Every day, thousands of small business owners find themselves in an occasional cash crunch. For many of these businesses, inventory financing may be an ideal solution to a temporary challenge. But just what is inventory financing, and how does it work?
Simply put, inventory financing is a type of lending that allows retail or wholesale business owners to obtain financing using their existing inventory as collateral. This type of financing can be used for the purchase of additional inventory, or to see a business through times of slower cash flow. Inventory financing is designed primarily for product-related, not service-related businesses, as this type of financing is based more on the physical inventory a company sells rather than credit history.
There are numerous reasons why inventory financing can be beneficial for these types of businesses. They may be faced with the challenge of increased demand during particular selling seasons, such as Christmas, or may be dealing with an unexpectedly large order from a customer that requires immediate fulfillment. Sometimes, cash flow fluctuation simply doesn t allow for the immediate purchase of additional inventory; but for many retailers, it can be difficult to grow a customer base without it. In order to stay well stocked and ensure customer satisfaction, inventory financing can offer a temporary solution for both retailers and wholesalers.
A business may also consider inventory financing as an alternative to funding when it has been turned down for a traditional bank loan. Many business owners have been denied credit from a bank because of insufficient working capital or credit history. And because banks have strict lending requirements, including credit checks and extensive documentation policies, a business may turn to inventory financing as a faster, easier solution rather than waiting days or even weeks for a bank loan approval.
Inventory financing is not a solution for start-up businesses, as approvals are based primarily on a company s inventory and the sales history of its products. Companies with a high debt-to-income ratio may also experience difficulty obtaining this type of financing.
But for other retail businesses where it can be a viable option, here s a brief list of things to remember to improve the odds of obtaining inventory financing:
- Many lenders may pay a visit to your business, so be prepared for a possible inspection of your office, warehouse, or storage facility. Make sure that you are able to demonstrate a good, organized inventory system.
- Because business inventory acts as the collateral for financing, it should be well taken care of. If the inventory is stored in a warehouse, make sure that products are kept in a dry, safe environment, free from the possibility of humidity or other damage.
- Good sales and business records are at the heart of inventory financing, since this is where you prove to a lender that your business is not only successful, but that you move your products on a consistent basis. Make sure that your records are well organized before you show them to any lender.
There are many online lenders that offer inventory financing, and the application process is relatively fast and simple. Certified Business Loans is committed to helping small and medium-sized companies manage their cash flow needs through an inventory financing plan that works best for you. Contact us to receive a free, no-obligation quote and learn more about how we can help improve your business cash flow today.