Inventory Financing: The Pros and Cons

Inventory Financing: The Pros and Cons

You can’t run a successful business without sufficient working capital. Fortunately, there are numerous financing options available for small businesses to access additional working capital quickly and easily. One of the most common sources of funding for small businesses is inventory financing.

What is Inventory Financing?

Inventory financing is a short-term loan that business owners can use to buy more inventory. The purchased inventory will serve as collateral for the loan in case of default. This allows you to free up cash flow tied to your physical assets by using your existing inventory as credit.

This type of funding is suitable for businesses that need to restock their inventory. Companies can use the funds to purchase the inventory needed to meet seasonal demand, take advantage of bulk buying discounts, or replenish low inventory.

Inventory Loans: What are the Pros and Cons?

Before you apply for inventory financing, it helps to determine whether this type of financing is the best for your business. With that said, here are the pros and cons of inventory financing:

The Pros:

1.Beneficial for Small- to Medium-Sized Seasonal Businesses

Inventory financing is great for small to medium-sized companies seeking to fund inventory purchases. However, inventory financing is open to all businesses in need of inventory but don’t have the required financing history to secure a conventional loan. Simply put, if you need inventory but you can’t qualify for a bank loan, then inventory financing may be the right option for you.

2.Increased Sales Volume

An inventory loan – or any other loan – will only work to your favor if you use strategically. Companies that apply for inventory financing have typically gone through a season when the demand outpaced supply. These businesses know they could sell more if they had more inventory. By applying for an inventory loan and purchasing needed inventory, your business will grow as sales volume increases.

3.Expand Product Lines

Other than using an inventory loan to replenish your inventory, you can also use it to grow your business and increase sales by expanding your product lines. Inventory financing gives your business the resources it needs without spending all your cash.

The Cons:

1.Higher Interest Rates than Conventional Loans

Without collateral and a personal guarantee, lenders consider inventory financing less secure than conventional loans. That is why lenders charge higher interest rates to compensate for the added risk. It’s best to compare interest rates and APRs when shopping for an inventory loan to find out the best option for you.

2.Not Great for Large Businesses

At most, inventory loans generally offer $500,000, which can be plenty of cash for small to medium-sized businesses. But for large companies that need a significant amount of working capital for inventory, an inventory loan is not enough to provide the amount of money they need.

3.Restricted Use – Only for Inventory

Inventory financing has clear limitations on how you can use the funds. If you’re looking for flexibility in a loan, you can’t find it in inventory financing. With an inventory loan, you can’t use the funds for any business purpose, such as meeting payroll, paying taxes, or for daily business expenses. You can only use the funds from an inventory loan for inventory.

Apply for Inventory Financing Today!

Whether you’re in the transportation industry, manufacturing, wholesale, or construction, you might want to check out inventory financing. SMB Compass offers inventory loans for businesses in the United States and we offer loan amounts from $25,000 to $10,000,000+.

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