Retailers, wholesalers and other companies that purchase and sell inventory on an ongoing basis will occasionally find themselves low on working capital as inventory fluctuates. When this happens, businesses need to find a way to access funds in order to replenish their inventory. Inventory financing is one way that businesses can get the capital they need to restock their inventory, make customers happy and keep the business running smoothly.
Though an inventory loan or line of credit can be a helpful tool for some companies, it is not right for every business. Additionally, there are different types of lenders that offer this form of financing. With so many potential loan types and lenders out there, it is important to understand what inventory loans are and how they can help your business so that you can choose the loan option and lender that is best for you.
What is Inventory Financing?
Inventory financing is a short-term loan or line of credit that small business owners can use to buy more inventory. The inventory or products that the business owner purchases are then used as collateral for the loan if the company is unable to sell the products or repay the loan.
This type of loan is useful for businesses who find themselves needing to quickly replenish inventory. Companies can use the funds from their inventory loan or line of credit to buy the inventory necessary to prepare for seasonal demand, fulfill a large order, take advantage of temporary bulk pricing or simply replenish low inventory levels.
Which Types of Businesses Can Qualify?
Inventory financing is designed for retail or product-oriented companies that have physical inventory, but not service-based businesses where there are no physical products. Furthermore, this type of funding is not intended for startup ventures, but rather existing businesses with an established history of buying and selling inventory.
As with any other type of business loan, businesses with an established record of solid sales performance are more likely to be accepted for an inventory loan or line of credit. Though larger and more established retailers may have an easier time finding financing, alternative lenders like Kabbage do offer inventory loans for smaller businesses who find themselves in a pinch and needing capital to buy more inventory.
What Are the Advantages of Inventory Financing?
Inventory financing can be a great option for small businesses who need to purchase additional inventory quickly or who are experiencing temporary cash flow issues. Here are just a few of the ways that inventory financing can benefit a business:
- Seasonal businesses can use inventory financing to prepare for slow and busy times of the year. Businesses who experience seasonal spikes in customer demand, such as companies that sell items that may be used for holiday gifts, can use inventory financing to purchase additional items in preparation for increasing demand. Likewise, companies that sell seasonal products, such as swimwear or snowmobiles, may use inventory financing to ensure they have capital on hand during slower months.
- Large wholesalers can use inventory loans to keep additional inventory in warehouse facilities. Many large wholesalers keep months’ worth of orders in their warehouse and often find that they need to purchase additional inventory in order to fulfill large future orders. When wholesalers do not have the funds on hand that they need to replenish their inventory, they can use inventory financing to purchase extra products.
- Businesses can use this type of financing to make sure stores and storage facilities are well-stocked. When a company does not stock enough of a product and sells out, many customers may become frustrated and take their business somewhere else. To avoid this, both online businesses and those with a physical storefront can use inventory financing to ensure that inventory is well-stocked and items are always available.
Inventory loans are also a viable option for businesses that have been turned down for a traditional business loan. Since inventory loans allow you to use inventory as collateral, businesses are able to make up for insufficient capital or credit history.
Where Can I Find an Inventory Financing Lender?
Many businesses have difficulty obtaining inventory financing from a traditional lender. This type of loan is considered unsecured because if the business cannot sell the inventory then there is a possibility that the bank will not be able to either. Due to this, banks are especially selective when it comes to inventory loans. Traditional lenders require extensive credit checks and financial documentation, and it may take several weeks before a business hears back from the bank with a loan decision.
However, a traditional bank lender is not the only option for businesses seeking an inventory loan. Alternative Platform Lenders like Kabbage make it possible for small businesses to obtain an inventory line of credit and get the funding they need in a short amount of time. Instead of just looking at your credit score, Kabbage uses a simple and secure application process which looks at real-time business data in order to make a decision on inventory loans in a matter of minutes. This can be an effective option for business owners who are not eligible for traditional bank loans.