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SpinDistribute.com Article Directory

The following article was published in our article directory on December 24, 2019.
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An Overview on Inventory Financing for Small Businesses

Article Category: Business

Author Name: Jason Cohen

All businesses are founded on two things: inventory, which can either be goods or services that have been produced or are under production, and cash flow, which in essence is the trading of the product for something that can be converted in order to create even more products – usually money.

Inventory financing, then, is the loan given to companies in order for them to finance the production of their products. In more technical terms, it is a revolving line of credit that uses the goods and services produced by the company that made the loan as the collateral if the said company fails to pay up.

Because one of the main barriers towards establishing a business is actually getting the resources, the money, to start producing what it is you want to sell, most business owners initially will either have to use their personal savings or more commonly, put up their property such as a car, a piece of land, or a house to qualify for a loan. Inventory financing cushions such risks and favorably distributes it with the entity that provides the loan. If they manage to sell their products, then they can proceed to pay the loan. But if for some reason they don't then they can just forfeit ownership of whatever they have produced and have that become the payment instead.

When applying for inventory financing, the bank or lender you are applying to will extend to you a loan and, as was stated, use the inventory that you will purchase with the loan as a collateral. However, this isn't the entire picture. While it is true that the lender will give you a loan to cover for the cost of your inventory, how much that cost will not be as direct of an affair to establish. Because it is their money on the line, the lender will of course ensure that you will have the ability to pay back the loan, or that your product's current value will be at least equal to the amount that they gave you.

In most instances, your lender will appraise the value of your inventory up to 50% to 80%, but bear in mind that this isn't on the product's market value. If for example your product costs $10 to produce and your asking price for it when you sell it is $20, your lender will not give you 50% to 80% of $20, which amounts to $10 to $16. Rather, it would be around $5 to $8 in proportion to the $10 manufacturing cost. If your inventory is comprised of intangible goods, or in general goods and services that are very hard or impossible to objectively liquidate, then you likely wouldn't be qualified for this type of loan.

In general, wholesalers, retailers, dealerships, and seasonal businesses are the most common types of businesses that apply for this type of loan. Inventory financing may also be used in other areas of your business, such as covering for seasonal fluctuations in your cash flow or for financing a new product launch.

Keywords: Small business loans, Business services, Start-up capital, inventory capital, seasonal emploee funding

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