Your Guide to Inventory Loans

Written by: Zach Johnson

Need to buy inventory?  No collateral?  No problem.  Inventory loans make it easy to get funding fast.

If you’re an eCommerce company you’ve got to have stuff to sell to make money.  The trouble is you’ve got to have money to buy the stuff to sell,  What if you don’t have the money?  eCommerce companies that need working capital to buy inventory but don’t have the assets to put up as collateral have an option they may not have thought of.  And that’s the inventory they want to buy.

What is Inventory Financing?

Wait, what?  You can use inventory assets that you don’t even own to get a loan.  Yep.   With inventory financing, the products, supplies, or materials your want to buy is the collateral that will secure your loan.  Short-term Inventory loans and lines of credit are specially designed to give small business owners fast access to the cash they need to buy inventory.

How Do Inventory Loans Work?

Small business owners who need to buy inventory but don’t have the capital or collateral to place an order can look into inventory financing.  This kind of financing usually comes from lenders who specialize in helping small businesses get the capital they need to buy the goods or materials they need.

The catch is that you can’t borrow all the money you need.  You usually can only borrow about 50% of the value of the inventory.  This means you’ll have to have the cash to cover the remainder.

As surprising as it may seem, your loan will be secured by the inventory you’re purchasing. That means that if for some reason you can’t pay off the loan, the lender can seize the inventory to cover your debt. The terms are pretty simple. You’ll repay your inventory financing the same way you would pay any other loan. That means you’ll have monthly payments for a term of up to a year.  Those monthly payments will include fees and interest as well as paying down the principal.

The Pluses and Minuses of Inventory Financing

There are tons of loan options out there.  But of all of them, there is probably no better way to borrow money to buy inventory than taking out an inventory loan.  But it’s not all sunshine and daisies.  There are a few pitfalls you’ll need to watch out for after you understand all the advantages.

  • The Pluses of Inventory Loans

The upside of inventory financing is obvious.  It lets you get your hands on the capital you need to purchase nventory purchases a whole lot faster than you could with a traditional bank.   If you took out a loan with a traditional bank, it could take weeks or even months for your application to be approved.

Inventory financing goes through pretty quickly. This means the inventory you buy with a loan can help your business get through a slow season when you might not have cash on hand to buy inventory.  Then you can repay the loan when money is coming in during your busy season.

Another even more important benefit is that even if you don’t qualify for other types of financing, you may qualify for inventory loans. So for example, if you’re a startup that SBA or a bank has declined because of your lack of creditworthiness, an inventory loan may still be a very viable way to go.

  • The Minuses of Inventory Loans

The downsides are far enough down that you’ll want to take them into consideration before you apply for inventory financing.  Chief among those is that inventory loans typically have a higher rate than other types of business loans.  So if can qualify for a loan with a lower rate from a traditional bank, you should probably go with that instead of inventory financing.

Another drawback is that inventory loans are usually short-term loans.  They are ones that have to be repaid within a year.  If your cash flow situation can’t handle that expense, you could be in serious trouble.

The last limitation you need to be aware of is that you can only use funds from these loans to buy inventory.  You can use them to purchase anything else.

What Kinds of Inventory Loans are There?

The good news is that there are a number of lenders that offer a variety of business inventory financing.  Here are just a few to consider:

  • Inventory Line of Credit

Don’t need a big wad of cash all at one time to buy inventory?  You might want to look into a business line of credit.  With a business line of credit, you’ll be approved for funds up to a certain credit limit.  However, you can borrow up to that full amount and then repay it. This is a perfect solution for businesses that have ongoing inventory purchasing needs.

  • Factoring

Some financing lenders specialize in what is called inventory factoring. When a business factors its inventory, it sells pending purchase orders for a discount to generate cash flow in order to buy products or materials from its suppliers. This is typically done when the business needs working capital immediately to buy the necessary inventory to fulfill the purchase order.  In return, the lender takes a fee.

  • Credit Cards

Another funding way to go is using business credit cards. While this option isn’t specific to buying inventory it’s a good option. Like consumer credit cards, these provide a revolving line of credit that you can use to purchase products, materials, and other items at brick and mortar stores and online.

  • Merchant Cash Advance

Although this isn’t a loan, a xmerchant cash advance can help you get the new inventory you need.  It’s good if you don’t have great credit and can’t qualify for other financing options. It's basically a commercial agreement where the business owner sells their future credit card sales or other business receipts to the merchant cash advance funding provider.

Where Can You Find Inventory Financing?

Although most banks don’t offer inventory loans, there are a variety of online lenders that specialize in inventory financing.  You can start by asking for recommendations from others in your industry or check out a clearinghouse for inventory loans like Cerebro Captial.  This resource promises to match you with one of over 1,492 top inventory lenders that you can review all in one place.

What’s the Best Way to Finance Inventory?

As with any loan, the best way is to find a financing company that offers terms you’re comfortable with. Take a look at what fees and interest rates you’ll have to pay.  You’ll also want to consider quickly you’ll have to pay the loan back.

Also, take time to read through reviews to find out how well the company does on customer service. Getting a loan with a low rate might not look so good if you can’t get customer service on the phone to answer questions or troubleshoot problems,

Most importantly, ask a lot of questions.  For example, find out if you can save money by paying the loan off sooner or whether there’s a prepayment penalty.  Getting answers upfront can prevent headaches later.

How Much Does it Cost to Get Inventory Financing?

The short answer is that it depends. Like any small business loan, inventory financing lenders will charge you interest on the money you borrow.  How much depends on your business and personal credit scores.  Because of that. those rates can vary from reasonable to exorbitant.  As always, the better your credit rating, the lower your interest rate will be.  If your credit scores are low, you’ll have to pay a lot more to get the loan.

How to Qualify for Inventory Financing

Choose a third-party processor if:

Choose a merchant account if:

You’re a small business that has 50 or fewer employees

You’re a bigger company with more than 50 employees

You don’t do many transactions

You want more control

You value simplicity

You want all transactions to occur within your platform

You have bad or no credit

You want low transaction fees

Head off disappointment by checking your business and personal credit scores before you apply for an inventory financing loan.  If you don’t have a business credit history, lenders may look more at your personal scores. So do what you can to boost them before you apply.

Unlike bank loans that require collateral, you won’t have to put up any business or personal assets for the loan in advance. That’s because the inventory you’re buying will be the collateral. You may have to provide order details on the inventory you want to buy with the funds.  That way the lender will know the value of the inventory and can decide how much to lend you.

How Getting Inventory Financing Works

Fortunately, the application process for inventory financing is pretty straightforward.  While it works differently with every lender, it typically doesn’t require much more than a few details about your business.  For example, they’ll want how long it’s been in operation as well as how much annual revenue you bring in. Expect them to ask about the details and specifics about the inventory you plan on purchasing as well.

The lender will base the amount of money it will lend you on the value of the inventory you want to purchase.  If they approve your application, you’ll sign the loan agreement, which includes your loan amount, interest rate, and repayment schedule. Your funds will be deposited into your business bank account in as little as a day.  And you’re ready to go.

Is Inventory Financing Right for You?

If you don’t have the capital to purchase products or raw materials on hand, it just may be the option you’re looking for.  In any case, it’s good to be aware of all eth various kinds of small business financing out there to help your business take off.

Your Guide to Inventory Loans
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Your Guide to Inventory Loans
Need to buy inventory?  No collateral?  No problem.  Inventory loans make it easy to get funding fast.

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