Inventory is the lifeline of a manufacturing, retail, or dealership business. Sometimes, a lean sales period could leave a considerable portion of your small business’s investment locked up in inventory or stock. This could lead to a shortage of funds to honor other payments like wages, rent, or other credit dues. In such a situation, inventory financing can be useful to meet your short-term payment obligations.
Inventory financing is a short-term secured loan availed against stock-in-hand or inventory. A financial institution will sanction funds based on the value of current or future stock pledged as collateral for the loan. This type of funding can help your business come out of a temporary cash crunch without having to sell products at a lower price. Before applying for such funding even from the best inventory financing company in the market, it is important to understand the process.
How Does Inventory Financing Work?
Inventory financing is a simple asset-based credit line offered by banks and financial institutions. As a manufacturing, retail or dealership business with inventory on hand, you can pledge them as collateral to receive funding.
The lender will evaluate the sales value of your inventory, offer funding for a percentage of that value, and set up a repayment schedule. If you repay the loan on time and in full, the inventory will be returned to you for sale. In case of failing to meet the loan obligations, the lender has the full right to sell your inventory and recover the money lent. The specifications of the loan vary from one lender to another, though most lenders will offer as much as 90% of the inventory market value as a loan.
When enquiring from a financial institution about ‘how does inventory financing work’ in their organization, keep in mind that your industry, market value of inventory, credit history, and financial situation will play an important part in the terms they offer.
Inventory Financing Advantages and Disadvantages
Pledging your inventory for money has many pros but some cons too. Here is what you should know about inventory financing advantages and disadvantages:
- Inventory financing allows you to free up cash locked in high-value inventory without having to compromise on pricing. It provides quick upfront cash to meet your short-term payment obligations.
- For seasonal businesses, such as umbrella manufacturers or sweater makers, inventory financing can be a boon to help tide through non-sales months.
- It does not restrict the usage of funds, meaning you can use inventory financing to meet a whole range of short-term obligations from rent payments to stocking up on new inventory.
- If your business has been rejected for a traditional loan in the past, inventory financing can be a good alternative.
- If you are a service-oriented business, you cannot apply for inventory financing. The collateral pledged needs to be tangible stock.
- Inventory financing cannot meet long-term funding requirements, such as capital needed for growth and expansion.
- Your business will need strong financial and credit history to qualify.
How to Apply for Inventory Financing
To apply for inventory financing, your business will need to meet certain criteria. Usually, the best inventory financing companies require that your business:
- is operational and located in India
- has high-value, tangible inventory with complete records
- has accurate sales records of all your stock for at least six months
- has been operational for at least a year
- has a good credit score
If you meet the minimum eligibility requirements, then you can apply for inventory financing either at a physical branch of the bank or financial lender or apply for it online. You will need to submit a filled-in application form and documents for verification including inventory details.
After this, the lender will verify your inventory value. Be prepared for a surprise visit from the lender to check your inventory quality and sales. Once the lender is satisfied, they will present you with the terms. Upon accepting these terms and pledging your inventory as collateral, your loan will be sanctioned.
Gold Loans as an Alternative to Inventory Financing
If your small business does not meet the eligibility criteria for inventory financing or if you are not comfortable with pledging your inventory for short-term funds, then a gold loan can be an alternate route to consider.
- Gold loans are also secured loans that provide funds against gold assets. Gold loans are simple to apply for, have low interest payments, and easy repayment schedules.
- Service-oriented businesses can also apply.
- Gold loans provide a high loan-to-value ratio. The Reserve Bank of India recently increased LTV of gold loans for non-agricultural purposes to 90%.
- You do not have to produce financial or credit history to avail gold loans. Simply providing the gold assets is enough.
Rupeek Fintech Private Limited will provide you the best terms on gold loans with high LTV, low interest rates and other attractive features such as insurance for your assets, doorstep pickup, and online processing of funds. Get money in your bank account within 30 minutes from the privacy of your home. We also provide flexible tenure for repayment and the option to choose how to repay: EMIs, advanced interest and principal repayment, or bullet payment option. With Rupeek’s gold loans, you can beat inventory financing advantages and disadvantages to get hassle-free short-term funds to keep your business running smoothly.