Running a small business can be both exciting and challenging, and as you enter a new phase, you will come to realize the importance of cash flow when expanding your business. The good news is that you do not have to allow your business plans to take a backseat because inventory loans will be the perfect option for you. With this type of funding, you can purchase inventory using the items you bought as collateral.
What Is an Inventory Loan?
Taking out a loan for the first time might be an intimidating endeavor since you will need to choose from a plethora of options. You will also have to make sure that you qualify because lenders are looking at businesses that demonstrate willingness and ability to pay.
In a nutshell, an inventory loan is a type of short-term business financing that helps small businesses purchase much-needed inventory. Many small businesses take out inventory loans for the following reasons:
- Obtain upfront cash to address customer demand and increase sales
- Prepare for short-term cash shortages
- Utilize capital that has been tied up in inventory
- Ensure business has enough resources during busy season
- Increase product lines
Unlike common types of business loans, inventory loans will not require you to offer your assets or property as collateral. If you default on a loan, the lender has the option to seize the stock that you have not sold as a way to cover the amount you owe.
Rates and Terms
While inventory loans have different interest rates, repayment terms and fees, most lenders follow these general rules:
- You can borrow up to 100% of your liquidation value, but in most cases, lenders finance businesses between 50% to 80%
- The repayment terms can also be up to three to 12 months but it is also possible to extend it up to 36 months.
- The annual percentage rate also varies from lender to lender. Your creditworthiness has an impact on your interest rate.
- An appraisal fee can help lenders determine the value of your inventory, prepayment penalties and origination fees.
How Does It Work?
Inventory loans work in two ways: Get a term loan from an online lender or from a bank to buy your inventory or secure a line of credit. The main difference between these two options is that a term loan gives you access to money upfront, provided you will repay it within the predetermined period.
The credit line gives you the option to pay the portion of the credit line you utilized. So if your line of credit is revolving, your credit limit will return to normal once you pay off what you owed.
If you need to purchase an inventory worth $400,000 so your business is well-prepared during peak season, you have to apply for inventory loans with a bank or online lender who will determine your assets’ liquidation value. If your assets have a value of $350,00, the lender will agree to grant you 80% of that amount.
Your inventory will be your collateral for this type of loan. The lender will also be the one to decide how much you are allowed to borrow.
How To Qualify?
Before you consider taking out an inventory loan you have to make sure that you are eligible. Keep in mind that every lender puts forth different guidelines, but in general, businesses that have been in operations for at least a year will qualify for inventory loans. Evaluate your creditworthiness by taking these factors into consideration:
- Annual revenue
- Inventory turnover ratio
- Inventory value
- Personal and business credit scores and history
- Financial statements including cash flow statements and profit and loss
- Inventory management system of your business
Lenders may also request for more proof to assess whether or not you can repay the loan amount. In the event you default, lenders want to make sure that your stocks can recoup the outstanding amount owed. While your stocks are important to qualify, your business financial health and credit scores will also play a crucial role.
Ways Inventory Loans Can Help
There are many ways inventory loans can help a small business:
- Availability of funding when you need to expand your business.
- Keeps your business and personal assets intact even in the event you default on your payment.
- Good credit is not necessarily required to qualify
- It is easier to purchase inventory once bargains or discounts are on offer
- Even if you have a start-up business, you are still eligible to apply.
If you want to take the inventory loan path for purchasing inventory, be sure to run the numbers. Find out about the amount you can borrow and whether that is enough to fulfill your inventory-buying needs. You will also have to factor in the interest rates and additional fees so you will have an idea about the annual percentage rate. Compare prices and be sure to read the fine print before signing an agreement.