Inventory Financing
1. What is Inventory Financing?
2. Who is This Good For?
3. When is This the Best Choice for
Me?
4. When is This Not Advised?
5. Tips for Getting Approved.
6. Ingredients You'll Need on
Hand.
7. Watch Out For...
1. What is Inventory Financing?
A bank line of credit secured by your inventory. This makes the
cash you have tied up in your inventory more available to you.
2. Who is This Good For?
Businesses with physical, touch-and-feel inventory. If you're
a service or knowledge-based firm, you probably don't have the kind
of inventory that lenders feel is secure enough collateral.
Businesses with good credit and sales history; lending institutions
aren't really interested in getting ownership of your inventory
so they want a pretty good sense that you'll be paying back the
money.
3. When is This the Best Choice for Me
When you've got a warehouse of goods ready to ship, but find yourself
short of cash to buy supplies for your next production cycle;
When you have to maintain high levels of inventory to conduct
ongoing business that keeps too much of your cash tied up.
When you have good turnover in your inventory but are short on
cash flow, and you have to keep replenishing your stock.
4. When is This Not Advised?
When you've got a storeroom full of out-of-date or hard-to-sell
merchandise; this isn't a solution for your business problem and
adding interest charges will only make a bad situation worse;
When you have very, very slow turnover of inventory and the entire
line of credit can be secured by your inventory. This makes the
cash you have tied up in your inventory more available to you.
5. Tips for Getting the Money
Get a very good system for maintaining information on your inventory;
your lenders are going to want to know how old the inventory is,
costs, etc.; get a computerized system for maintaining information
and reporting to your lender the status of your inventory;
Make sure your assets are maintained in good shape; your lender
may require to inspect the inventory from time-to-time;
Be able to show orders to give the lender confidence the inventory
will be moving quickly;
Be REALLY careful about buying inventory; keep it as low as you
can for doing business well and buy carefully so that you're not
stuck with merchandise that won't sell or gets obsolete quickly.
6. Ingredients You'll Need on Hand
- An inventory of your inventory; your lender may require this
to be audited or appraised by independent third parties.
- A basic financial
package.
- An up-to-date business plan that shows your business is indeed
on an upward growth spiral, indicating your ability to stay on
top of loan payments.
- Your lender may want to see orders for merchandise, giving
them confidence that the inventory will not age.
- Your lender may also require an additional form of collateral,
such as a secondary position on a mortgage.
7. Watch Out For...
Many banks are not familiar with inventory financing, so you may
have to do search for one that will do this kind of loan.
You'll have a line of credit secured by your inventory -- how
elastic it is depends on the worth of your company's physical assets.
What if you need more?
You may have to pay off the line of credit every 12 months --
that is, pay it off completely and not use it at all for one month.
If sales suddenly slow, you've got two problems: you may have
to unload your inventory at a loss, undermining your ability to
stay current on your line of credit. And the interest on the loan
may sap your ability to keep production on schedule.
High interest rates or other fees.
Lenders may want security in place to make sure you are not disposing
of your assets, their collateral, improperly.
|