Limitations include added inventory accountability and potentially high interest rates. If a business is growing and moving merchandise quickly, inventory financing may be a good move. Arrangement A typical inventory financing arrangement occurs when a financing firm buys inventory stock from a manufacturer on behalf of the buyer, according to Entrepreneur.
The financing firm holds the stock until there is a committed buyer for the merchandise. Theses loans are often short term. Eligibility Inventory financing often requires some track record of sales where inventory is consistently turned into cash.
It doesn't always work with start-ups, according to Startupjunkies. Companies seeking inventory financing are usually eligible if they have a lot of inventory, high demand and high inventory turnover. Additionally, a steady sales history, a mature product and low debt are also attractive to financiers. Companies with aging inventory, poor sales performance and high debt, or those looking for long-term loans are poor candidates for inventory financing. Requirements Lenders are often very stringent about inventory control and product movement.
Companies must provide lenders with timely accounts receivable, shipping and returns information on products. Often this means creating a detailed and appraised inventory system. In some cases lenders want to see the merchandise, so it is important to safeguard items from damage. Financing also often requires proof of sales orders. Lastly, a current business plan that illustrates company growth is required, because lenders want reassurance of repayment.
Benefits Inventory financing allows a company to use money that is otherwise invested in inventory on other items. It can often lead to discounted purchases, according to Entrepreneur. With more money to buy inventory, bulk sales are often sold at a more affordable prices.
Acquiring the added financing also may give companies more favorable payment options with the manufacturer, resulting in more time to pay and fewer late fees. Drawbacks There are some drawbacks to inventory financing. If business declines, losses may occur, because inventory must be sold quickly.