WHAT IS INVENTORY FINANCING?
Inventory financing is an asset-backed, revolving line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan. Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume - for example, by allowing a business to acquire extra inventory to sell during the holiday season.
BENEFITS / 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
Structure diagram – Inventory finance
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