Editor's choice: First Down Funding business loans
- Works with bad credit and most industries
- Only 100 days in business required
- No credit check
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Relying on your cash flow to obtain products from suppliers can cause financial strain if you have a growing business that relies on lots of inventory to keep going. This is where inventory financing comes in.
It’s designed to pay your supplier directly on your behalf, allowing you to meet your financial obligations while keeping your shelves stocked and your business’s reputation intact.
Inventory financing is a line of credit or short-term loan that a business can use to buy the products it sells. Any inventory you purchase becomes collateral for the loan, protecting the lender against default. If you’re not able to repay the loan, the lender can seize and sell the products to satisfy the debt.
Here’s a breakdown of how it works:
Depending on the lender, you can apply for up to $1 million. The repayment period is determined by how long it would take to sell your inventory.
A shorter repayment term may mean a higher interest rate, but it’s usually a small increase. It could make financial sense to choose the shortest term you could afford because paying interest on a small loan over a longer period will eat away at your cash flow.
Generally, inventory financing is used by manufacturers of consumer products and auto dealers that have large amounts of money tied up in inventory. This type of financing is especially good for businesses with international suppliers because sometimes there are delays between paying the supplier and receiving the goods.
Lenders want to see that you’re able to make repayments, so you need to prove that your business is in decent shape financially. While you don’t have to put up collateral if applying for an unsecured inventory loan, your business must meet some standard eligibility requirements:
Because inventory financing relies on a flow of buying and selling goods, it may be more difficult to be approved by a lender during this global crisis.
Your lender may require a higher overall revenue and extra proof you’l be able to repay your loan — and that your inventory can still sell. A brick-and-mortar store may find it more difficult to qualify during a local stay-at-home order. You can compare lenders and contact their customer service teams to see if your business meets current eligibility criteria.
But even if your business is eligible, it may not be the best decision. If you aren’t able to sell your inventory, your business’s cash flow could be eaten up by frequent loan repayments. Instead, you may want to consider an SBA disaster loan if your business is struggling to stay afloat because of the coronavirus.
Inventory financing comes with several perks, including:
There are a few questions you can ask yourself before applying to ensure it’s the right decision:
Inventory financing can be a useful option to keep your business moving if your cash flow relies on maintaining lots of inventory at once. Make sure you compare your loan options before selecting a lender to ensure you get the right terms for your business’s needs.
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