All About Inventory Loans

Every small business owner understands the power of having cash in hand to take advantage of opportunities that present themselves.  The problem is that often cash flow is tight and funds are not available to purchase inventory for volume discounts or special discount buy opportunities.  The banking and business finance community have put together some solutions for small business owners to manage inventory and funding with inventory loans.

The inventory loan can be structured in several ways depending on your business credit, the lender, and your business goals.  A business that is asset strong and sitting on inventory can possibly get a revolving credit facility that is secured by the existing inventory on hand.  This is called an asset based inventory loan.  Several asset based lenders now offer inventory only loans.  When your inventory heavy and need cash to operate more efficiently the asset based inventory loan can offer a good solution.

The downside to asset based inventory loans is that they require expensive audits by banks or finance companies.  The lender needs to manage the collateral by making sure all the inventory stated on the inventory report really exist.  The lenders normally perform the inventory audit on a quarterly or 6 month time interval.  When you’re paying $750 to $1000 per day for these audits that can get expensive.  Another bone of contention is the loan formula is typically 30% to 50% of the wholesale value so you’re not getting near the advance on the collateral that accounts receivables financing can provide.

Since the banks have really cut back on business lending that requires some risk hundreds of new commercial lenders have jumped into the market proving new options for inventory.  If you have a smaller need, let’s say to purchase inventory you could look at the cash flow loans to cover the inventory purchase short term.  These loans are secured by cash flow and paid down over a 3 to 12 month time frame.  They can close and fund quickly allowing the business owner to take advantage of a good inventory purchase opportunity, but the cost of funds is normally very high.  Generally these cash flow loans or merchant advance loans will run 1.25% to 1.4% of the funds advanced.  When you’re dealing with cost of funds this high its critical to make sure your profit margin is strong enough for the loan to make sense.

In summary, inventory loans come basically in two forms.  You have asset based inventory loans that provide a loan against existing inventory and you have short term cash flow and merchant advance loans that provide a quick loan so you can purchase additional inventory and take advantage of profit opportunities.  Asset based inventory loans require tax returns, business financials, and reasonable business credit.  Short term cash advance loans normally require at least one year in business, but typically do not require much paper work as it’s a quick, but expensive business loan product.  One thing that both inventory loans offer is the ability to turn profit by using your company’s inventory effectively.

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