Many companies have cash flow problems from time to time. With banks so strained on funding small businesses, it has become more difficult for entrepreneurs to secure funding to keep their businesses and growth going. Even if they qualify for funding from traditional lenders, it can have a negative impact on their scores if something goes downhill, such as missing the deadline or default.
Fortunately, an inventory funding option for small business owners is inventory funding. As the name suggests, inventory loans are financing options that allow you to use your company’s inventory for cash. Your inventory is used as security. If the company cannot repay the funding, it can seize the inventory and use it as a means of payment.
Despite this risk, inventory financing is still one of the most accessible financing options for small businesses. If you’re still on the fence, check out these five advantages of inventory financing for small businesses:
1. Unlock the money tied to the inventory.
Companies have to cover their daily expenses. If most of their capital is tied up in their inventory, it could be more difficult for them to cover their daily expenses. Inventory funding allows the company to free up cash that is tied up in its inventory to improve cash flow. They can then use the money on business initiatives, including their monthly debt, marketing, more inventory, or business expansion.
2. It is structured as a line of credit.
One of the things that induce business owners to apply for an inventory loan is that it can be structured as a revolving line of credit. This gives small business owners flexibility as they can withdraw funds from the line of credit at any time, as long as they don’t exceed the set limit. They can use the money to pay for their operating costs, settle payroll, or reorder inventory.
3. The line of credit increases as your business grows.
With inventory financing, you can meet your financial obligations and grow the business. As the business grows, it may have more financial obligations and more money to meet its growing needs. This means that they would have to contact the lenders again for funding. And since you’ve improved your credit score and created a better credit report, lenders are more inclined to extend your line of credit to meet your growing needs.
4. Improves cash flow during the slow season.
Seasonal businesses are more prone to cash flow gaps, especially during the slower season of the year. This makes it more difficult for them to meet their monthly liabilities such as utilities, rent, or payroll. Additionally, in preparation for the company’s peak season, they need an additional boost in their cash flow to replenish inventory.
With inventory financing, companies can get the financing they need to cover their financial obligations. They have more cash to buy the inventory they need to meet their customers’ demands in time for the high season.
5. No additional collateral is required for portfolio financing.
In the case of portfolio financing, the company’s portfolio alone is sufficient to secure the loan. You don’t need to pledge any personal or business assets such as real estate, equipment, or bills to secure the loan. This makes it less risky compared to other types of financing like business loans.
6. The application process is straightforward.
Financing companies that offer inventory financing do not require as much paperwork from the applications. At a minimum, the lending company must submit documents such as detailed financial records, ID cards, bank statements, balance sheets, and other important documents. It’s also worth noting that service companies may not be able to qualify for inventory funding.
After submitting the documents, all they have to do is wait for the lender’s approval. Once the funding company approves the application, the company can expect funding to arrive within 24 hours.
7. It doesn’t increase your debt-to-income ratio.
The debt to income ratio is a measure that lenders typically use to measure how much debt you have compared to your monthly income. Basically, this tells them whether or not a person or company can afford to take out another loan.
Inventory finance is a type of corporate finance that does not affect the company’s credit report. In other words, it won’t increase your debt-to-income ratio or affect your ability to borrow more in the future.
Final thoughts on inventory financing.
Inventory financing is just one of the many financing options for product-based businesses. By using your assets (in this case inventory) to secure a loan, you can get better financing terms (ie longer repayment period, lower interest rates).
With inventory funding, companies can unlock cash tied to their inventory to increase their cash flow. With more capital, companies will be more confident about re-ordering more inventory or investing in potentially profitable business opportunities.