Finance

Types of Inventory Financing and What They Offer

Inventory financing has proven an effective way of businesses accessing products to sell. This approach allows a company to secure credit to finance the purchase of stocks or inventory. In turn, the purchased products act as collateral for the short-term loan. There are two main types of inventory financing: line of credit and inventory loan. Here are a few insights into each.

Inventory Loan

An inventory loan is a short-term credit extended to a business that is in immediate need of cash. This company should be ready to use its inventory’s resale value as collateral for the loan. This loan is usually a one-time offer.

The tenor of such inventory loans is significantly short. Often, you will need to repay it within three to twelve months. The amount offered is no more than $500,000 in most cases. However, you must prove that you have been in business for some time, often approximately six months.

While you might want a loan equivalent to your inventory value, it might not suffice. Lenders will be willing to offer between 20 and 80 percent of this value, depending on the nature of the inventory. For this reason, it would be best to compare different lenders before settling for one. Since your inventory is collateral, the lender can exercise their right over stocks if you default on the loan. However, you are free to renegotiate the terms to avoid this.

Line of Credit

Suppose you want a flexible loan. It would be best to consider a line of credit in this case. Financial institutions offer this credit facility, including banks, governments, and other businesses or individuals. This vast pool of options allows you to select a provider with much friendlier terms in the long run.

This credit facility has a revolving nature. That means it is not a one-off loan, giving the business flexible terms and access to credit. The only catch is that the company must commit itself to make regular payments. You will also need to meet specific terms and conditions of this arrangement to avoid contractual breaches.

Different lenders offer different interest rates on their products. However, this rate is often much friendlier than what’s provided in the inventory loan. Also, you can access enough money to facilitate inventory purchases without going through a lot of hassles.

Benefits of Inventory Financing

Once you understand which inventory financing model to use, you’ll need to choose an excellent lender. Regardless of the type of inventory financing selected, a great lender allows you to enjoy various benefits, including the following.

  • This loan gives you access to working capital, allowing you to meet various everyday expenses.
  • It allows you to meet unforeseen demand or supply chain issues. This way, you do not compromise your business image.
  • Inventory financing gives you immediate access to money. The process is significantly short, allowing you to meet your most pressing issues.

In summary, inventory financing is what you need to keep your business going, thanks to improved cash flow. However, you must compare the terms of the financing options above, ensuring that you choose a better option.

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