Inventory Finance - Definition, How It Works, Pros, & Cons

Inventory finance is an ideal funding option to unlock the value stuck in your stock. Get a Business Loan against your inventory and use it to cover various business-related expenses. Let’s see how it works and how it benefits business owners.

Various cost centres affect the trajectory of a small business, namely logistics, shipping, marketing, and inventory. Undoubtedly, stock or inventory is one of the most significant parts of a company’s assets. It constitutes the products it holds for a short term to fulfil the expected demands. However, when the duration of account receivables is high, your company’s capital gets locked, and you might need more funds to restock inventory or carry out business operations. That is when inventory finance provides much-needed financial support. In the following sections, you will understand the meaning of a Business Finance Loan, its working, and its pros and cons. 

What Is Inventory Financing?

Inventory financing is an asset-backed, short-term Business Loan that SME owners usually borrow against some or all of their stock. The financial institution decides the loan amount and interest rate based on the inventory volume and market value. Since the inventory pledged as collateral is a security, an inventory loan is adequately characterised as a secured funding option. 

Suppose you are a small business owner managing inventory in large quantities. In that case, you can obtain this type of financial facility to cover various expenses, such as covering short-term financing shortages, expanding the product line, or securing advance cash to fulfil customer demand when the sales increase. Some traders, retailers, distributors, and manufacturers also use this loan to purchase more inventory.

How Inventory Financing Works?

Inventory funding is an option to secure funds against inventory you already own. Lending institutions Like Hero FinCorp estimate the market value of your inventory to determine your loan amount, interest rate, and repayment tenure. You receive your stock back for sale after repaying the borrowed amount on time. If you default, the lending institution has legal rights to seize and sell your inventory to recover its money. Many reputable finance providers offer up to 80% of the stock’s market value. However, they also consider your credit history, industry, and financial well-being.

Advantages and Disadvantages of Inventory Financing

Inventory loans for small businesses have both pros and cons. Understanding them can help you decide if it is the right funding option. Here's a brief overview:

Pros of Inventory Financing

Cons of Inventory Financing

Inventory finance lets you retrieve money locked in your inventory and obtain more cash for other business operations. You can use this amount to expand your operations or improve sales. If you run a seasonal business, you can sustain operations using this loan during low seasons.  If you cannot qualify for a traditional Business Loan, you can easily get an inventory loan at competitive interest rates.  Since inventory loans for small business owners do not have any end-use restrictions, you can use this funding option to meet various short-term business expenses, such as rent payments and paying salaries.

Inventory loans are not accessible to service-oriented companies, as you must pledge stock as collateral to obtain them. Inventory loan interest rates are usually higher than other loan types. Due to their limited loan amount and repayment terms, you cannot use these loans for long-term business needs like expansion and growth. Your business must have solid credit and financial history to qualify for inventory financing.

Types of Inventory Financing

Now that you know what inventory financing is, we shall discuss its different types, which are as follows:

• Inventory Loan

As an SME owner, you can obtain this type of funding solution when your business faces an immediate cash requirement. It allows you to receive funds based on your inventory’s resale value. Loan providers offer a one-time lump sum amount you must repay in EMIs along with interest rates.

• Line of Credit

An inventory line of credit is more suitable if you want to stay prepared for unforeseen expenses without taking a loan each time. In this type of financial plan, you get a credit limit up to which you can borrow whenever required and repay with interest for that amount only. 

Eligibility Criteria for Inventory Financing

You must fulfil these conditions to qualify for inventory financing: 

• You must be a self-employed professional or an entrepreneur running a private, public, or proprietorship firm.

• You must be running the current business for a minimum of three years.

• Your business profitability should be sufficient as per the industry norms.

• You must maintain a good credit score with low financial obligations to prove high repayment capacity.

Things to Consider Before Availing Loan for Inventory

Inventory loans for small businesses are great funding options that provide the required money at the right time against the inventory you have already stocked up. However, before applying for one, here are a few key things to consider:

• Nature of Inventory

The nature of inventory matters a lot while availing an inventory loan against it. For instance, a stock of perishable products may not get an easy loan. Most lenders will not want to lend you money if the inventory has a short life of only a few hours or days. So, consider the nature of inventory before applying for inventory finance.

Also, Check: Supply Chain Finance: Meaning, Process, Features & Benefits

• Credit Score

Your credit score is an important factor in determining loan eligibility. The higher the credit score, the better the loan eligibility and the lower the interest rate. So, maintain a consistent repayment history, reduce the debt-to-income (DTI) ratio and credit utilisation rate (CUR), and diversify your credit portfolio to get the best loan scheme.

• Confidence Level in Inventory

Your inventory's market demand and resale value also determine your loan eligibility. Lenders want to ensure they can get their money back in case of default.

How to Apply for Inventory Financing?

Are you planning to apply for inventory finance? These are the steps to follow:

• Go to the Business Loan page of the Hero FinCorp website.

• Click Apply Now to fill out the online application form.  

• Submit the necessary documents to complete the KYC process.

• Wait for the evaluation of your credit score, eligibility, and financials.

• Receive a loan offer with an appropriate loan amount, interest rate, and repayment tenure.

• Accept the loan offer to get disbursal directly into your bank account.

Conclusion

An inventory loan is an asset-based, short-term loan you can take from Hero FinCorp using your inventory as collateral. You can use this loan for any business-related expenses and repay it with interest in up to 120 days. Our Business Loan rates for these funding options are reasonable, and they are the best funding sources to improve cash flow, boost operations and sales, and prepare for the peak season. 

FAQs

• What are the objectives of inventory in financial management?

Inventory is a crucial part of a company's financial management. It is considered a company asset with appropriate resale value. Proper inventory management is vital to managing business finances with minimal wastage and adequate cash flow.

• Can I get a loan against my inventory?

Yes. Inventory financing is an ideal way to get a loan against your inventory and repay it in easy EMIs in up to 120 days.

• What is the interest rate for inventory loans?

The inventory loan rates depend on various factors, including the inventory's nature and value and the business owner's credit score, financials, experience, and other factors.