Inventory financing is a funding option that may be suitable if your business has high inventory turnover, but needs a cash infusion to replenish stock levels in order to maximize revenues and profits. Alternatively, inventory financing could be viable if you have ready-to-ship inventory that hasn’t yet been paid for (in whole or part), and you need cash to cover your next production cycle.
However, before you apply for inventory financing, it’s vital to conduct due diligence and get clear, comprehensive answers from prospective inventory financing companies. Here are 6 key questions you should ask:
What is your experience with inventory financing?
Contrary to what you might have been led to believe — especially given the abundance of marketing and advertising content that you may (or perhaps already have) come across — most banks and financial institutions have limited experience with inventory financing. As such, they aggressively push borrowers towards other products with which they’re more familiar and, of course, from which they generate more profit. If a bank or financial institution that you’re evaluating doesn’t have several years of experience with inventory financing, then look elsewhere for a partner who is worthy of your business and trust.
What repayment term options are available?
Inventory financing option terms vary widely from lender to lender. Some require full repayment within 6 months, while for other its 12 months (or longer). It’s critical that you choose a loan duration that not only makes your repayment amount realistic, but doesn’t position you to need additional funds during the life of the loan (note: this may happen if something unexpectedly good or bad occurs; the point here is that after crunching the numbers and analyzing it against your known inventory cycle data, that you don’t realistically anticipate requiring additional funds).
Can I apply for back-to-back inventory financing?
Some inventory financing companies require borrowers — especially small businesses — to take at least one month off between inventory financing loans before reapplying. For example, if the financing runs from May 1 to April 30, and provided that a borrower meets all repayment requirements during the 12-month period and wishes to get new financing, they must wait until June 1 before getting additional cash.
What limitations (if any) govern how inventory can be sold?
Some inventory financing companies impose strict limitations on how borrowers can sell inventory, essentially because they are concerned that a borrower may unload some/all of their inventory at a loss (this could be for a for a variety of reasons, but usually to free up additional working capital). Ensure that you clearly understand any restrictions or limitations that may be imposed on you during the repayment period.
Are their inventory inspections, and if so, what do they include?
Some inventory financing companies reserve the right to conduct periodic inventory inspections during the repayment period. If this is a provision enforced by a prospective lender on your list, find out exactly what this involves and what your obligations are. If these are too onerous, keep looking for a more reasonable partner.
What are the reporting requirements?
Some inventory financing companies impose strict reporting requirements that include (but are not limited to) weekly or monthly sales updates. Essentially, the lender wants to be comfortable that you’re maintaining the minimum amount of inventory-on-hand and maximizing turnover. Ensure that you know what’s expected of you, and that you find the reporting requirements reasonable and administratively viable.
At National Business Capital, we offer inventory financing that, like all of our lending solutions, focus on helping our clients succeed. Our terms are reasonable and fair, we take a “less is more” approach to administration, and we’re here 24/7/365 to provide support, advice and answers. To learn more, contact us today or fill out our two-minute application to see the funding options we suggest. Get the facts you need to make a smart financing decision that is right for your business.