Everything you need to know about Inventory loans

Inventory loans are a type of financing that allows businesses to borrow money based on the value of their inventory. This can be especially helpful for businesses that need to purchase new inventory in order to keep up with demand, but may not have the cash on hand to do so. By using inventory as collateral, businesses can secure a loan that can be used to purchase new inventory or to cover other expenses.

Additionally, inventory loans can be a useful tool for businesses that need to free up cash flow, as they can use the funds from the loan to pay off other debts or invest in growth opportunities. Overall, inventory loans can be a valuable resource for businesses looking to manage their cash flow and grow their operations

It has become easier to sell online in many ways. Since 2019, global ecommerce sales have more than doubled, and there are a thousand tools available to help you sell and reach new customers.

In spite of this, inventory management has never been harder than it is today. As global events continue to challenge supply chains, and prices increase on suppliers, shipping costs have increased sharply.

It is stressful to have your sales directly handed over to your competitors in the event of a stockout. You will be able to take out an inventory loan as a business owner in this situation to cover the costs of making sure you can meet demand.‍

To help you determine whether inventory loans are right for you, we’ve put together this in-depth guide.

What are inventory loans?

Retail and ecommerce businesses use inventory loans to buy inventory as a short-term loan. Like traditional business loans, inventory loans must be repaid over a fixed period or in a lump sum as soon as the inventory is purchased.

An inventory loan is different from other business loans since you don’t have to put up collateral such as a house, car, or equipment. In place of a loan, you use the inventory you own or plan to purchase as collateral.

ƒBusinesses that need to purchase inventory can obtain inventory loans as a form of short-term business financing.

Why choose inventory loans?

The purpose of inventory loans is to assist your business in buying inventory.

An inventory loan may be necessary if your stock costs are higher than you anticipated or your demand exceeds your expectations.

If a business is having short-term cash flow problems and needs a little help to purchase inventory, this type of inventory financing could be a lifesaver.

When small business owners can use inventory loans

An inventory loan can be used for a variety of reasons by small businesses, including:

• There is a short-term cash shortage that needs to be covered
• Black Friday and Christmas are busy seasons for retailers, so they need to prepare and stockpile inventory
• Their product line needs to be expanded
• Existing inventory needs to be unlocked to release capital
• To meet customer demands, they need to secure cash upfront

You must have a plan for selling the stock you buy at a profit before applying for inventory loans. You will have trouble making repayments if you don’t sell the stock.

Inventory loans vs an inventory line of credit

An inventory loan and an inventory line of credit are two types of inventory financing that are often referred to as inventory financing.

It is both a matter of purchasing inventory and securing the loan with that inventory.

The standard inventory loan works just like any other loan. The process has to be restarted if you need additional financing.

Unlike a regular business line of credit, an inventory line of credit provides ongoing, as-needed funding. Businesses with the expectation of needing financing again can consider this option. In most cases, businesses should start with inventory loans before applying for a line of credit.

Which businesses benefit from inventory loans?

The most benefit of inventory loans is for small businesses that sell products online or in-person. A loan for inventory is less likely to be applied for by larger, more established companies, since they are more likely to get a line of credit that covers inventory costs.

An inventory financing loan may be a good option for your small business if it sees strong, predictable sales. Your inventory sales can quickly cover the loan costs, since the sale of the inventory is about to be made.

Eligibility for inventory business loans

Your business may be eligible for an inventory business loan depending on the terms of different banks and online lenders.

However, to qualify, your company should generally meet these requirements:

In business for at least a year

At least one year of revenue must be generated by your business. It is easier to get a loan approved if you have been in business for a long time, because you have a more extensive sales history.

Even though it’s pretty rare for a brand new business to receive an inventory loan, you can still find a lender with high interest rates willing to take the risk.

Sales history

During the loan application process, you will need to demonstrate the profitability of your business and your ability to repay the loan.

Your business’s previous financial and inventory records will determine your eligibility for an inventory loan, so be prepared with a detailed sales history report.

Inventory turnover, as well as sales projections, should be included in the report.

A detailed inventory system

Inventory control and product movement can be very important to lenders. In order to understand where the product is and where it is going, they want to know exactly where it sits.

Reports on shipping, returns, receivables, and sale orders will be required on a regular basis.

No major credit violation

Your business credit history is checked by lenders. Bankruptcies, repossessions, and tax liens in the business’ recent history could prevent approval of a loan.

The advantages of inventory loans

Let’s walk through the pros and cons of inventory loans.

No need for a personal guarantee

Collateral does not need to be provided in the form of a home, car, or another personal asset. Therefore, you don’t have to worry about losing your home if you don’t sell all of your stock.

If you take out an inventory loan, your only risk is the inventory you purchased.

Fast process

The process of getting an inventory business loan is quicker than getting a conventional business loan, assuming you are eligible and have all the required documents in order.

Meet customer demand

The advantage of inventory loans is that they allow you to stock your warehouses well during peak seasons, resulting in more sales when demand is higher.

