Inventory Financing

November 3, 20152 min read
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When a business or company would like to secure a loan, for whatever intended purpose, inventory can be used as collateral for the loan. It’s a high-risk maneuver – considering the fact that if the loan cannot be fully repaid, inventory can be seized and sold by the lender.

Two Main Types of Inventory Financing

To ensure better security and risk assessment for both the lender and the borrower, there are currently two main types of inventory financing.

Inventory Loan

Usually, when a new small business is set to open, entrepreneurs may acquire an inventory loan. This works quite similar to that of a small business loan, but instead, it’s calculated against the amount of inventory required by the business.

The owners are responsible to make monthly installments or set up a repayment term for the inventory loan. As inventory is sold off, owners will make the necessary repayments of the loan.

Inventory Line of Credit

An inventory line of credit allows business owners to establish a sort of partnership with their financial institutions or lenders. With this, business owners will be able to receive additional funding on an as-needed basis.

Using an inventory line of credit, business owners have more leniency considering their initial loan and allow them to be covered in the event of unforeseeable circumstances.

When will a small business use inventory financing?

Small business owners may require additional financial support to assist with the growth of their business. A small business owner may use inventory financing for:

  • To assist with immediate cash shortages
  • Increase and grow product offering
  • Introduce a new line of products
  • Increase supply to help meet growing demands

Inventory financing is mainly used by small business owners to assist with short-term-based financial backing, but over time can help increase overall inventory expansion.