A lot of businesses often struggle with cash flow from time to time. With banks getting so uptight about granting financing to small businesses, it has become more challenging for entrepreneurs to secure funding to sustain their business operations and growth. Even if they qualify for funding from traditional lenders, it could negatively impact their scores if something goes downhill, say, if they miss the payment deadline or default.
Fortunately, one business financing option available for small business owners is inventory financing. As the name implies, inventory loans are financing that allows you to leverage your business’ inventory in exchange for cash. Your inventory acts as collateral which means that if the company cannot repay the financing, they can seize the stocks and use it as payment.
Even with that risk, inventory financing is still one of the most accessible financing options for small businesses. If you’re still on the fence about it, check out these five benefits of inventory financing for small businesses:
1. Unlock cash tied up to inventory.
Businesses have daily expenses to meet. If most of their capital gets tied up in their inventory, it could be more challenging for them to meet their day-to-day expenses. With inventory financing, the business can free up cash tied up in their inventory to improve their cash flow. They can then put the money towards business initiatives, including their monthly payables, marketing, more inventory, or business expansion.
2. It’s structured as a line of credit.
One of the things that draw business owners to applying for an inventory loan is that it can be structured as a revolving line of credit. This provides flexibility to small business owners since they can draw funds from the credit line whenever they need it as long as they don’t exceed the predetermined limit. With the money, they can pay for their operational expenses, meet payroll, or reorder inventory.
3. The credit line increases as your business grows.
Inventory financing allows you to meet your financial obligations, allowing business to grow. As the business grows, it may have to take on more financial obligations, requiring more cash to meet its growing demands. This means that they would have to turn to the lenders again for financing. And since you’ve built up your credit score and established a better credit report, the lenders will be more inclined to extend your credit line to accommodate your growing needs.
4. Improves cash flow during the slow season.
Seasonal businesses are more prone to experiencing cash flow gaps, especially during the year’s slower season. This makes it harder for them to meet their monthly payables like utilities, rent, or payroll. Moreover, in preparation for the business’ peak season, they need an additional boost in their cash flow to stock up on inventory.
With inventory financing, businesses can have the funding they need to pay for their financial obligations. They’ll have more cash available to purchase the inventory they need to meet their customers’ demands in time for the peak season.
5. Inventory financing doesn’t require additional collateral.
With inventory financing, the business’ inventory alone is enough to secure the loan. You won’t have to pledge any personal or business assets such as real estate, equipment, or invoice to secure the loan. This makes it less risky compared to other types of financing like business term loans.
6. The application process is straightforward.
Financing companies that offer inventory financing don’t require that much paperwork from the applications. At the very least, the borrowing company will have to submit documents like detailed financial records, identification, bank statements, balance sheets, and other essential documents. It’s also worth noting that service-based companies might not be able to qualify for inventory financing.
After they’ve submitted the documents, all there is left to do is wait for the lender’s approval. Once the financing company approves the application, the business can expect the funding to arrive within 24 hours.
7. It doesn’t add to your debt-to-income ratio.
The debt-to-income ratio is a measurement that lenders typically look at to measure how much debt you have compared to your monthly income. Basically, this tells them whether a person or business can afford to take out another loan or not.
Inventory financing is a type of business financing that doesn’t reflect on the company’s credit report. In other words, it will not add to your debt-to-income ratio and will not affect your ability to borrow more in the future.
Final Thoughts on Inventory Financing.
Inventory financing is just one of the many financing options available for product-based businesses. Leveraging your assets (in this case, inventory) to secure a loan can afford you better financing terms (i.e., more extended repayment period, low-interest rates).
With inventory financing, businesses are able to unlock cash tied up on their inventory to boost their cash flow. With more capital on hand, companies will be more confident to reorder more inventory or invest in potentially profitable business opportunities.