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. In fact, these types of businesses can use their inventory as a form of asset to back the loan. In addition, the capital obtained can be used for numerous purposes such as to purchase more inventory or expand.
Examples of how inventory financing is utilized.
For instance, an air conditioner wholesale distributor wants to purchase more inventory because they project a peak season. In view of, the distributor needs to purchase more inventory from the manufacturer but at this time it is expensive.
Financing would resolve the distributor needs to acquire the inventory. 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.
Evaluate your inventory
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, when purchasing computers and reselling them, every year new models are launched. To summarize, that inventory may become obsolete. Also, accounts receivables may build up and cause liquidity issues.
Inventory financing is a good option when sales are strong. In truth, when product demand is high, getting more cash to make sales is a wise choice. In summary, financing inventory may not be a wise solution to test new products.
If you’d like to learn about inventory financing at Lendinero, click here.
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