Lendinero's blog on Growing Your Business
Inventory financing is form of a loan which you can use your inventory as collateral. Inventory financing is used by wholesale distributers, retailers and manufacturers because they depend on goods to keep their business running. These businesses can use their inventory as a form of asset to back the loan. The capital obtained can be used for numerous purposes such as to purchase more inventory or expand.
Let’s say a air conditioner wholesale distributor wants to purchase more inventory, because it expects an increase in air conditioning sales due to a hot summer. The distributor needs to purchase more inventory from the manufacturer but at this time it is expensive.
The distributor gets financing to make these transactions based on the value of the new air conditioners it’s going to buy. Once the distributor gets inventory financing it can acquire and sell the goods they wanted. Assuming sales go as projected the distributor can utilize the income to pay off the loan, make payments and if there is a profit reinvest in the business. It is obvious that inventory financing is an integral part of the cycle of buying, distributing, selling and growing a business.
One of the factors that businesses need to consider is the value of the inventory as time proceeds. Will the inventory depreciate in value? Will it be less liquid than its invoices? Inventory in the short term will add value to your business but in the long run it depreciates in value. For instance, if you purchase computers and resell them you know that every year new models come out. That inventory may become obsolete. Also, if you resell and build up an accounts receivable you may run into liquidity issues.
Inventory financing is a good option when sales are strong. If there is a high demand for your products and the market is responding well, getting more cash to make sales is a wise choice. If you are going to test the market by taking a loan and you are unsure of the results than financing your inventory may become more of nightmare for you.
If you’d like to learn about inventory financing at Lendinero, click here.
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By: Richard Lopez
October 12, 2017
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