What Is Inventory Finance and How Can It Help Your Business Grow?

Inventory financing is a short-term loan that you take out to finance inventories when you are facing cash flow problems. This financing is suitable for small and medium-sized businesses.

The inventory you purchase is used as collateral against the money you borrow. It means that when you become unable to pay off the debt, inventory will be sold to cover the outstanding balance. Inventory finance in the UK is available from online lenders, specialist lenders and banks.

Types of inventory financing

There are two types of inventory financing: inventory loans and an inventory line of credit.

• Inventory loan

An inventory loan is akin to a business loan. When you borrow money only for the specific purpose of purchasing inventory, it is called an inventory loan. They work similarly to any other business loan. You will be required to discharge the debt in fixed monthly instalments.

• Inventory line of credit

This is quite different from an inventory loan. This provides you with a constant financing option. You can use funds as and when you need, based on the available limit.

Interest is accrued only on the unpaid balance, which means you do not have to pay off the whole balance at one shot. The amount you pay back instantly becomes eligible for refinancing inventory.

Why do businesses rely on inventory financing?

There are various reasons why businesses rely on inventory financing:

• Manage cash flow

Inventory financing will help you manage cash flow. You will be able to retain more money in your hand to cover business expenses. Every month, a fixed sum of money will go towards the debt, so you will face less cash constraint.

• Increasing inventory supplies

During boom times, the demand for your products increases, which means you will need to purchase more supplies of inventory. Even though your business has money to purchase it outright, it might not be a good idea, as you will be left with very little money to cover business expenses.

• Increased customer demand

Sometimes, the demand is more than the supply your business can offer. If you fail to meet your customers’ demand, you will certainly lose them. Over time, your sales will start declining. Companies finance inventory in order to avoid bearing the far-reaching impact of insufficient supplies. When you are able to constantly meet your customers’ demands, your business will build a positive reputation.

Advantages of inventory financing

Inventory financing has loads of benefits. It helps businesses which struggle with cash flow management.

• Improved cash flow

It helps improve the cash flow of your business as it spreads the cost of the inventory. It helps you retain money to cover other business expenses.

• Flexibility

An inventory line of credit provides you with flexible funding options. Whenever you need money, you can withdraw funds based on the available limit to buy stock. Unlike inventory loans, you have the flexibility to repay the amount. You will pay interest only on the unpaid balance.  

• Quick access to funds

Stock finance for online businesses provides immediate cash to buy inventory. They do not require too much paperwork as compared to traditional loans. When you have to urgently purchase inventory, you can get quick access to funds. You do not need to get into the hassle of loads of formalities.

• No additional collateral

There is no requirement to secure collateral for inventory financing. The inventory you purchase serves the purpose of collateral. In case you fail to repay your debt, the inventory will be repossessed to convert it into cash.

Drawbacks of inventory financing

Although inventory financing brings lots of benefits to businesses regardless of their size, it is subject to drawbacks as well.

• High interest rates

Interest rates are quite high, which increases the total cost of the debt. Whether you take out inventory loans or inventory financing, a high cost increases the risk of falling into debt. If your credit score is not up to scratch, you will more likely end up with high interest rates.

• The risk of inventory loss

Though inventory financing is not subject to additional collateral, the inventory you purchase serves the purpose of collateral. If you fail to discharge the debt, you will end up losing the inventory.

• Restricted loan amount

An inventory loan is usually smaller than traditional business loans. If you are looking to borrow a larger sum of money, you will not be able to receive approval. This is because these loans involve very high interest rates.

Tips for applying for an inventory loan

Here are the tips for you to apply for an inventory financing loan:

• Evaluate inventory value

How much inventory you need depends on the demand for your products. You can decide on the loan amount based on the value of the inventory. Make sure that you do not overborrow and underborrow. Inventory management tools can help you track inventory so you better know how much inventory you need.

• Choose a lender

Make sure to research the right lender. Compare interest rates, repayment terms, loan amounts and your lender’s reputation.

• Prepare documentation

You will need some documents to complete the process for qualifying for inventory loans. Required documents are:

• A complete list of inventories
• Financial statements, including balance sheets, income statements and cash flow statements
• A business plan if your trading history is less than two years.

• Submit application

Having submitted your application, you will need to wait for approval from your lender. They will assess your creditworthiness to decide on the loan amount. Once the approval decision is made, you will receive funds in your bank account.

The final word

Inventory finance can help grow your business faster because you can protect your cash flow. This spreads the cost of the inventory, so you do not struggle to meet other business expenses.

Whether you consider inventory loans or a line of credit, make sure that your creditworthiness is good, and you will not struggle with debt payments.

FAQs

• Can I apply for an inventory loan as a start-up?

Yes, you can, but you must have hit the breakeven point. Most lenders hesitate to lend money to start-ups that are not making a profit.

• Can I apply for an inventory loan without a credit history?

There is a possibility of applying for these loans without or with little credit history, but make sure that the lender you are applying to accepts borrowers like you. Since the risk is too high, interest rates will be high. Bear in mind, you will struggle to get approval for an inventory line of credit in the absence of credit history.

• Are there alternatives to inventory financing?

If you need a small amount of money to fund the gap in your inventory budget, credit cards should come in handy. If you need a large sum of money or you want to spread the cost of inventory, business loans should be an alternative.

• For which businesses is inventory financing suitable?

Inventory financing is suitable for manufacturers, wholesalers and retailers or seasonal businesses.

• How to identify which type of inventory financing should be used?

Inventory loans are best when you have to purchase in bulk, and there is a predictable cash flow. However, a line of credit is a suitable option when there is a seasonal surge in demand for products and unpredictable cash gaps.