When businesses need working capital, they have options ranging from traditional bank loans to borrowing from friends and family. Wholesalers, distributors, manufacturers, and some importer/exporters have another option: inventory financing. Inventory financing is a short-term loan or advance that is based on the value of a company’s current inventory. The loan can be used to purchase more inventory or cover other costs. With inventory financing, the company’s existing inventory and newly acquired goods serve as collateral for the lender to sell if the business can’t repay the loan.
For businesses that need to promptly pay suppliers, such as distributors having to purchase inventory from manufacturers or factories have to buy from raw materials providers, inventory financing can be an excellent source of working capital. It is an efficient cash flow solution when businesses must pay their suppliers before they have received payment for goods sold to their customers.
Inventory financing is also a viable solution for wholesalers and manufacturers without strong credit scores. If their customers are reputable and creditworthy with strong histories of paying on time, the company can still be considered for inventory financing.
Here are some advantages to inventory financing:
- Stabilizes cash flow during seasonal ups and downs in sales
- Enables companies to buy extra inventory during high sales volume times
- Allows manufacturers to stock up on raw materials and continue production
- Turns the value of current inventory into cash to use for business growth
- Empowers companies to work with larger customers with longer payment terms
As a form of asset-based lending, inventory financing lets you leverage current inventory to buy more inventory and increase your profitability. You can pursue new product lines and opportunities by leveraging your inventory. With the unrestricted cash advance that you will receive, you can also pay bills and improve your own credit score and save money with your suppliers’ early payment discounts and volume discounts.
Some business consultants advise using inventory financing in combination with other cash flow solutions, such as invoice factoring. When you sell your invoices to a factoring company, you are not incurring debt but are rather receiving an advance for products you have already completed or delivered. Factoring lets you turn the future revenue sitting in your accounts receivable and purchase orders into money in your pocket now without waiting weeks and months for customers to pay their bills.
With inventory financing, the appraisal and valuation of current inventory and the assurance that the inventory continues to be marketable are critical to getting accepted for a loan. This valuation is a due-diligence process that can take some time. However with invoice factoring, acceptance is fast and simple. After submitting some basic business documents that any company could easily access, the company can look forward to receiving their first advance right away. Since factoring is not a loan, you have no additional monthly payments or additional debt.
So many small to medium-sized manufacturers and distributors have long sales cycles that can put them in jeopardy while they wait for payment from customers. That’s where inventory financing and invoice factoring can help turn around a company and provide capital to grow their business.
When you’re ready to explore funding options for your company, call the friendly financial experts at Interstate Capital, a leader in supporting North America’s businesses with affordable cash flow solutions since 1993.
If you are ready to improve your cash flow and build your inventory for the future, contact Interstate Capital for a factoring rate quote today.