If you’re in the retail business, then you need merchandise. Without an inventory, you don’t have a business. But sometimes, your cash flow might be low, and you don’t have the funds on-hand to purchase the merchandise you need. So what do you do? You can turn to inventory financing.
In this post, we’ll explore inventory financing—what it is, how it works, and when to use it. There’s truth to the saying “you need money to make money.” But even if you don’t have enough of your own cash to bring in the profits, borrowed money can work just as well.
What is Inventory Financing?
Inventory financing is a way to borrow money to purchase inventory, most often through a short-term loan. With some lenders, the inventory you purchase with the borrowed money then serves as collateral to ensure you pay back the loan on time. In the event that you default on the loan, the inventory is given to the lender instead.
Let’s say you own a sporting goods store, and spring has just begun. Your customers are thinking about all the warm-weather sports they can play again—golf, baseball, soccer. You want to make sure you’re prepared to take advantage of the seasonal shift to restock your shelves with new equipment for the upcoming sports seasons. If you don’t have enough golf balls, baseballs and soccer balls in stock, then you’re going to miss out on key profits.
So even if you’re running low on cash flow needed to make these purchases, you can still find ways, using inventory financing, to borrow the funds to get the merchandise you want.
Is Inventory Financing Right for You?
Inventory financing can be a great option for some businesses. It can be the wrong choice for others. And some might not even be eligible for inventory financing in the first place.
Here are the questions you should ask yourself to figure out if inventory financing could work for you.
- Are you selling a physical product?
Inventory financing, of course, is for businesses that need inventory. If you’re not selling a physical product, then inventory financing isn’t for you. But if you own a store and you need goods on the shelf for your customers to buy, then inventory financing could be a great way for you to get the money you need. Whether you’re a retailer, wholesaler, or specialty shop, you can use inventory financing to get the money needed to buy the product you sell.
- Do you have a proven business track record?
It can be difficult for brand new businesses to use inventory financing. Lenders are more likely to work with you if they can see at least one year of proven success selling a product to an established customer base. Startup businesses, unfortunately, aren’t typically eligible for inventory financing for this reason.
- Are you willing to borrow enough money?
In addition to having a strong sales record, some times you also need to be looking to borrow a large sum of money. The minimum amount many lenders are willing to let you borrow could be around $500,000. To make the agreements financially viable for lenders, they often require businesses to take out large quantities of money. So if you’re looking to borrow only a small amount, again, inventory financing might not be for you. This said, not all lenders have these strict requirements. For example, Camino Financial is an alternative lender that offers microloans that range from as little as $5,000 to $75,000, to adapt to any of your inventory financing needs or to any investment plan you have for your business.
The Pros and Cons of Inventory Financing
To determine whether inventory financing could work for your business, you need to evaluate its pros and cons.
- Quick and easy access to capital
Inventory financing loans are easy to apply for, simple to get approved, and efficient at getting you the money you need to buy the merchandise your customers want. Because you can get the money from the loan quickly, you can act fast to take advantage of opportunities as they present themselves, like a limited time-sale.
- Variety of lenders
Lots of lenders and institutions offer inventory financing options. So if this strategy makes sense for your business, chances are good that you’ll find an institution with terms and conditions that work for you. There’s no need to pass up the opportunity to make a profit just because you’re short on cash at the particular moment you need to purchase the merchandise.
- More flexibility with a short-term loan
Because inventory financing options are most often short-term loans, as opposed to long-term loans, they give you more flexibility to act fast instead of planning ahead. Sometimes, loans with a longer repayment period can cause long-term complications. In addition to running your business, you also have to concern yourself with making monthly loan payments over a period of months or years. The agreements for most short-term loans can be completed within a few months. The idea is that you pay off the loan quickly while you sell out the inventory, and then you can move on to other matters. Getting a loan with Camino Financial isn’t meant to be a burden—it’s meant to help your business in a moment of need without creating added stress down the road.
- High-interest rates
Businesses are more likely to default on inventory financing loans than standard personal or business loans because there’s no guarantee that all of the inventory acquired will be successfully sold. As a safeguard against that potential outcome, lenders often charge higher interest rates for these types of loans.
- Potentially high fees
While processing the loan application and getting the money can be a quick and easy process, it could come at a cost. Bond Street says lenders will often charge a fee of as high as 5% to finalize the loan agreement, added to other costs like processing fees, late-payment fees, etc. Getting the loan might be worth the cost, but it’s something to be aware of before beginning the application process.
- The need for a personal guarantee
Some lenders require that you as the business owner also add a personal guarantee to the loan agreement. If that’s the case, then not only is your business liable for paying back the loan but so are you as a private individual. In the event that you can’t pay back the loan, your personal property may be at risk.
Remember: These strict features don’t apply to every lender! Keep reading to discover the flexible terms and fewer requirements that make Camino Financial different and true to their motto: No business Left Behind.
What Type of Inventory Financing is Better for Your Business?
There are different types of inventory financing that you should consider.
- Vendor financing
If your own provider offers you the financing option, you can receive funding to purchase inventory and then repay those borrowed funds in a short amount of time. Unlike most forms of inventory financing, this is a great way for new companies without established financial histories to borrow money so they can get their business up and running.
- Line of credit
Using a line of credit gives your business the flexibility to always have funds available whenever you need them. You can use the credit when you need it and leave it alone when you don’t. And if you don’t use the credit, you don’t need to pay any interest. There’s no fixed amount that you need to use—you can simply use the credit for however much inventory you need to purchase.
- Short-term business loans
If you sell your entire stock of inventory, you can pay back a short-term loan quickly. You should be smart about how much money you’re taking out and feel confident that you can sell the entirety of the merchandise you’re purchasing. A short-term loan doesn’t need to have a long-term effect on your business. By paying it back within a few months at most, you’ll have gotten what you needed and can move on to pursue other initiatives for your business—you won’t be stuck making monthly payments for years.
A short-term business loan from Camino Financial could be the solution that better adapts to your inventory financing needs. In fact, many of our members are using the funds from our loans for that purpose. When you apply for a business loan with us, we analyze your situation to match you with the best financing option. We’ll study the purpose you are intending for the loan and make sure you are comfortable with the fixed monthly payments and a convenient payback period between 18 to 24 months for our short-term loans. Our microloans loan amount range from $5,000 to $75,000 to adapt to your needs, even if you are not looking to invest a large amount of capital in your inventory.
What else makes us different from other inventory financing options?
- We have minimum requirements: you need to earn $30,000 in annual gross sales and have been operating your business for only 9 months.
- Our interest rates are reasonable.
- Our fees are low: the only fee you’ll have to pay is an origination fee (6.99% for microloans) and there are no prepayment fees if at any time you decide to pay off your loan.
- Our borrowers don’t need to put up collateral or any personal guarantee. In the case of inventory financing, this means you don’t need to put up the inventory you are acquiring as collateral to guarantee your loan.
- Our loan process is simple and quick: you can get the funds you need to buy your inventory in just 2 days! This is an excellent opportunity if you are trying to take advantage of a special sale or limited-time offer on inventory.
- After 9 months of timely payments, you can graduate to a second loan for a larger amount and lower interest rates. This will bring you the opportunity to obtain more inventory or improve any other area of your business.
You shouldn’t let a modest cash flow prevent you from purchasing the merchandise for your business. With inventory financing, you can borrow the money you need to buy products to sell to your customers. You just have to make sure you find the right fit for your business and the options that work best for you.