Inventory finance explained
Inventory finance, in its simplest term, is basically a short term loan from a lender to a borrower secured against assets.
The lender would either be a bank, finance company (or individual).
The borrower would be a company (who produces goods) or business person (who provides services).
The security would usually be an asset, such as a physical goods due for manufacture
Inventory financine in detail
Inventory financing is a line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan. Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period of time than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume – for example, by allowing a business to acquire extra inventory to sell during the holiday season.
Naturally, the first question to ask is if the business cannot sell the inventory, what use is the security and what value is it to the lender?
In answer to the above, the lender will only lend on a percentage of the total market value in order that it can mitigate, to some extent its risks.
Inventory financing is usually offered in combination with an invoice factoring line. Combining both products allows companies to leverage their assets and further enhance their cash flow.
How do they work together?
Companies that have cash flow problems should first consider using accounts receivable financing. This solution is simpler to implement and more cost-effective than inventory financing. However, if factoring your invoices does not solve your problem, consider financing your inventory as well.
Inventory financing lines settle through the sale of your product. Once inventory or raw materials are turned into product and sold off to a customer. The sale creates and invoice, which can then be financed. The funds from financing the invoice can be used to settle the inventory line.
Who uses Inventory Financing ?
Inventory Financing is particularly suited to businesses in areas such as:
But any business that manufactures services or goods for onward transmission to other businesses and gives customers credit terms of 60-90 days, Inventory financing can solve the problems associated with cash flow.
Inventory financing could also be useful for start up finance, growing a business (putting cash to work quickly) and businesses that struggle to bridge the gap between manufacturing and shipping.
Get advice — for free
If you are considering Inventory Finance, why not speak directly to a lender instead of paying an additional brokerage fee which can often unnecessarily raise costs?