How to Strategically Use Inventory Financing

Being an entrepreneur is not for the faint of heart. Starting a business means raising capital to get it going. To be profitable, small business owners need to maintain their working capital, manage cash flows, and seek additional financing when needed. There are two small business financing options: equity financing and debt financing.

Most business owners don’t want to take on partners or angel investors because it means giving up a percentage of their companies. Instead, they turn to debt financing options like term loans, business credit cards, or lines of credit. Businesses can also access loans designed for specific purposes, such as equipment financing or inventory financing.

If your business maintains large amounts of inventory, read on to learn more about inventory financing and how you can best utilize it to grow your business

What Is Inventory Financing?

Inventory financing refers to loans that a business can use to buy more inventory. The loans are generally structured as short-term loans or as a revolving line of credit. The products bought from using the funds then generally serve as collateral.

Lenders typically offer financing based on a percentage of the inventory’s value. The rates vary depending on the loan provider and the products your business carries, but the range falls between 20% to 80%.

For instance, let’s say you own a shop at a ski resort and your business needs $100,000 worth of gear to be ready for the season. If you decide to borrow capital, you may find a lender who can lend you 50% of the inventory’s value. So, you’ll get funding for $50,000 that you can use toward buying the products you need.

This is why inventory loans can be an excellent option for businesses that need or maintain large amounts of merchandise. They allow business owners to strategically use the value of their inventory to raise capital, manage cash flows, and grow their businesses.

What Things Can You Use Inventory Financing For?

Inventory financing is a popular funding strategy used by businesses in the retail, wholesale, and manufacturing industries. If your business involves buying inventory of any kind, inventory financing can be helpful because it can keep your shelves stocked during busy seasons. On top of that, the additional capital can allow you to purchase products or raw materials in bulk at a discounted price.

Aside from using inventory loans to meet customer demand, you can utilize them to improve your offerings or launch new products. For instance, if you’re a ski gear retailer and your customers also ask for supplies for other outdoor activities, you could leverage inventory financing to stock more products, like snowshoes or ice fishing supplies.

Inventory financing is particularly beneficial to new businesses and startups because it frees up their capital. When most of their money is not tied up with inventory, they can maintain their cash flows and cover everyday operating costs even when experiencing slow sales.

Is Inventory Financing a Good Idea for Businesses?

Yes, inventory financing can be a good option for businesses to get additional capital. Like most financing options, you can use inventory loans to manage your cash flow and maintain inventory.

Here are some reasons an inventory loan works as a financing option:

  • With inventory financing, the loan is secured by the inventory you’re going to purchase, so you don’t have to put up personal assets for collateral.
  • The application and approval process is generally quick and easy, especially if you’re working with an online lender. You can get the funding you need in as little as 24 hours!
  • You only get approved for a percentage of the value of the inventory. For small businesses, this is beneficial because you don’t want to take on more debt than you can repay.

Ultimately, remember that loans mean more responsibilities. Before you apply for a loan, make sure you have a plan on how to use it for your business and pay it back. You should also have a clear understanding of your company’s cash flow. This means knowing where your revenue is coming from and understanding your sales cycle.

For example, let’s say you have a list of the products that sell the most and the projected sales you could potentially make during your high sales season. All this information can help you determine if taking on a loan is suitable for your business.

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Types of Inventory Financing

There are many types of loans, and some are better suited for a specific purpose than others. Below are several loan structures that you can use for inventory financing.

Short-Term Business Loans

Inventory financing can be structured as a short-term business loan. It’s a type of financing with a short repayment period of six to 36 months. With short-term loans, you receive a lump sum amount from a lender. You’ll then pay it back in fixed, regular monthly payments where the interest rate and fees are built into the repayment term.

As mentioned above, the inventory you purchase will serve as collateral to secure the loan. However, some inventory financing companies may still require a personal guarantee and general lien.

Clarify Capital has an easy approval process and flexible terms if you’re interested in short-term business loans. Prequalify for a small business loan today.

Inventory Line of Credit

A business line of credit works like a credit card or home equity line. You’re approved for a set credit limit that you can access whenever you need it. You’ll then only pay interest on the amount you withdraw from the line of credit.

Business credit lines are typically revolving, which means you have access to the maximum credit limit once it’s paid back and you can continuously draw from the available funds. This is why many business owners prefer the flexibility of credit lines as a funding option for ongoing inventory purchases.

Getting a line of credit is an excellent way to build up your credit rating. Apply for a business line of credit today with Clarify Capital. We’ll walk you through the entire process so you can make a better-informed decision.

SBA Loans

The U.S. Small Business Administration (SBA) is a federal agency that provides capital through loans and business grants. The loan programs are issued by lenders like banks and credit unions. Several programs, like microloans and 7(a) loans, can be used as inventory financing loans.

For microloans, borrowers can receive up to $50,000 to purchase inventory, equipment, or machinery. Meanwhile, with the 7(a) loan program, you can borrow up to $5 million to launch or expand your business operations.

SBA loans are small business loans partially guaranteed by the SBA. This means if a business defaults on payment, the government pays the lender the guaranteed amount. These loans have long terms and low interest rates, but the requirements are strict and the application process can take months.

Are you interested in learning more about SBA loans? Check out our SBA loan page for general requirement information and speak with a Clarify advisor to guide you through the application process.

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What Do You Need to Qualify for Inventory Financing?

Most businesses can qualify for lines of credit and short-term business loans. Check out the minimum requirements below and get your financial statements ready.

Time in Business

You will generally need to have been in business for at least six months. Lenders are interested in this information because it represents your creditworthiness. Since lenders see longevity as less risky, the longer you’ve been in business, the more confident they are in lending to you.

Monthly Revenue

Your business will need to generate at least $10,000 a month to qualify for most financing. This is because lenders want to know that you have solid revenue and can pay back your loans. The maximum loan amount your company can borrow is also calculated based on your income.

Credit Score

Your personal credit score is one factor that lenders look at when you apply for any kind of loan. At Clarify Capital, we recommend a minimum credit score of 550 because your credit score determines the interest rate you’re going to get. The higher your credit score, the better APR you’ll receive.

Easily Apply for Inventory Financing With Clarify Capital

How fast you can grow your business can be limited by your capital. Why not take advantage of financing options available to scale your business? Whether you plan to launch a new product or expand your offerings and carry more inventory, Clarify Capital is here to help you achieve your business goals.

We strive to get you the best deal possible. That’s why your dedicated Clarify advisor will work to get you the lowest interest rate possible because your best interest is our focus. Apply online or speak to us directly on the phone today and you could receive your funding as soon as tomorrow.

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