Inventory Financing for Small Businesses
Getting access to small business financing is a crucial aspect of running a small business. Every business encounters occasional cash flow problems, especially if customers are slow to pay their bills, if unexpected expenses arise or if the business is a seasonal business that relies on a short timeframe to make enough money to last all year. There are a number of options available for businesses to get access to cash, and some are faster and more convenient than others – these options include traditional bank loans, lines of credit, credit card financing and accounts receivable financing. However, especially for small retail businesses, when the company needs financing to buy inventory, getting an inventory loan is often the best solution.
But what makes inventory loans so useful, and how can small business owners get the most benefit from inventory loans as a form of working capital? Let’s take a look.
What Is Inventory Financing?
An inventory loan, or inventory financing, is a line of credit or a short-term loan specifically designed to help small business owners buy inventory. With this type of loan, the business’ inventory (current and future) is used as collateral against the loan and can be surrendered to the lender in case the business is unable to repay the loan. This form of inventory funding can be a lifeline to otherwise successful businesses that have run into a cash flow crunch and need additional cash on hand to help buy inventory.
Who Should Consider Inventory Financing?
Inventory loans are designed primarily for existing businesses – not startup businesses. Lenders want to see an established track record of buying inventory before they will agree to use your company’s inventory as collateral. Also, inventory lending is intended for retail or product-oriented businesses, not for service businesses (which have no physical inventory).
If you’re trying to get an inventory loan, like any other type of small business loan, traditional and platform lenders such as Kabbage prefer to lend to businesses that have strong sales performance records. If your business has strong sales and has a solid track record of sales performance, then perhaps an inventory line of credit will be a good option for your business.
Larger, more established businesses – especially retailers – tend to have an easier time getting access to lines of credit or financing to help fuel their business if they hit a rough patch. But for smaller businesses, a “rough patch” could have dire consequences. This is why platform lenders like Kabbage are now stepping up to offer small businesses a fast, convenient solution to their cash flow issues.
Platform lenders use a slightly different, more flexible approval process than a traditional lender. Instead of just looking at your credit history, platform lenders will consider your sales performance, as well. This is key for many small business retailers who may not have perfect credit, but who are showing strong sales year after year.
How Can An Inventory Line of Credit Help Your Business?
Inventory lines of credit can help your small business by providing the funding you need – in a quick turnaround time of just a few days – so you can purchase inventory when the time is right and when opportunity strikes. An inventory loan or inventory line of credit is also helpful because it enables small businesses to stock up on inventory in advance, and avoid situations where they sell out of popular items at times of peak demand. This helps retailers provide a better customer experience and hopefully generate more repeat sales.
Inventory funding is also helpful for seasonal businesses. If you run a seasonal retail business, inventory loans can help you buy the inventory that you need before the peak season starts, and then repay the loan within a short turnaround time. Inventory funding helps retail business owners be more flexible and adaptable to sales opportunities as they come along.
Four Ways Inventory Financing Benefits Small Businesses
Here are four ways that inventory loans can help small businesses improve their operations:
- Inventory financing keeps the business’ storeroom and display units fully stocked.
This may seem like an obvious point, but think of it from the customer’s perspective. Whether you’re an online retailer or if you have a storefront, imagine how frustrating it is as a customer if you’re looking for a certain product and it’s not there. When your inventory is under stocked or sold-out, when customers can’t find a great item that they are ready and willing to buy, it translates into lost sales for the business – and frustrated customers are less likely to return, and more likely to give your business a bad review online. Inventory loans keep the store shelves stocked and ready for potential customers.
- Inventory loans are often a good option for businesses that have been turned down in the past for a traditional loan. If your business has poor credit or insufficient cash or collateral to put down on a traditional small business loan, using your inventory as collateral can be a good solution.
- Seasonal businesses can use inventory financing as a lifeline during slower times of year.
