A Quick Look At Inventory Loans for Your Business
Effective inventory management impacts every aspect of your business—from having fully stocked shelves in your store to fulfilling orders timely. Having the resources to keep the right amount of inventory on hand is crucial to keep your business moving on the right track. As you work to meet customer demands and grow your business, you may discover that you can benefit from inventory financing.
Inventory financing is a type of business loan that provides a term loan or a line of credit to purchase inventory, or to purchase raw materials that are then manufactured into finished goods. The inventory in turn is used as collateral. This extra boost of capital can help businesses:
- Alleviate short-term cash flow shortages
- Prepare and accumulate inventory for high-demand seasons
- Expand product lines
- Unlock capital tied-up in inventory
How Does Inventory Financing Work?
When you apply for inventory financing, generally, you can expect to be able to finance at least 50% of your inventory purchase if approved. The inventory you plan to buy typically acts as collateral for the loan.. However, if you default on the loan, the lender could seize the inventory to cover the balance owed. The good news, with inventory financing, you have many options and alternatives.
Term Loan: You receive a lump sum of capital to purchase your inventory and pay back that amount, with interest, over time.
Business Line of Credit: You receive a credit line from which you can draw to purchase your inventory. Unlike a term loan, which requires that you pay back the entire amount that you’ve borrowed with interest, you only pay interest on the amount you draw from your credit line.
SBA Loans: The Small Business Administration’s 7(a) loan program and CAPLines are designed to help small businesses meet their short-term and cyclical working capital needs. This SBA inventory financing option works as a business line of credit, with a maximum of $5 million. Maturity lengths can go up to 10 years.
Inventory Financing Requirements
Every lender, loan option and qualification may vary, but here's what you generally can expect as some baseline requirements:
- Be a product-based business: By nature of the type of financing, your business cannot be a service-based business.
- At least one year in business: You need to be in business for at least one fiscal year for consideration.
- Meet loan amounts: Most lenders will grant loans or a line of credit for a minimum of $50,000 and possibly up to $1 million or more.
- Minimum annual revenue: $100,000
- Minimum credit score: 600
How to Apply for Inventory Financing?
During the application process, a lender will look at your personal credit history and business finances. Termed the due diligence process, the lender will evaluate your current inventory management system, the value of your inventory, the loss or damage rate, profit margins and inventory turnover. Lenders want to finance inventory that has a good resale value in the case that you default on the loan. Having a successful track record with buying and selling inventory and keeping timely and accurate inventory records will increase your odds of obtaining a loan. Some expectations include:
- Detailed financial history: Part of the loan application process includes submitting an application followed by providing detailed financial records to the lender, including tax returns, balance sheets, cash flow statements, profit and loss statements, and inventory turnover ratios.
- Assessment of current inventory: The lender may want to see an estimate of value for the inventory you already have on hand, how quickly you typically sell inventory and an estimate of resale value for the inventory you plan to purchase.
- Detailed inventory system: Some lenders may expect that you can provide reports on the shipping and returns on products, accounts receivable or sale order receipts, and anything else that proves that you are monitoring and safeguarding the merchandise.
- Adequate time for due diligence: Depending on your lender, your credit history, and your needs, the underwriting process may take several weeks.
- Review offer: If approved, a lender will then present you with a preliminary offer that details the loan or line of credit amount, interest rates and terms.
Inventory loans can be a beneficial financing tool for your business. This is especially true if you run a business that has highly seasonal sales volume or if you can purchase supplies at a discounted rate.
The Savoy Bank Lending Team is here to help answer your questions and determine which inventory loan is right for you and your business needs! Learn more about financing solutions for your business here.