Inventory financing

Businesses need money. Having money is an essential part of a successful business. Most of the time a business owner needs to borrow money from a bank so that they can start up their business. And many businesses also need to borrow money after they have started their business to keep it running. Banks and other lending institutions offer several different financing options to business owners. One of the financing options that is available is inventory financing. This article discusses inventory financing in more detail.

What is inventory financing?

Inventory financing is a line of credit (or a loan) that a business owner can get for their business. This line of credit is secured, or backed, by the business' inventory. This means that if the business owner were not able to pay their loan payments, the bank could take their inventory instead.

Why is inventory financing a good idea?

Many businesses have an inventory. And the business' inventory has cost the business a lot of money. It is definitely a good idea for a business to have an inventory. But while the inventory is considered inventory it is not making the business any money. And it can leave the business with not a lot of cash flow, especially if the business is just beginning. If the bank feels that the inventory can be used to back the loan, it can be a good idea for the business to use inventory financing to increase their cash flow so that they will have the cash to buy their supplies when they need them. Having cash on hand from inventory financing can also help a business keep their high levels of inventory and replenish their stock of inventory when they have a good turnover rate.

When is inventory financing not a good idea?

While inventory financing can be a great option for many different types of businesses, there are some businesses that should not use inventory financing as their financing option. For example, if a business has an inventory full of older merchandise or the merchandise in their inventory is hard for them to sell; they should not get use inventory financing. The reason that inventory financing is not a good idea in this case is because the business is already having a hard time selling their inventory, they should not add on a loan payment that will also have interest.

Another example of when a company should not use inventory financing as their financing option is when the business has an extremely slow turnover rate for the merchandise in their inventory. The cash from this business' inventory is more available to them and their line of credit can be secured by the business' inventory.

Who can use inventory financing?

A business that would like to use inventory financing has to be a business that has an inventory. The business also has to have a really good system that lets them keep track of their inventory so that they might be a great candidate for inventory financing. The merchandise in the inventory needs to be kept in good shape because sometimes the lender may drop by to check out the inventory to make sure that it is in good condition.

A business that is interested in using inventory financing should also have proof that the inventory moves quickly. And a business that is careful about buying any inventory might be a good candidate for inventory financing. They should make sure that they are doing business well and not buying things that will not sell.