A Business Owner's Guide to Inventory Financing

Published May 24th, 2023 by River Point Capital

Have you ever heard of inventory financing? If you are a business, this is a great type of financing that you can do to help your business finances out!

So what is it?

Inventory financing is a type of funding that allows businesses to use their inventory as collateral to secure a loan. This means that if you don't have the cash flow options available but do have the inventory to back up what you need, then you can use that as proof for collateral to get a loan. 

This type of financing is particularly useful for businesses that have a lot of inventory on hand but need cash to pay for other expenses. So even if you do have the cash, you may need to use it elsewhere, such as payroll or rent.

If you are a business owner looking to explore inventory financing, here's what you need to know about inventory financing. 

First, Understand the Basics

Inventory financing is a type of asset-based lending that uses your inventory as collateral to secure a loan.

So how does this work? What would this mean for you?

The lender where you are getting your loan will typically advance you a percentage of the value of your inventory, which you will need to pay back with interest. If you are unable to repay the loan, the lender can seize your inventory to recover their losses.

Basically, instead of paying up in cash, you are paying with inventory.

Determine If This Is the Right Option for You

Inventory financing can be a good choice for businesses that have a lot of inventory on hand but need cash to pay for other expenses.

However, it may not be the best choice for businesses that have a lot of slow-moving inventory or inventory that is difficult to value. This can make the process much more complicated than it has to be.

When deciding if this is the right choice for your small business, determine how much inventory you have and how easy it is to value the inventory you are working with. You should also take into consideration the cash flow options you do have to see if that route would be better or not.

If you have enough cash, it may be better to find a lender and financing option that deals with cash rather than inventory. Dealing with inventory can be a tricky thing, so you have to decide if this is what you are wanting to do for our small business.

Find the Right Lender

Owning a business is hard enough, but finding a lender that is right for the job may be even more daunting. You want to make sure that you do enough research to trust the lender you are going to work with. Not only that but if you want to do inventory financing, you need to find a lender that offers inventory financing because not all lenders offer inventory financing.

While you do your search, look for lenders that have experience in your specific industry. This way, they will have a better understanding of the value of your inventory.

You should also read reviews to make sure that you are picking a lender that works well with others. You can also ask the lender for testimonials from past clients that have used them! This can give you a lot of the information you need about the company upfront. 

Understand the Terms

When you finally secure a loan and a contract for it, you need to take your time going through it.

Pay specific attention to all the details, but most importantly, the interest rate, repayment schedule, and any fees or penalties. You should also ask about any restrictions on how you can use the funds, as some lenders may require you to use the money only for specific expenses.

Knowing these things before you sign off on the loan can save you a lot of headaches down the road if something were to go wrong or you didn't understand the conditions fully.

Prepare the Inventory 

Since inventory financing is a bit different than other financing options, you are going to have to do some behind-the-scenes work to prepare the inventory.

Before you can secure inventory financing, the lender will need to inspect your inventory to decide its value.

Before they come to inspect, make sure your inventory is well-organized and easily accessible so the lender can quickly and accurately assess its value. If you don't, this can be a much more difficult process than it has to be.

Come Up With a Plan

Before you start with a financing plan, you need to have a plan about how you are going to manage your cash flow with the inventory.

This type of financing can be risky if you are not careful. This is why you need to be sure you have a plan for managing your inventory and keeping it in good condition.

If you don't, you could find yourself in a difficult situation.

A Guide to Inventory Financing

Inventory financing is an extremely helpful tool for small businesses that need more cash to cover expenses but don't have the financing to back it up. If you have the inventory, that is all that matters!

However, it is important to understand everything about this type of financing before getting started with it.

Want to apply for inventory financing at River Point Capital? You can do that here.

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