Consider businesses in cold-weather states that rent beach-related items in the summertime: umbrellas, chairs, snorkel equipment, surfboards, boats, etc. Clearly, their sales will drop during the colder months, but in order to adequately prepare for a surge in sales for the late spring and summer, the business needs to have cash on hand to buy more inventory when the time is right. Inventory loans and inventory funding can help make this happen.
- Inventory financing can be a good option for wholesalers that need to keep a much larger amount of inventory on hand in warehouses and larger storage facilities. Larger wholesalers without a lot of cash on hand to replenish their supply may have the next few months’ worth of orders in a warehouse, but might need a reliable source of cash to help buy additional inventory to fulfill future orders.
Inventory Loans: Yes or No?
Small businesses may want to consider applying for an inventory loan or inventory line of credit if any or all of the following statements are true:
- Your business has high inventory turnover rates, which shows that your company has strong sales.
- Your business needs a loan to help restock inventory to get ready for another sales cycle.
- Your business has a decent credit history (not necessarily perfect) and has been turned down by a traditional bank lender for a small business loan. (In this case, you may want to consider trying a platform lender for your inventory financing.)
- You want to get a flexible form of small business working capital that will help free up some of the cash normally associated with maintaining inventory, and enable you to use it for other business operating expenses.
Companies or small businesses that are relatively new may not be eligible for an inventory financing loan, because they don’t yet have the sales numbers to reassure lenders that they are worth the risk. If the business owners cannot prove that their sales are strong and their inventory is turning over in a healthy way, lenders will not see the value in issuing an inventory loan.
Small businesses that have difficulty getting rid of inventory would obviously also not qualify for inventory lending. Clearly, the product is not moving fast enough – the lender would be taking a huge risk and may end up stuck with the unsold inventory. Also, if a business has a high debt-to-income ratio, potential lenders will deem it too risky to offer the business an inventory loan.
So you’ve decided that an inventory loan is something you want to pursue. What do you need to do in advance to present yourself and your business in the best possible light for potential lenders? Here are some tips to get started on securing an inventory loan:
Top 5 Tips for Securing an Inventory Loan
- Demonstrate accurate inventory management. Make sure your inventory management system is well organized. Can employees find what they need? Are items grouped similarly by product line, color, size, etc.? Having a proper inventory management system is key to positioning your business to get your inventory loan approved. You must also have accurate business records including an account of your total inventory. You may need to work with an auditor to ensure the integrity of the numbers you present to lenders.
- Check the elements. Is your inventory storage or warehouse facility temperature controlled? Is it too humid or too dry? How are you protecting your inventory supplies from the elements? Any damage to your inventory is like throwing money out the window. It’s wasteful and irresponsible, and it can be prevented simply by putting in place some easy checkpoints for you and your employees.
- Be prepared. It’s not unusual for inventory loan lenders to make surprise inspection visits – after all, the lender wants to know what kind of risk they will be taking by using your inventory as collateral. Prepare your workspace, your inventory space, your employees and yourself for visits from lenders. Even if the surprise visit never happens, at least you have established a pattern among your employees to have high working standards.
- Maintain impeccable sales records. This should be a no-brainer. You truly want to show lenders that your business is successful, and the most important metric is strong sales records. Showing lenders a solid track record of sales success will help you qualify for that inventory loan to help you replenish and restock inventory and move your business forward.
- Don’t be wasteful. There is nothing worse than a warehouse or storage facility filled to the brim with inventory that is slowly moving or worse, not moving at all. Of course, you need to have some inventory on hand to fulfill orders and to meet customer demand. But too much inventory shows poor planning, poor management, poor forecasting and predictions of sales, low inventory turnover rates (which are not good in the eyes of potential lenders) and poor leadership. Don’t be wasteful. Only keep enough inventory on hand to be able to fulfill orders for the next few months. Anything beyond that, especially for a small business, is probably too much.
Inventory financing can be an essential option for small businesses to get the funding that they need to replenish inventory, unlock extra cash flow, keep store shelves well stocked, make customers happy and maintain efficient and profitable business operations. With careful planning, inventory financing can be part of your company’s financial toolkit.