What is Inventory Financing and How Does It Benefit Small Business Owners?

Product-based businesses know the importance of inventory. Without it, you wouldn’t have a business to run. Inventory keeps your operations going and your customers happy. But if you find yourself in need of additional business financing, did you know you can use your inventory as collateral to secure the capital you need? 

If your product-based business could use some extra cash and you have a warehouse full of unsold inventory, inventory financing may be a viable funding option. 

In this article, we’ll learn what inventory financing is, the types of inventory financing, and how it benefits your business. 

What is Inventory Financing?

Inventory financing is an asset-based loan where borrowers can secure working capital by using existing inventory as collateral. The terms, rates, and loan amounts depend on the value of some or all of your inventory. Business owners sometimes use the funds to purchase more inventory, but they can also use it for other business expenses like equipment purchases, payroll, utilities, etc. 

This financing option is best for bridging short-term cash flow gaps for businesses with a huge chunk of their capital tied up to their inventory. It’s also a great option for stocking up inventory to prepare for the busy season. Inventory financing is often used by businesses with large quantities of unsold inventory, like retailers and wholesalers. 

2 Types of Inventory Financing

Inventory financing is usually structured in two ways: inventory loan or an inventory line of credit. While both options need to use inventory as collateral, they differ in repayment terms, payouts, and more. 

  1. Inventory Loan

Inventory loans are structured similarly to your class small business loan; lenders give you a lump sum which you’ll need to repay in fixed monthly payments over a specified period. You’ll need to repay the full loan amount and once you’ve repaid everything, you’ll need to reapply and take out another loan if you need additional financing. 

  2. Inventory Line of Credit

Inventory lines of credit provide you with additional working capital on an on-going basis. It’s structured similarly to business credit cards, where you’re given a credit limit that allows you to withdraw money as needed, provided that you don’t exceed the limit. 

Many business owners prefer inventory lines of credit so they’ll be able to handle emergency expenses that may pop up. Unlike loans, you don’t have to reapply if you need more money. Once you’ve repaid what you’ve withdrawn, your credit limit goes back up to its original value. Lenders may have you sign an inventory financing agreement detailing the terms and conditions of a potential long-term business financing partnership.

How Inventory Financing Benefits Small Business Owners

As mentioned, there are several ways you can use the funds from inventory financing. Here are some of the ways small business owners can benefit from this type of financing:

1. Secure Additional Working Capital

All types of businesses need working capital to operate, so securing additional capital is one of the main reasons business owners apply for financing. The funds from an inventory loan ensure that you’ll have enough cash in the event of business growth spurts and seasonal sales fluctuations. 

2. Buy Inventory

Small businesses commonly apply for inventory financing to purchase more inventory or raw materials. You can also use the funds to expand your product lines. By having a wide range of products, you’ll have more than enough to keep up with demand and keep your customers happy.

3. Marketing and Advertising

Many small business owners refuse to spend money on marketing and advertising because those cost a lot of money upfront. However, marketing is essential in establishing your brand and increase awareness. The money you get from inventory financing allows you to pay for online advertising, SEO, and other promotional strategies to take your business to the next level. 

4. Purchase Insurance

Insurance costs a lot, but it’s a necessary expense. Your business might need employee healthcare insurance, malpractice insurance, liability insurance, property insurance, and calamity insurance, and an inventory loan can help pay for the cost of buying insurance.

5. Seize Business Opportunities

Some business opportunities are just too good to pass up. If you need to jump at any opportunity to ensure the success of your business, you can use inventory loans to pay for these once-in-a-lifetime opportunities. 

If you have a high volume of inventory lying around, inventory financing is a great way to secure the additional working capital you need. But before you take out a loan, it makes sense to compare interest rates, fees, and even lending companies. Be sure to read the fine print, so you know what you’re agreeing to.

About the Author: Rumzz Bajwa is a digital strategist and content marketer at SMB Compass. She enjoys spending time with her family. She loves to go out and experience new moments whenever they come to light. Rumzz discovers satisfaction in investigating new subjects that help to extend her points of view. You can frequently locate her immersed in a good book or out searching for a new experience.

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