to prepare for the peak season.
No Personal Credit Score Required
As a norm, lending institutions will first run a credit check to assess your credit score and credit history. If you have a history of late payments, delinquencies, or bankruptcies, getting approved for a loan can be challenging. This might cripple your business due to cash flow problems.
However, with inventory financing, you don’t have to worry about your credit report being checked or being asked about your business credit history. Instead, an inventory loan financer will consider the value of your inventory as collateral. This makes it possible to access inventory financing without running a credit check.
Fast Process
Compared to other conventional loans, acquiring an inventory loan is much quicker. There is less paperwork involved, and your loan will be approved within a couple days if you qualify and meet all the requirements.
Disadvantages of Inventory Financing
While inventory financing loans offer an excellent way to access funds to purchase inventory for your business, they also come with several disadvantages.
Higher Interest Rates
Unlike other types of loan products, inventory financing features a high-interest rate. Since there is no additional collateral involved other than the inventory, lenders feel they need extra security. This leads to higher interest rates to shield the lender. You must, therefore, always check the inventory loan rates to ensure you can afford the monthly payments.
Difficult to Access
While the application for an inventory or merchandise loan is fast and easy, securing inventory financing is more difficult. Since the lender will use the merchandise purchased as collateral, they will have to assess how risky your business is.
If they conclude they will have a hard time selling the merchandise, they may struggle to recoup their money trying to sell the products if you default on the loan. As a result, inventory financing lenders are more likely to offer inventory financing to businesses with high-potential products.
High Setup Costs
Since the lender must appraise your products and evaluate your business, the setup costs will be high. The lender will also consider the high operational costs, which require regular appraisals usually done on-site by a professional appraiser.
Types of Inventory Financing
Lenders offer two main types of inventory financing. Each option is dependent on the kind of products your business handles. And while your inventory secures both financing types, they have different interest rates and fees depending on the lender.
Inventory Loans
Inventory financing loans are based on the total value of your inventory. Like regular small business loans, the lender offers you a specific amount of money depending on your inventory’s value. You are then required to pay it back in fixed monthly payments over a repayment term following the sale of the inventory. After paying back your inventory financing loan in full, you can take out another small business loan if you need more financing.
Inventory Lines of Credit
Unlike inventory loans and other loan types, inventory lines of credit provide your business with revolving credit. This means you get money on an ongoing, as-needed basis. Most business owners prefer having an inventory line of credit to handle unforeseeable business expenses that might occur. You might sign an inventory financing agreement with terms and conditions for a long-term funding partnership.
Best Small Business Inventory Financing Options
Accessing small business financing is a critical aspect of running and managing a small business. Most small business owners encounter cash flow problems when customers are late on bill payments, seasonal sales dip, or equipment breaks down. This can cripple your business operations which can significantly hurt your bottom line. Luckily, several small business inventory financing options are tailored to help small business owners run and manage their businesses.
Merchant Cash Advance
At mCashAdvance™, we offer a variety of business financing option designed to help small businesses flexibly access cash whenever they need it.
You can get approved for up to $500,000 in just a few minutes. Use the funds to purchase new inventory, scale your operation or however you’d like. We are a direct lender, not a broker so you don’t have to worry about a third party. We also don’t require any collateral.
To get started, fill out our easy and safe online application. It will not impact your credit score, and there’s no hidden fees or other obligations. Click here to get started!
Fundbox
Fundbox is an online lender best suited for business owners who need funds as quickly as the next business day to fill a cash-flow gap. It requires a minimum credit score of 600, a minimum annual revenue of $100,000, and at least three months of invoicing history with a supported business checking account or accounting software such as QuickBooks, Xero, Clio, or Harvest.
After approval, your funds will be deposited into your bank account within one business day. Like most online lenders, Fundbox requires a personal guarantee for all their business lines of credit which holds you responsible for repaying the loan if your business fails.
You can access funding of up to $150,000 with an APR of between 10.1% to 79.8%, which you should repay in 12 or 24 equal weekly installments determined by Fundbox’s assessment of your business.
BlueVine
BlueVine offers multiple loan products to help small business owners address several business shortcomings like inventory purchasing and managing cash flow. With BlueVine, you can access a line of credit or invoice factoring where you can use your large unpaid invoices to access funding if your customers make on-time payments.
