Inventory financing can take many forms. Both using inventory as collateral to secure financing and leveraging financing to purchase inventory can be referred to as “inventory financing,” which can be a major point of confusion.
This article will explore various types of inventory financing options and explain their differences to help business owners figure out the best way to meet their company’s financing needs.
Inventory Financing: What is it?
If your business is in need of cash, inventory financing may be a good option. Inventory financing is when a company uses its inventory, instead of personal assets, as collateral for a loan. This can be in the form of a line of credit or a short-term business loan.
Inventory financing lenders allow businesses to free up cash that would otherwise be tied up in inventory. This can be helpful for businesses that are seasonal or have fluctuating inventory levels. Another advantage of this kind of asset-based financing, especially for companies with a limited business credit history, is that it can be easier to qualify for than other types of business loans, since the inventory serves as collateral.
Types of Inventory Financing
One common type of inventory financing is a merchant cash advance. With this type of financing, businesses commit a portion of their future sales in exchange for immediate funding, using those sales to pay off the amount borrowed. This can be a good option for businesses that need quick access to capital for purchasing inventory and supplementing their cash flow.
Another type of inventory financing is called accounts receivable financing. With this type of financing, businesses pledge part of their accounts receivable in exchange for a loan. This can be a good option for businesses that have difficulty qualifying for traditional business loans.
Inventory financing loans are a third type of inventory financing, one where businesses borrow money against the value of their inventory. This can be a good option for businesses with a lot of capital tied up in inventory on hand.
Inventory Financing from Merchant Growth
For many companies, inventory financing that leverages future cash flow is the best way to go about purchasing inventory. This type of financing is often used by businesses that have seasonal inventory needs or are experiencing rapid growth.
This form of inventory financing from Merchant Growth offers several advantages. Thanks to a lack of collateral requirements (meaning that the inventory does not serve as collateral), it is easy to apply for and quickly delivered, providing immediate working capital to make timely inventory purchases, take advantage of early payment discounts or other business opportunities, and the flexibility to repay the loan based on sales.
What’s the Best Way to Purchase Inventory?
The best way to finance inventory will be different for each business owner, as each type of business financing has its pros and cons. Here is how some of the more popular options compare:
Business Line of Credit
Instead of receiving a lump sum, you can purchase inventory and finance your company through a business credit line. This enables you to withdraw cash from a revolving credit line. The interest will only be charged on the amount used, and the principal amount does not need to be paid until the end of the draw period.
Pros
- Minimum Payments: In contrast to a lump sum loan, you can keep your line of credit in good standing by making the required minimum payments.
- Quick Access to Cash: The main advantage of a credit line is that you will have swift and consistent access to funds (dependent on your credit limit).
- Limited Interest: The interest charged will only be on the amount you use instead of the credit limit.
Cons
- Fees: Some banks and financial institutions will charge a yearly fee.
- Minimum Payments: Making only minimum payments can result in higher interest rates and accumulation of debt.
- Higher Interest Rates: Once the prime rate increases, the variable interest rate may be greater than the fixed rate.
Inventory Financing Loan
An inventory loan is essentially a secured business loan. A lump sum of money is deposited in your bank account after being approved for the loan. You then repay inventory loans through monthly installments, with a possibility of prepayments (larger or earlier installments). Defaulting on the loan can lead to your inventory getting seized depending on if it is a secured on unsecured loan.
Pros
- Fixed payments: An installment loan comes with a fixed rate of interest, so you know how much you are required to pay monthly and can budget for it.
- Better terms: The terms of an installment loan have shorter, more flexible repayment plans than a credit line.
- Lower risk: Because the collateral in this loan is the inventory, the total risk the lender takes is significantly lower. Due to this, you may be able to get a higher amount of money and a lower interest rate.
Cons
- Cost: It does not matter whether you do or don’t use the entire amount borrowed; you’ll be required to pay interest on the whole amount borrowed.
- Might affect credit: If you make incomplete payments or don’t pay, it might negatively affect your credit rating.
- Collateral: The collateral used in inventory financing is your inventory (if applicable). Defaulting on the loan can lead to your stock being seized by the lender and sold to recoup losses.
Merchant Growth – Fast & Flexible Financing
If you’re looking for financing for your business, our online application is the first step. We’ll review your information and contact you to discuss financing options that are tailored to your specific business needs. We understand that every business has different financing needs, and we’re committed to finding the right solution for you whether that’s our fixed solution, business line of credit, or e-commerce financing.
Merchant Growth can offer up to $500,000 in financing within 24 hours of approval so you can grow your business. What are you waiting for? Apply today!
