As a business owner you may have dealt with situations where you’ve been unable to pay for suppliers on time. Or perhaps you have needed to purchase large orders in a quest to expand your business growth but have come up against a shortfall of funds? The area of inventory finance refers to an adjustable financing option to access cash. This is so you may pay suppliers on time and order large amounts of stock, to ensure you stay competitive in your market and not miss any opportunities to grow commercially.
Ideally, inventory finance is like a stop-gap between the time your customers order products, supplying an invoice and the money coming in to pay for those products. Inventory finance will provide the cash to support your business while keep an ongoing relationship with your customers and collect payments against outstanding invoices..
How Does Business Inventory Finance Work?
Inventory finance allows you to take a short-term loan in order for you to purchase your merchandise in advance without depleting existing business funds. The merchandise you purchase is used to substantiate the loan, therefore there is no need to secure the loan with any of your assets.
The process works by:
- The finance lender paying your supplier
- The supplier shipping the merchandise which in turn fills your stock supplier
- You then continue to sell your merchandise and repay the finance lender once you have made the sales.
Generally, the funding will be approved under a director’s guarantee, and you may usually apply for up to $1 million – depending on your choice of lender. The term of the finance is determined by the length of time it takes for you to sell your stock.
You may face a higher interest rate as a result of a shorter-term loan. However, if you’re only taking a relatively small loan, you would want to pay it off as quickly as possible. You wouldn’t want to be taping into your profits, due to paying interest on a small amount over a long period of time.
What are the Benefits of Inventory Finance?
Obtaining inventory finance may benefit your business in a number of ways. Some of these include:
- No need to use your assets as security: One of the most attractive benefits of inventory finance for most borrowers, is that they don’t need to put up any of their assets to secure the loan. This is particularly helpful for small business owners and start-ups who are looking for a fast cash injection without using their property to substantiate any loans.
- International suppliers: There can be numerous delays when you supply merchandise overseas. Having to delay paying suppliers can further add to those delays which makes inventory finance beneficial in speeding up the shipping experience and eliminating one possible set back.
- No need to use working capital: Accessing inventory finance means your cash flow can be used for the daily running of your business.
- Business growth: Having the capacity to purchase larger amounts of stock and take on bigger orders will boost your business growth and increase your profit margins.
Inventory Finance Options
Inventory finance is a short-term loan for your business needs which generally has a maximum of a 12-month agreement. This type of finance is extremely flexible with the option of paying the loan and the consequential interest weekly or even daily, depending on the terms and conditions of your lender.
Inventory Finance Rates and Fees
Inventory finance is a very competitive market. As with any loan type it pays to shop around for the best package suited to your specific needs. Currently, it is possible to obtain short-term inventory finance rates from as little as one percent with associated establishment fees and account maintenance charges..
Qualifying for Inventory Finance
Regardless of the less stringent lending guidelines, no lender will give you funds that they don’t believe they will be able to recover. What this means in relation to inventory financing is your business must be in a financially sound position. While you’re not required to use your assets as security you must adhere to certain guidelines. These include:
- Industry experience: The majority of lenders expect you to have been in business for a minimum of two to three years.
- Annual income: While the minimum requirements will vary between lenders, you will have to illustrate your yearly revenue.
- Credit history: Lenders will want to look at your credit history and whether you’ve previously defaulted on other loans. Obviously if you have defaulted on your commitments in the past, they will be less likely to loan you the funds.
Your industry type will have an impact on eligibility for invoice finance, as they assess the strength of your market. The more unpredictable or unstable your industry, the more chance your loan will be not be granted.
Applying For Inventory Finance
Lending criteria and documentation requirements can fluctuate between lenders but as a general rule, there are certain documents will you will benefit from compiling. These will include:
- The balance sheets of your finances for the past two years. Note that two years would be considered the minimum expectation.
- Your current profit and loss statements over the past three years.
- A projected sales forecast, as this gives the lender the ability to accurately determine how feasible inventory financing will suit your business.
- Tax returns for your business will give the lender a solid overview of your revenue history.
- If you are start-up or sole trader, you may be required to provide your personal tax return.
- You should also have compiled a detailed list of all your on-hand inventory.
Advice and Considerations
Be prepared for the possibility of lenders sending in someone to independently audit your business. This is a means for them to reduce their level of risk by ascertaining whether inventory financing is a suitable fit for your current situation.
While on the surface inventory financing appears to be a no-lose situation for most businesses to keep things moving, it is always good business sense to research and compare all your viable options before applying.
It is always a good idea to ask potential lenders what their level of experience in this area is. Within such a competitive market, it is important not to take the marketing and advertising of some smaller lenders at face value. Many financial institutions are not equipped with the level of experience you may expect – especially when compared to other types of financing. It would not be in your best interest to be pushed into any form of financial contract with a lender who wasn’t sufficiently knowledgeable in the that area, so execute your right as a prospective customer to ask as many questions as possible before deciding upon a lender.
Inventory Finance FAQs
What do I need to take into account before applying for inventory finance?
As with any financial contract, there are always aspects to consider before making a financial commitment. In relation to inventory finance, some points to think about before applying include thinking about aspects of your inventory. Asking yourself how fast you usually move your merchandise can help determine if this is a good financing option for you as stock that takes a long to time sell may not appeal to many lenders.