The Cost of Capital: When Is the Right Time to Use Inventory Finance?

Published February 7th, 2024 by River Point Capital

Imagine running a company with a team of devoted employees and an audience of passionate customers. You also have plenty of ambitions you're striving to achieve. However, you can't seem to secure financing to take things to the next level.

 This common issue prevents companies from purchasing enough inventory to sell to their customers. Issues like these are the reason around 20% of small businesses fail within their first year.

The good news is you can leverage inventory finance options when buying inventory. Let's explore how you can take advantage of this business finance method.

You Need More Inventory Quick

This is one of the most common reasons why companies pursue inventory financing. Companies often need inventory ASAP after finishing product development.

 The same can be said when striving towards short-term performance goals. Regardless of the reason, you might not have the cash flow to purchase the required amount of inventory.

 Financing ensures you stay fully stocked and hit the desired sales numbers. You can also avoid unnecessary downtime.

 To clarify, your company wouldn't be able to operate appropriately if you didn't have inventory. Even a brief period of downtime can lead to significant issues.

 Your overall revenue will suffer, and you could damage your company's reputation. If your consumers switch to a competitor, there's virtually no chance they'll return to your business in the future.

Leveraging Your Inventory Is Risky

If your company has inventory but leveraging it is risky, you can likely benefit from inventory financing. Inventory financing can help you forego this predicament and purchase additional products.

 It's never recommended to leverage inventory unless your research concludes it's the best option. Small businesses should be especially careful. Making mistakes in the early stages of your career can derail your trajectory.

Your Products Are Selling Quickly

High consumer demand can lead to inventory shortage. Despite the increased number of recent sales, you might not have enough capital to accommodate increased spikes in demand. Inventory financing can help you satisfy your audience's needs without having to cut costs in other areas.

 It's best to have access to inventory financing before you run a large marketing campaign. If your brand can't deliver on its promises, this could impact your long-term performance.

Your Company Operates Seasonally

This doesn't apply to most businesses, but it's still an important scenario to consider. If your company operates seasonally, it doesn't always make sense to store leftover inventory until the next season. It's often best to sell everything you can and then restock when necessary.

 Depending on factors like your company's income and consumer demand, you may have trouble getting inventory for the upcoming season. Financing can help accommodate this need and ensure you meet your target metrics.

How Does It Work?

Inventory financing functions similar to most other forms of business financing. However, there are two primary types you can leverage: inventory loans and inventory lines of credit. Let's briefly explore them both.

Inventory Loans

As the name implies, these are loans you can use to purchase inventory. Eligibility requirements will differ depending on the lender you work with. For example, some lenders prioritize credit scores while others focus more on the collateral you can provide.

 Another contributing factor is the size of your loan. As you might expect, lenders will be more stringent when providing large amounts of money. Regardless of your loan's requirements, you'll receive a lump sum that you can pay off through monthly payments.

 The terms of your loan will depend on the provider you work with. Some require relatively quick repayment times. Others might have a higher interest rate than you anticipated.

It's best to shop around different lenders until you can find one suitable for your needs.

Inventory Lines of Credit

Lines of credit function a bit differently than conventional loans. They provide business owners with ongoing access to funds. Revolving term lines of credit allow you to withdraw the same amount of funds after you repay them.

 This helps ensure you always have access to the cash you need to handle your operations. However, you'll pay interest on the amount of money you use.

 The good news is you don't have to pay interest on your credit line's total value. You should always use business lines of credit responsibly, though.

 Overreaching could leave you with a substantial balance that occurs interest until you pay it off. Depending on your company's performance, this could be a rigorous process.

Finding a Provider

It's essential to find a reputable provider when searching for inventory financing. See what other people online have to say about working with them. Did they encounter difficulties with the provider's terms?

 How fast did they receive their money after applying? The answers to questions like these will help ensure you make the best decision for your needs.

 Thoroughly review their loan terms before signing anything. The last thing you want is to deal with unnecessary fees.

 Check how you can repay the loan before choosing a loan provider. It's customary to have access to an online portal that allows you to make payments. Alternative payment options are often time-consuming and inconvenient.

 They should have a robust customer support policy, as well. It can be highly frustrating to overcome issues on your own. Make a list of prospective providers and narrow them down from there.

As long as you're patient during your search, you'll find the ideal lender.

Don't Overlook Inventory Finance Opportunities

At first, handling inventory finance options might seem overwhelming. This is especially true if you're not sure when you should use inventory financing. The tips in this guide will help you make the best decision for your needs and avoid mistakes you would've otherwise made.

At Riverpoint Capital, we have proudly served our customers for over a decade and strive to help take businesses to the next level. We learn as much as we can about our clients so we can develop individualized finance plans. You'll discover more about how we can help when you schedule a consultation today.

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