Inventory Financing

Table of Contents

1. What is Inventory Financing?

2. Who is This Good For?

3. When is This the Best Choice for Me?

4. When is This Not Advised?

5. Tips for Getting Approved.

6. Ingredients You'll Need on Hand.

7. Watch Out For...

1. What is Inventory Financing?

A bank line of credit secured by your inventory. This makes the cash you have tied up in your inventory more available to you.

2. Who is This Good For?

Businesses with physical, touch-and-feel inventory. If you're a service or knowledge-based firm, you probably don't have the kind of inventory that lenders feel is secure enough collateral.

Businesses with good credit and sales history; lending institutions aren't really interested in getting ownership of your inventory so they want a pretty good sense that you'll be paying back the money.

3. When is This the Best Choice for Me

• When you've got a warehouse of goods ready to ship, but find yourself short of cash to buy supplies for your next production cycle;

• When you have to maintain high levels of inventory to conduct ongoing business that keeps too much of your cash tied up.

• When you have good turnover in your inventory but are short on cash flow, and you have to keep replenishing your stock.

4. When is This Not Advised?

• When you've got a storeroom full of out-of-date or hard-to-sell merchandise; this isn't a solution for your business problem and adding interest charges will only make a bad situation worse;

• When you have very, very slow turnover of inventory and the interest charges will eat up any profit you might have: you've got a business problem that needs a better solution;

• When you're operating on such a slim profit margin that the additional payments of interest will make your inventory unprofitable.

5. Tips for Getting the Money

Get a very good system for maintaining information on your inventory; your lenders are going to want to know how old the inventory is, costs, etc.; get a computerized system for maintaining information and reporting to your lender the status of your inventory;

Make sure your assets are maintained in good shape; your lender may require to inspect the inventory from time-to-time;

Be able to show orders to give the lender confidence the inventory will be moving quickly;

Be REALLY careful about buying inventory; keep it as low as you can for doing business well and buy carefully so that you're not stuck with merchandise that won't sell or gets obsolete quickly.

6. Ingredients You'll Need on Hand

• An inventory of your inventory; your lender may require this to be audited or appraised by independent third parties.

• A basic financial package.

• An up-to-date business plan that shows your business is indeed on an upward growth spiral, indicating your ability to stay on top of loan payments.

• Your lender may want to see orders for merchandise, giving them confidence that the inventory will not age.

• Your lender may also require an additional form of collateral, such as a secondary position on a mortgage.

7. Watch Out For...

Many banks are not familiar with inventory financing, so you may have to do search for one that will do this kind of loan.

You'll have a line of credit secured by your inventory -- how elastic it is depends on the worth of your company's physical assets. What if you need more?

You may have to pay off the line of credit every 12 months -- that is, pay it off completely and not use it at all for one month.

If sales suddenly slow, you've got two problems: you may have to unload your inventory at a loss, undermining your ability to stay current on your line of credit. And the interest on the loan may sap your ability to keep production on schedule.

High interest rates or other fees.

Lenders may want security in place to make sure you are not disposing of your assets, their collateral, improperly.

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