Unlike other lenders, you can qualify for financing even with bad credit. You can access line of credit amounts of between $5,000 and $250,000 that you can repay in either six or twelve months at 15% to 78% APR. You will, however, need a credit score of 600+, six months in business, and at least $120,000 in annual revenue.
OnDeck
If you need a financing option with convenience, speed, and less strict qualifications than most banks, OnDeck has you covered. It offers loans to small business owners with fair to good credit.
OnDeck offers lines of credit up to $100,000 with an APR of 11% to 61.9%. They also offer term loans of $5,000 to $250,000 featuring an APR of 9% to 99%. Their term loans have repayments are either daily or weekly via ACH, and are available for three to thirty-six months. For OnDeck’s financing, a personal guarantee is required, and you must not have filed for bankruptcy in the past two years. OnDeck is currently not available in North Dakota, South Dakota or Nevada.
SBA 7(a) Loan
The SBA 7(a) loan program is SBA’s most common loan product. It provides financial help to small businesses with special requirements. You can use it to refinance current business debt, purchase equipment, fixtures, and supplies, and provide short and long-term working capital.
You can access loan amounts of up to $5 million, but you must meet several eligibility factors. They are based on the purpose of the business, where it operates, and its history. Your lender will then determine which loan is best suited for your business.
To apply for this financing option, you must complete SBA Form 1919, SBA Form 912, and SBA Form 413 and submit them to an SBA participating lender. You also need to have been in business for a minimum of two years with strong annual revenue and a credit score of at least 690.
Credibility Capital
Founded in 2013, Credibility Capital offers short-term business loans to low-risk borrowers. It offers competitive rates among online lenders and has no prepayment penalty.
To qualify for financing from Credibility Capital, you need to have been in business for a minimum of two years. You also need to have minimum annual revenue of $200,000, a credit score of at least 650, and you shouldn’t have filed for bankruptcy in the past five years. You can access loan amounts of up to $500,000 with loan terms of up to three years.
Credibility Capital requires general lien on business assets (UCC-1 filing) to make the loan more secure, and may also require a personal guarantee. You can set automatic monthly payments through ACH transfer, making repayments easy and secure.
Alternative Options to Inventory Financing
Inventory financing is an ideal option for helping businesses meet inventory needs and customer demands while maintaining business cash flow. However, it might not be an ideal option for you. There are several other financing options you can consider to help finance your business.
Business Credit Cards
A business credit card is your best bet if you need access to small amounts of funds for financing ongoing expenses such as equipment, utilities, and raw materials. Business credit cards are a revolving line of credit that gives you access to funds for as long as you need it provided you pay the minimum monthly payment and don’t exceed the credit limit. They operate just like personal credit cards but may have higher interest rates.
Term Loans
A term loan is a loan product that allows you to borrow a considerable amount of money that is repaid over time according to a repayment schedule set by the lender. Although the amount you can borrow through a loan term varies. A huge disadvantage of term loans is that they may require collateral. However, you can use the loan amount to cover other business-related expenses without having to justify your money use to the lender.
Purchase Order Financing
Businesses that lack the cash flow to complete customer orders can use purchase order financing to buy the inventory they need to fulfill their orders. The financing company will pay your supplier to deliver and manufacture the goods to your customer. In turn, your customer pays the purchase order financing company directly, and they deduct their fees from the remainder before sending it to you.
Business Line of Credit
A business line of credit is a similar financial tool to a business credit card. It allows you to access funds up to a certain amount which you can access anytime you need it. You can use it to cover business expenses, including purchasing inventory.
Accounts Receivable Financing
Under this financing option, you can leverage your unpaid invoices to get financing for your business. You don’t have to provide any additional collateral. Instead, the lender gives you an amount of money based on the value of your unpaid invoices. You then repay the financing company as your invoices are paid, along with fees.
Other Business Loan Types
Funding Your Business Is Our Business
Small Business Inventory Loans in Summary
Inventory financing is a superb way to access quick funds to purchase inventory. Unlike other loan products, you don’t need to use personal assets as collateral. Instead, the inventory you purchase is the collateral. Inventory financing falls under two categories with different terms and has several benefits. There are several small business financing options tailored for small business owners, however, if they don’t suit your business needs or they are too expensive, you can consider other financing options.
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