Inventory financing is the strategy of utilizing the inventory of consumer products owned by a business as a means of securing a loan, an advance, or a revolving line of credit. The idea is that as items are sold from the inventory, the proceeds from those sales are used to settle a portion of the outstanding debt. In return for the financing, the lender receives a percentage of the sales as interest on the loan, as well as receiving payments on the principal.
While there are some variations, the basic process of inventory financing involves assessing the current value of the inventory and determining if it is sufficient to cover the amount requested for the loan or line of credit. If that is the case, and if there is evidence that every item that composes the inventory can be sold and payment collected within a reasonable time frame, the lender will provide the debtor with the amount requested. For this service, the lender also applies a rate of interest to the balance in the debtor’s account. In turn, the debtor agrees that the lender will receive the payments on all inventory items that are sold, until the amount of the debt is satisfied in full.
For lenders, inventory financing helps to minimize the degree of risk associated with making the loan. In the event that the debtor should default, the lender has the right to assume control of the remaining inventory and sell it in order to satisfy the debt. In exchange for this reduced degree of risk, lenders are usually willing to provide competitive interest rates to the debtors.
Along with the lower interest rate, debtors also benefit from the quick processing that is common with inventory financing. This means the debtor can receive the funds from the loan or advance almost immediately, and begin utilizing those funds for various projects, operational expenses, or whatever need is pending. The quick availability of the funds makes it possible to move forward without having to wait for the inventory to be sold and paid for by customers, which in turn allows the company to take advantage of opportunities that might not be available at a later date.
Depending on the nature and size of the inventory, a lender may require additional collateral before the inventory financing is approved. Assets that are not currently being used as collateral on other loans or financial obligations are generally acceptable, providing they have a verifiable value on the open market. For example, the lender may also require the debtor to pledge a section of real estate as collateral, along with the current inventory before the loan is processed.