How Does Inventory Financing Work?

Inventory financing is a form of asset based lending that allows you to leverage your inventory. This can help improve your company’s cash flow and provide funds to pay for business expenses, or to purchase additional inventory. This type of financing is useful if you are unable to get higher credit terms from suppliers/vendors, or if they are asking for faster payments.

In this article, you will learn:

  • What is inventory financing
  • How it works
  • Advantages of the solution
  • Disadvantages
  • Alternate options

The right strategy

The first thing we should say about this solution should be used strategically. In most cases, inventory financing should not be your first option of financing. This is because it is more expensive that other alternatives.

Instead, you should consider trying to finance your receivables first. This can be done by using a factoring line or by getting an asset based loan. If these solutions do not provide sufficient funding, at that point you should consider financing inventory.

How does it work?

The line is usually offered in combination with a factoring line or as part of an asset based loan. It allows you to finance inventory shortly after it has been purchased. Your company get’s the funding by submitting a draw request to the lender, who deposits the funds in your bank account. Once you have the funds, you can use them for any business expense. Transactions settle regularly as inventory is turned into product and sold off to customers.

The lender funds inventory by advancing up to 80% of it’s appraised value. However, lenders don’t use the market value of the inventory in these transaction. Instead, they either use the Net Orderly Liquidation Value (OLD) or the Forced Sale Liquidation Value (FLV). Note that the OLV and FLV are usually lower, sometimes substantially, than the market value. This can affect your ability to leverage your inventory.

Who can use inventory financing?

Our inventory financing program can be used by wholesalers, distributors, and manufacturing companies.  Generally, companies have to meet these requirements:

  • Need a minimum of $500,000 in financing
  • Have inventory or raw materials that are marketable
  • Use an inventory management system with perpetual inventory
  • Have reliable financial statements
  • Have exhausted other options (e.g. factoring, ABL, line of credit, etc.)

Advantages

This type of financing has some advantages over other solutions. Some advantages include:

  • Allows you to leverage inventory
  • Allows your business to accumulate inventory (i.e. to meet contractual obligations)
  • Easier to get than conventional financing
  • Line can increase as your company grows

Due diligence can be expensive

One of the disadvantages of this solution is that it require more due diligence than other alternatives. This is due to the nature of inventory itself, which requires additional financial controls. The due diligence can be expensive for some, which is why it only makes financial sense to use this type of financing if your company needs a minimum of $500,000.

As part of the review process, the finance company will need to:

  • Perform a field examination of your facilities
  • Review your accounting system
  • Test your inventory system
  • Appraise your inventory and raw materials

Some of these functions are conducted by third parties who must travel to your plant or warehouse. Initial costs vary based on the size of the facility and the complexity of the line. Additionally, the financing company will need to monitor your inventory regularly, usually every 3 to 6 months. These examinations add to the maintenance cost of the line. This is the main reason we recommend you exhaust other financing options first.

Alternatives

One option that can be used to finance certain inventory transactions is purchase order financing. This is a very specific type of funding that allows you to finance inventory that is associated with a specific purchase order from a customer. However, purchase order funding can only finance transactions where margins are high (20% or more) and where you purchase the finished goods from a third party vendor.

 Need inventory financing?

We are a leading inventory finance company and can provide you with a competitive proposal. For a quote, please call us at (877) 300 3258 or fill out this form.