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What is Inventory Financing?
Inventory financing is a sourcing solution that is arrears-based and completely in the mode of a term loan, line of credit or a short-term loan that’s made to a corporation for the abrupt purpose of shopping for products for sale. It works similar to an equipment financing the inventory itself delivers as collateral on the loan.
As long as you compensate on time, that fund is yours to figure with as you see capable. But if you were to fail to make or default your loan, your banker or lender would have the right to recapture your inventory (or any other inventory of comparable value) compensation for your debt. The interest rate in Inventory Financing will vary, this is based on market conditions and risk level of your inventory. This sort of financing scheme isn’t suitable for companies that are new within the business or don’t have tangible products in their inventory.
Types of Inventory Financing:
Depending on the type of business and its products, there are 2 types of financial schemes using an inventory that a business can apply for:
Inventory Loan: This type of financing solution is applicable when a business needs urgent cash requirements and needs to use the resale value of its inventory to receive funds. It is a single time loan offered to borrowers.
Inventory Line of Credit: The Inventory Line of Credit is more popular among businesses since it can be used to look out of any unforeseen expenses that arise after the borrower has already received the funds from the loan. During this financial plan, the lender offers extra cash to the borrower on an ongoing basis whenever there’s a requirement.
How does Inventory Financing Works?
Inventory Financing allows you to finance your inventory after it’s purchased. The lending Corporates lends funds up to 80% of the appraised value of inventory. However, lenders use Net Orderly Liquidation Value (OLD) or the Forced sale Liquidation Value (FLV). The OLV and FLV are normally lower as compared to the market price. Your ability to leverage the Inventory is affected.
Documents Required for Inventory Financing:
- DRIVER’S LICENSE
- VOIDED BUSINESS CHECK
- BANK STATEMENT
- BALANCE SHEET
- PERSONAL TAX RETURNS
- COMPANY REGISTRATION INFORMATION
- APPRAISAL REPORT
- PROFIT & LOSS STATEMENT
- COPY OF INVOICES OF THE INVENTORY
- COLLATERAL DOCUMENTS
Advantages of Inventory Financing:
- It allows you to weight inventory.
- Allows your business to acquire inventory.
- Easier to get than standard financing.
- Line can have an increment as your company grows.