Improved cash flow

Stocks can be released and cash freed up. Your newly acquired stock could be promoted in a number of marketing campaigns.

No personal credit score required

Getting an inventory loan does not require you to worry about your credit score. The credit history of your business is usually checked instead when you apply for a business inventory loan.

The disadvantages of inventory loans

As with any type of loan, inventory loans come with a number of disadvantages these are:

It’s tough to get approval

Especially if you’re applying for a new product, lenders may take a while to assess your application. If a business has already proven its products are successful, lenders are more likely to approve inventory loans.

The interest rates are higher

Lenders charge higher interest rates on inventory loans because personal guarantees are not required. The interest rate on inventory loans typically ranges from 8-10%.

You may need further business financing

For your business to grow meaningfully, you’ll probably need other sources of funding aside from inventory loans. Inventory loans can only be used to purchase inventory.

How to know if you need an inventory loan

Retailers without enough capital to buy inventory can take advantage of inventory loans.

There may not be enough capital for them to:

• To save money in the long run, purchase stock in bulk at a discount
• Make sure you have enough inventory to cover peak trading periods like Black Friday
• Increase cash flow and buy inventory
• Grow their business to meet customer demand

Frequently asked questions

What types of businesses are eligible for inventory loans?

Inventory loans can be available to businesses of all sizes and in different industries, such as retail, manufacturing, and distribution. However, eligibility criteria may vary depending on the lender, such as minimum credit score, revenue, and collateral requirements.

How much can a business borrow with an inventory loan?

The amount of money that a business can borrow with an inventory loan depends on various factors, such as the value of the inventory, the lender's policies, and the borrower's creditworthiness. Typically, lenders may offer inventory loans that range from a few thousand to millions of pounds.

Are inventory loans secured or unsecured?

Inventory loans are typically secured loans, which means that the borrower must provide collateral in the form of inventory. The lender can seize the inventory if the borrower defaults on the loan. However, some lenders may offer unsecured inventory loans, which do not require collateral but may have higher interest rates and more stringent eligibility criteria.

How to apply for an inventory loan

Step 1: Determine the amount and type of inventory needed

You need to decide how much money you need and what you’re going to use it for before applying for an inventory loan.

You should consider seasonality and sales volumes, as well as economic factors that may affect customer activity, when determining what you need.

It is possible to overestimate your needs and end up with hefty payments and unsold inventory. On the other hand, underestimating can leave you scrambling to find more inventory or having to return to the lender for more inventory financing.

Also, lenders will be more likely to approve a loan if you have a track record of selling the inventory you’re applying for.

Step 2: Get your financial records ready

Don’t forget to prepare all the required documentation before applying for an inventory loan. The lender should be able to get a comprehensive idea of your company’s financial status from this documentation.

You will need to prepare the following financial documents:

• Balance sheets
• Profit and loss statements
• Business bank statements
• Inventory list
• Inventory management records
• Sales forecast
• Business tax returns

Step 3: Complete the application

The application form can be completed once all of your financial documentation is ready, and it can be submitted along with your documents. Basic information such as the name of the business owner, the name of the business, and the amount of the loan will be included in the form.

A lender will initiate the ‘Due Diligence Period’ if they determine you are eligible for an inventory loan. Your business is investigated as part of due diligence.

Step 4: Go through the due diligence process

A loan agreement is usually required before due diligence is complete, since due diligence is a lengthy process. By signing this agreement, you reduce the risk that you will not take out the loan.

If you change your mind and cancel the application, they want to know they aren’t wasting their time.

It may be necessary for you to submit a field audit during the due diligence process. If you store inventory in an office space, warehouse, facility, or other location, a lender representative will visit.

It is important to remember that if you are unable to pay back the loan, your stock will be theirs. It is important for them to examine the condition of the stock’s location and the existing stock held there to ensure that the inventory is kept safe.

Step 5: Review the offer and wait for final approval

A preliminary offer will be presented to you once your application has been reviewed and passed due diligence. Detailed terms and interest rates will be included in the loan offer.

Please note that this is not a binding offer. The final decision will be made once your application is complete. You should know by this point whether you have been approved or not.

Step 6: Submit final paperwork and receive funding

Once the final paperwork is signed, including the loan agreement that details the rate, terms, and conditions, you’ll be ready to move forward.

The funds will be sent to you once all of that is done. Within a few days, it should be processed.

Conclusion

Inventory loans are a type of financing that can be particularly useful for businesses that need to purchase inventory to meet customer demand but may not have the cash on hand to do so. These loans allow businesses to use their existing inventory as collateral to secure financing. This can be beneficial for businesses that have valuable inventory but may not have other assets to use as collateral.

Additionally, inventory loans can help businesses free up cash flow and manage their working capital. By using the funds from the loan to purchase inventory or cover other expenses, businesses can continue to grow and meet customer demand without having to worry about cash flow constraints. Overall, inventory loans can be a smart choice for businesses looking to manage their finances and invest in their growth.