3 Things to Consider Before You Explore Inventory Financing

Inventory is more than just products to sell—it’s an asset on the balance sheet that can be used whether it’s in storage or on shelves. Not only is it useful to the development of your product, but it can act as collateral if you need to apply for inventory financing.

An offshoot of asset-based lending, inventory financing enables companies to use their inventory as collateral for loans. B2B companies can use their physical assets in conjunction with various intangibles, such as accounts receivables, as collateral. B2C companies, on the other hand, can only use inventory and, in some cases, equipment as collateral for inventory loans.

For small-business owners and entrepreneurs, inventory financing (or other asset-based loans) can be the difference between success and failure. Uncovering alternative financing solutions can provide relief in a landscape in which small businesses and entrepreneurs are under intense pressure from unpredictable demand fluctuations and even overall business continuity. Inventory financing is one way to keep inventory stocked while maintaining the working capital your small business needs to thrive.

What’s to Gain From Inventory Financing

There are many types of loans available to companies, and the current economic climate has caused a lot of business owners and entrepreneurs to weigh their cash-flow options. While quick business loans can provide a direct path toward much-needed funds, asset-based loans like inventory financing can be more sustainable options if inventory is a crucial part of your business. After all, it’s good business sense to tie the capital you need to the asset class (e.g., inventory) you rely on the most. This also enables small businesses to have capital available to purchase more inventory when they need it.

For example, my firm recently worked with a manufacturing company that was looking for a new lender for a variety of reasons. This company’s primary goal was to get a higher advance rate and more liquidity against its collateral. We did this by looking at all of the company’s inventory on hand, including inventory in transit, raw materials, work in progress and finished goods. In the end, the company gained more capital for growth in comparison to the limit it had due to capital constraints.

What to Do Before Entering an Inventory Loan

Like an SBA loan or similar financing options, inventory loans shouldn’t be entered into lightly. Here are a few things you should consider before exploring inventory financing:

1. Maintain a perpetual inventory system.

There’s a need for a perpetual inventory system—lenders will almost always require it. Perpetual inventory is an accounting process that tracks how inventory is sold or purchased through a digital point-of-sale system or software. This allows you to collect an accurate, immediate reading of how much inventory you have on hand, which will be important if you need to meet specific ratios of inventory to cost of goods sold for your inventory financing lender.

 Uncovering alternative financing solutions can provide relief in a landscape in which small businesses and entrepreneurs are under intense pressure from unpredictable demand fluctuations and even overall business continuity.

2. Use previous inventory appraisals.

Similar to inventory systems, lenders will almost always request inventory appraisals. Some lenders might even ask for an entirely new appraisal, so you may need to be able to go through the process quickly and efficiently before you can receive an inventory loan. A third-party provider can step in to conduct the appraisal, reviewing storage facilities, accounting and whatever inventory system you use. Keep the report the provider generates as a show of preparation for future lenders.

3. Know how much capital and inventory you need.

You should always be mindful and transparent of your company’s assets and capital—even if you’re not entering into an asset-based loan. This information can help you plan for what’s to come and get a good sense of the inventory that’s available to sell, how much you need to purchase and what you could potentially borrow against. Keeping these figures up to date allows you to focus on your objectives before taking on an inventory loan. Additionally, it fosters the proper management and oversight of available inventory to ensure you don’t deplete your resources and impede production.

While there are multiple options for small businesses and entrepreneurs in need of cash-flow injections, inventory financing is the best choice if you rely on inventory above your other assets. An inventory loan can give a boost in growth and working capital, allowing you to maximize current—and future—opportunities.

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