What is Warehouse Financing?

Warehouse financing is a form of financing made available to businesses using assets held in a warehouse as collateral. Many commercial banks offer this service or can refer their customers to partner banks with warehouse financing options. This service has a number of advantages for banking customers, as well as their banks, and may be offered or discussed as an option when a business seeks financing for its activities.

In warehouse financing, goods held by the borrower are pledged as collateral. They may be transferred to a facility held by the bank or a third party, or they can be left on site and a third party can be given control of the storage area. In all cases, the value of the assets is determined and the bank extends a loan on the basis of this assigned value.

For banks, warehouse financing has the obvious advantage of coming with collateral. If the borrower fails to repay the loan or lags on payments, the goods can be seized and sold to recoup the costs of the loan, along with associated fees. When offering this type of loan, banks consider the value of the goods along with their potential on the sales market. Since the company usually retains the goods with the goal of selling them, the bank can be assured there is a market for them and they will be purchased reasonably quickly by interested buyers in the event of a seizure.

Borrowers may find it advantageous to use their existing inventory as collateral. If the assets need to be stored anyway, there are obvious benefits in using them to secure a loan to buy more inventory or cover other business expenses. As the loan is paid back, collateral can be released, allowing people to sell the goods in a timely fashion as they repay the loan. This financing option may be useful for a business struggling to expand and lacking other forms of collateral, as well as access to capital.

In a warehouse financing contract, the rate of interest and other terms on the loan will be clearly disclosed, as will the assigned value of the goods. If there are any disputes about aspects of the contract, they should be discussed before the contract is signed and finalized. Once approved, the contract is difficult to change, as it requires consent from both parties. Reviewing the contract with an attorney can be advisable to catch any surprises or traps structured into the language of the contract.