One of the most critical components of your business is its ability to maintain inventory. Customers will want to ensure that you are able to fulfill orders after they are processed. For these reasons, it can be advantageous to always have cash on hand for inventory purchases. You’ll want working capital to ensure that you can make large inventory purchases prior to seasonal increases in demand. In order to maximize your efficiency, you should always ensure that you have the capability of filling any order. Also, you can save a considerable amount of money by purchasing bulk orders, which is another reason an inventory loan may come in handy.
Based on a survey which took place in the Spring of 2016 by the Electronic Association (ETA), over half of the surveyed participants (51%) stated that their primary reason for seeking a business loan was for the purpose of obtaining inventory financing. Additionally, the majority of the businesses stated that they expected to receive a 5X return on investment for every dollar that was borrowed. In this way, the businesses were planning to leverage the funds that were borrowed in order to increase their ROI (Return on Investment). As long as the business has the required cash flow to make the loan repayments on time, obtaining an inventory loan could be a stellar choice.
How do Inventory Loans Work?
There are several different ways in which the inventory loan can be structured by taking into consideration your business credit, the goals for your business, and the lender. When a business is considered asset strong and there is a surplus of inventory, it is possible for the business to receive a revolving credit loan that is secured by the inventory on hand. When a business obtains a loan backed by its inventory assets, this is called an asset-based inventory loan. There are many different lenders that are currently offering inventory only loans.
Another type of inventory loan is a cash loan for the purchase of inventory. If you have a need for cash to purchase inventory, the lender will provide a quick cash loan which enables the business owner to purchase inventory and take advantage of discounts and other profit opportunities. When comparing these two distinct types of inventory loans, it helps to understand the differences. An asset-based inventory loan requires business financials, tax returns, and good business credit. Learn more about how to apply for a business loan with bad credit. However, short-term cash advance loans typically need just one year in business and not much paperwork but the long-term cost of the loan may be more. Both of these options provide the business owner with the opportunity to turn a profit by using the company’s inventory in the most effective and efficient way.
Should My Business Get an Inventory Loan?
When making the decision as to whether or not to obtain funding for an inventory loan, it is imperative to consider that the loan term plays a big role in the final decision. In general, a business should be aware that the longer the term of the loan, the smaller the periodic payment will be, however, the total dollar cost will be smaller. In addition, a loan that has terms shorter than a year’s time due to calculations of the APR will typically have a higher APR than a loan with a similar interest rate at a longer term. The cost of the loan could make it prohibitive to obtain it and as such, due diligence regarding the terms of the loan should be done prior to taking out the loan.
Inventory loans cater primarily to enterprises existing in the retail industry. Retail providers are normally keen to prepare for seasonal changes in demand and receive discounts for purchasing goods in bulk. Because these businesses know that demand will increase, they are also assured that they will be able to pay back the loan quickly and with minimal interest. Inventory loans are normally perfect fits for large retailers who need to keep large amounts of product on hand in warehouses and other storage facilities. Many of these large companies may have months worth of inventory on hand and require additional funds to continue adding inventory.
Business Line of Credit – An Alternative to Standard Inventory Loans
An alternative to standard inventory loans that many businesses have opted for is the business line of credit. This is a much more flexible and accessible loan option that still provides the cash on hand that businesses need to increase their inventory. A business line of credit differs from a traditional inventory loan in that it allows the business owner access to a part or to all of the entire credit line. Once the credit amount is repaid, the business owner can then access the funds once again as needed. In addition, interest is only assessed on charges that are used by the business owner.
The inherent flexibility that a business line of credit affords the homeowner is one of the primary advantages of going this route vs. a traditional inventory loan. In this situation, the enterprise owner can access funds whenever needed without the requirement of going through additional credit approvals each time. Once a line of credit is opened, the business owner can get access to a stated amount of funds as required.
The same due diligence should be done with a business line of credit as with a traditional inventory loan. The rates and credit limits are established by lenders based on an evaluation with many lenders charging an annual fee for the line of credit in addition to interest. In the event that the line of credit will be frequently accessed with many different transactions using the credit line, additional fees may apply. However, the benefit of being able to access immediate funds when needed is a favorable benefit that far outweighs the minor fees which may be assessed. Be sure to check reviews and references on companies that advertise a business line of credit no credit check required.
