Discover the ins and outs of Inventory Financing: types, advantages, and disadvantages. Learn how businesses can secure short-term loans backed by inventory, optimizing working capital, and gaining financial flexibility. Understand Inventory Loan vs Inventory Line of Credit and find out if this financing option is suitable for your business needs.
What is Inventory Funding: Inventory funding or Inventory financing is a short-term loan which provides by Banks to the businesses against the inventory / stocks which are intended for sale.
How it works: – For getting inventory financing business needs to submit application to bank along with the required documents and complete inventory related information like current stock, stock turnover, Average monthly sales and any other details required by the bank. After submission of application, bank will verify the documents and they can also verify with the manufacturer about the stock turnover of your business. In this type of financing Inventory will be remain as a collateral. In case business will not re – pay the loan, bank will sale the inventory and recovered his loan amount.
Types of Inventory financing:
There are Two types of Inventory financing
1. Inventory Loan: – This is just like a regular loan in which banks will provide one time short – term loan against the inventory which will be re-paid by the business in equal monthly installment or full amount of loan along with interest in one time once the inventory will be sold out. In this type of loan, you have to do the whole process again & again whenever you want to take loans from the bank.
2. Inventory Line of Credit: – This is revolving credit unlike a regular loan. In this loan Banks will sanctioned a maximum amount of loan for a specific period based on the business requirements. Borrower can borrow money any no. of times as per his requirement and re-pay them after sale of inventory and interest will be charged only on borrowed amount not on the total sanctioned amount. At any point of time total borrowed amount should be more than the sanctioned amount.
This is like borrow funds ⇒ Repayment of loan ⇒ Again borrow ⇒ Again repayment of loan.
In Line of credit facility need not required to submit documents again & again like inventory loan.
Advantages of Inventory financing
1. For inventory financing collateral will be inventory only , no other assets are required for collateral.
2. It unlocks the working capital blocked in the stock
3. It is chain of financing or rotational loan you can take as per business requirement and repay.
4. It helps small & medium business to get financing for their business which they may not get from other traditional loans because of credit rating or collaterals requirements.
5. It will be very helpful for seasonal business to stock up the inventory during season time.
Disadvantages of Inventory financing
1. It is not available for service industry…because in inventory financing some physical/tangible assets are required for collateral.
2. Re-payment will be critical for slow moving industry because funds will get stuck in inventory till it get sold out.
3. May be higher interest rate for new business.
4. It does not help in growth & business expansion because it is not available for capital expenditure.
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