If you’re a small business owner in the retail sector and you’re struggling to obtain working capital financing, an inventory loan may be the perfect solution. Wondering what these loans are or how they work? Here’s a look at this unique financial product, an explanation of how it works and who this type of funding appeals to.
What is an Inventory Loan?
An inventory loan is a special loan, designed specifically for business owners in retail or product-oriented sectors. Essentially, it provides you with the funds you need to buy more inventory so you can keep your doors open and your business running successfully. Because it’s focused on business owners who stock inventory, this type of loan relies on a different approval process than most traditional loans.
What’s the Approval Process for an Inventory Loan?
When you apply for an inventory loan, the lender doesn’t ask for a business plan and, in some cases, they don’t even take your credit history into account. Rather, the lender wants to see the flow of inventory through your business. Lenders look for a strong sales performance and they want to see your numbers. In most cases, if you can demonstrate accurate inventory management, the lender is more likely to approve an inventory loan.
Depending on the lender, they may also request information on how your inventory is organized and stored. If your inventory isn’t well managed and your staff routinely cannot find customers’ requests, that can diminish your chances of obtaining an inventory loan. Similarly, if your inventory is stored in a place where it’s subject to the elements or even in a warehouse without humidity controls, the lender may also deny the loan.
How are Inventory Loans Secured?
Lenders offering inventory loans look very closely at how your company handles its inventory because the inventory secures the loan. Much like how a mortgage or a car loan is secured by a home or a car, an inventory loan is secured by your inventory. Both current and future inventory is used as collateral on the loan and, in the case of default, the lender has the right to claim the inventory.
Who Can Benefit from Inventory Loans?
Anyone who carries inventory and needs a financial boost can benefit from an inventory loan. In particular, companies who need extra capital to invest in a new product can benefit. Similarly, companies with seasonal cash flows or companies who anticipate a large surge of demand after a slow month of sales can also benefit.
For example, if you sell a summer product, your revenue is likely to be low throughout the winter. As a result, when you need to restock your shelves in the spring to prepare for the summer rush, you may not have enough operating capital available – an inventory loan helps fill this gap.
What are the Benefits of an Inventory Loan?
An inventory loan helps facilitate keeping large amounts of inventory on-hand in warehouses or storage facilities, ensuring you can easily fill customer’s orders and meet demand. If you don’t have the inventory you need on-hand, clients may be willing to wait as you backorder it or they might go somewhere else. Over time, this practice can erode your client base as well as your company’s reputation.
If you own a brick-and-mortar shop, inventory loans help you keep your displays full. Customers aren’t likely to be enticed by a store that is half empty and, while walking by, they may even guess that it’s closed. An inventory loan helps eliminate this risk.
Do You Have to Buy Inventory with Inventory Loans?
Many business owners use inventory loans to buy new inventory, but that is not their sole purpose. These loans are secured by inventory and your sales numbers are taken into account when determining approval, but you don’t have to use inventory loans to buy more inventory. If you already have lots of inventory on-hand but you need working capital to pay your employees, keep the lights on, make your mortgage payment or for any other business expenses, you can turn to an inventory loan.
How Do Inventory Loans Work?
When you apply for an inventory loan, you provide the lender details about your inventory on-hand as well as your sales records and potentially a few details of your inventory management processes. If the lender approves your application, it extends an installment loan or a line of credit to you.
An installment loan is a lump sum loan that you pay back in equal installments for the loan’s term. In contrast, a line of credit allows you to access the funds when and if you need them, potentially saving you money on interest and fees as you only pay those costs on the money you use. If you have a revolving line of credit based on your inventory, you can spend it, pay it back and spend it again in pace with your cash flow.
If you need working capital to buy new inventory, pay your employees or cover any other expenses, it may be time to consider an inventory loan. Depending on the lender, you can secure these loans with the inventory you have on-hand or the inventory you plan to buy. Either way, inventory loans provide the capital you need to stay afloat, expand and move forward.