Inventory Financing

What is Inventory Financing?

X Bill Herrfeldt Bill Herrfeldt specializes in finance, sports and the needs of retiring people, and has been published in the national edition of "Erickson Tribune," the "Washington Post" and the "Arizona Republic." He graduated from the University of Louisville.

By Bill Herrfeldt, eHow Contributor

Print this articleWhen a company borrow money from a lender like a bank and secures it with its inventory, it is called inventory financing. Companies do this to free up cash that otherwise would be tied up in inventory. This is only available to companies that have inventories tangible items--- physical things that can be touched and felt. Companies in service industries or those that sell their knowledge do not have the luxury of financing an inventory.

For a company to finance its inventory, it must have good credit. A lender needs to know that the company will pay the loan back and not force it to own the inventory. Typically, a company has a relationship with a bank to begin with, and that bank knows whether the company has good credit, or not.

Timing

Any time a company is ready to manufacture more goods while it has a lot of inventory ready to ship to its customers, it may want to finance its inventory to buy raw materials. Also, many companies, such as retailers, keep a lot of inventory on hand to facilitate sales. When a company has a great deal of money invested in the inventory, it cannot buy anything else either until the inventory is sold, or it secures inventory financing.

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If a company has a lot of inventory that is either old or difficult to sell, inventory financing probably is not a good idea. Borrowing money and paying interest on it can compound the problem in a situation like that. In that case, it is better to sell off the bad inventory and start fresh rather than borrow against it.

Requirements

Before applying for an inventory loan, it's important to take a comprehensive inventory of the product on hand. Lenders sometimes require that the inventory be appraised by an outside source. In addition, lenders may require up-to-date statements that reflect business growth and demonstrate ability to make payments. Lenders sometimes also ask for additional collateral to secure a loan.

Other Idiosyncrasies

With inventory financing, lenders often offer companies lines of credit so that can be drawn down as necessary. But most lenders require borrowers to pay off that line at least once each year, and not use the line for at least thirty days. Furthermore, if there is a lot of money at stake, the lender may do a spot inventory from time to time to make sure that all collateral is intact.Read more: What is Inventory Financing? | eHow.com

Question: What is Inventory Financing? How Does Inventory Financing Work?

Answer:

Inventory financing uses inventory as collateral for loans. Inventory financing is used by manufacturers of consumer products and by dealers (including automobile, truck, RV, motorcycle), because they have significant amounts of money tied up in their inventory.

How Does Inventory Financing work?

Let's say a car dealer wants to increase inventory. The dealer must purchase the inventory from the car manufacturer, but vehicles are expensive. The dealer gets a loan from a financing company like GMAC, based on the value of the cars. When the car is sold, the dealer can pay off the portion of the loan related to that car, or purchase more inventories to sell. As you can see, inventory financing is part of the production cycle of buying, making, and selling. Inventory is less liquid than accounts receivable, so you will not be able to get full value on your financing.

When to Consider (and Not Consider) Inventory Financing

If your inventory selling well and you are in need of more money to keep selling, you may want to consider inventory financing. I:f your is out of date or not selling (you have slow turnover), it may not be wise to attempt inventory financing, because you may not find a willing lender.

What Else Is Needed for Inventory Financing

As with other forms of financing, you will need a good credit record, a compelling business plan, and a list of the inventory you want to finance, along with values. The lender will give you an estimate of how much you can borrow on the inventory.

During Financing

While your inventory is waiting to be sold, you will need to keep track of it and make sure it is in good repair and in shape. Your lender has the right to inspect the inventory to make sure it has retained its value.

Raise Cash for Working Capital With Inventory Financing

Inventory Management

*Small Business Inventory

*Inventory Management

*Asset Inventory

*Car Loan Finance

*Inventory Control

If a small business goes to a bank for a loan to finance their working capital and the bank says no, the business doesn't have to give up. If the business produces products and has inventory, it can use inventory financing to raise money. Inventory financing is more expensive to the business than a bank loan. However, inventory financing can be used to supplement working capital needs, including cash needed for import and export financing.

Blanket Inventory Lien

One form of inventory financing is the blanket inventory lien. A blanket inventory lien is a loan secured by the firm's inventory. The inventory is, in effect, the collateral for the loan. This type of loan allows businesses to keep large amounts of expensive inventory on hand. The business could not afford to keep this inventory on hand on its own. The only way it can afford to have the inventory selection for its customers is to utilize this type of inventory financing.

Examples of firms that may use blanket inventory liens are those who sell inventory that is high priced and doesn't use move very quickly, such as luxury items.

Floor Planning

Floor planning, also called trust receipts, is another form of inventory financing where the loan is secured by

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