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Having a successful business does not guarantee that you will not experience challenges and bumps along the way. Faulty equipment, late invoice payment from customers, and governmental policies can place a business in a terrible financial state. When these issues occur, it is essential to have working capital available to handle your business needs.
Thankfully, several loans and lines of credit are available to take care of your mounting business needs.
This article will explore everything you need to know about one of them: inventory financing. You will find out how it works, which businesses can apply for it, eligibility requirements, and many more.
What Is Inventory Line of Credit?
An inventory line of credit is a short-term loan granted to a business or company to make inventory purchases to keep them running smoothly. It is a type of asset-based loan where the existing inventory purchases are used as collateral to secure the line of credit.
Businesses typically use an inventory line to credit for purchasing new inventory. However, it can be used for other business needs as well. Inventory line of credit is best suited for your business if it doesn’t have the finances to acquire new inventory.
How Does Inventory Line of Credit Work?
If your business needs to acquire new inventory to match customer demands but does not have the funds to do so, then an inventory line of credit is what you need. Also, if you need to stock up for a busy season where inventories may be expensive, you should consider this line of credit.
You meet a lender who reviews your application and existing inventory and products and approves your loan request. Whenever you need funds, you apply for a withdrawal and payback plus interest when you’ve made your income.
Inventory Financing Vs Accounts Receivables
People often mistake inventory and A/R line of credit as the same thing. They are different in application. While the collateral for the inventory line of credit is based on existing inventory, unpaid invoices from clients are the collateral for the A/R line of credit.
While the unpaid invoices owed by your customers remain constant, inventory can depreciate in value over time. That’s why lenders critically review your existing inventory identify its viability before approving the credit.
Businesses That Can Benefit From Inventory Line of Credit
Different companies will have different inventory needs. You may need funds to acquire inventory to meet client demands, just as another company is purchasing a new line of services.
Applying for an inventory line of credit is typically a good sign that your business is doing well and needs to be strategically prepared to meet emerging demands. Some of the companies that need this type of financing include:
- Wholesalers. Businesses that essentially run a warehouse to stock up various products and make them available to retailers can apply for the credit. Wholesalers move products in bulk quantities to retailers and need funding to stock up their warehouses after completing orders.
- Seasonal businesses. These businesses receive an influx of orders from customers during specific seasons. They should stock up on products during the off-season when the prices are low.
- Retailers. Retail operations can also apply for this line of credit if they do not have the finances to acquire more merchandise to meet customer demands. These retailers include department stores selling beverages, beauty products, sports gear, toys, and many more.
Pros of Inventory Line of Credit
No line of credit doesn’t come with its advantages and disadvantages. It is vital to review the pros and cons before applying for an inventory line of credit from a lender. We discuss the pros below:
- Zero need for personal collateral. One of the benefits of an inventory line of credit is that you don’t need to submit personal or business assets as collateral. Often, the idea of offering assets such as cars, apartments, or equipment as collateral scares business owners. In this case, the collateral considered is the existing inventory available. Best case scenario? You make profits and pay off the credit plus interests. Worst case scenario? You give up your inventory alone while remaining in complete control of your business. Inventory line of credit is designed to keep you in control, whatever the case may be.
- Quick approval. Unlike applying for a bank loan, inventory financing is faster to process with lenders. These institutions would need less paperwork and can approve your request within days.
- No hard inquiries. Another benefit to this line of credit is that lenders will not conduct a hard inquiry which might impact your credit score. The reason is that your existing inventory will be used as collateral, so your credit report doesn’t matter.
- Meet your customer demands. Inventory line of credit allows you to comfortably meet your customer demands the best way possible. It also allows you to stock in preparing for when there’d be an influx of orders.
Cons of Inventory Line of Credit
The demerits of inventory line of credit include:
- Relatively higher interest rates. The only demerit to the inventory line of credit is a somewhat higher interest rate. All you need to do is review different interest rates from a long list of certified lenders and choose one.
Documents Needed to Apply for an Inventory Line of Credit
You’d need the following financial documents to apply for this line of credit.
- Profit and loss statement
- Business bank statement
- Inventory list
- Inventory management records
- Sales forecast
- Balance sheet
- Tax returns
Alternatives to Inventory Line of Credit
There are alternative financing options you can opt for if you do not want an inventory line of credit. They include:
- Business credit cards
- Merchant cash advances
- The business line of credit
- Invoice factoring
- Purchase order financing
Final Thoughts
Inventory line of credit is an impressive way to ensure that your business is sufficiently prepared for customer demands. Here at Bunny Lender, we do our best to connect you with hundreds of verified lenders in your city to approve your credit request and fund your business.
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