When To Get an Inventory Line of Credit
One of the main things that inventory-dependent businesses seek to avoid is running low on inventory. Nothing is worse than watching as your merchandise stock continuously depletes while you have no way of replenishing it. This is why many retail and merchandise businesses need to know when exactly to get an inventory loan or line of credit to prevent this scenario from occurring.
Prior to Seasons Changing
Many retailers find that certain seasons are more productive than others. An inventory line of credit can be used to efficiently manage seasonal dips in business and can be used to replenish inventory at just the right time. This will ensure that enough inventory is on hand to meet the demands of the new season.
When Starting A New Business Venture
Another time that it makes sense to obtain an inventory loan is when beginning a new business venture. It may be difficult to learn exactly what products will sell out faster than others so business owners can benefit by purchasing a standard stock in each product category in order to have sufficient items on hand to meet the supply of their customer base.
When placing re-orders
Another time that it makes sense to obtain an inventory loan is when placing reorders for specific merchandise. If you have sold out of one category but are fine in others and would like to replenish the category that is the highest seller then an inventory loan makes the most sense.
To take advantage of discounts and specials
When a business owner becomes aware of a special deal for bulk ordering, it is wise to stock up on that particular merchandise in order to turn a profit. However, in many instances, the business owner simply doesn’t have sufficient cash on hand to make the purchase in order to take advantage of the discount. This is when it makes sense to apply for an inventory loan or line of credit so that the order can be made and a significant ROI can be realized.
When making the decision as to whether or not to obtain an inventory loan, there are many factors to take into account. It is critical for a business owner to genuinely assess their ability to repay the loan instead of relying on the sales of the inventory they plan on purchasing. By taking an honest look at their finances and potential ROI, as well as comparing different loan terms, a business can have a solid idea as to whether or not an inventory loan is the best option for their needs. There are many different advantages to obtaining an inventory loan or an inventory line of credit.
Some of the Benefits of Obtaining an Inventory Loan Include:
Keeps shelves fully stocked – With an inventory line of credit, the shelves at your place of business will consistently remain fully stocked with all of the merchandise needed to properly run your business. Since your inventory is the main way in which your business makes a profit, it makes sense to focus on this critical component.
Offers your business a revolving line of credit – Another advantage to obtaining an inventory loan is that it provides your business with a much-needed revolving line of credit. When your business has access to cash whenever the need arises, you can feel confident knowing that you can handle any potential inventory shortages or emergencies that may arise.
An alternative source of funding – Traditional loans are hard to come by especially for newer businesses. They require that the business owner have a high credit score, significant assets, as well as adequate cash flow. When a business lacks all of these credentials, inventory financing can provide the perfect source of alternative funding. It provides your business with access to cash using inventory as collateral for the ultimate in convenience. If you're a veteran the take a look at VA small business loan requirements.
Pay only on what you use – In the case of getting an inventory line of credit, the business owner only pays on what they use. Once the capital borrowed has been paid for, they can obtain access to additional funds on their line of credit. This consistent access to business funds can make a significant difference in the overall performance and profitability of a business.
Taking the next steps
Whether your business is a startup or well-established business in need of funding to purchase inventory, a business line of credit can provide the perfect solution. When taking the next steps to obtain an inventory line of credit, it is important to begin by contacting potential lenders or using a third-party provider. A third party provider can contact different lenders on your behalf in order to find the perfect options for your needs.
Apply For an Inventory Loan Today!
If you are a new business with limited credit history you may find it difficult to get an inventory loan through a traditional lender. Banks and financial institutions often require extensive documentation and business history to qualify for their inventory loans. We take the pain out of this process by only looking at simple revenue data when making our lending decisions. Our entire application process is streamlined through our online portal that is able to make speedy automated decisions. We can give you access to up to a $150,000 line of credit, which will ensure that you always have enough capital on hand to purchase additional inventory. Don’t wait for the busy season to approach, apply for a line of credit through our online lending portal today! Also, take a look at small business credit cards which may be a better option depending on how much financing you need.
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