Inventory financing uses a company’s inventory to obtain a loan or line of credit, with the lender receiving a percentage of sales as interest. Lenders minimize risk by taking control of remaining inventory in case of default. Borrowers benefit from fast processing and may need additional collateral.
Inventory financing is the strategy of using a company’s inventory of consumer products as a means of obtaining a loan, down payment, or revolving line of credit. The idea is that as items are sold from inventory, the proceeds from those sales are used to pay off a portion of the outstanding debt. In exchange for the financing, the lender receives a percentage of the sales as interest on the loan, as well as receiving payments on the principal.
While there are some variations, the basic inventory financing process involves evaluating the current value of the inventory and determining if it is enough to cover the amount requested for the loan or line of credit. If that is the case, and if there is evidence that each item in the inventory can be sold and paid for within a reasonable time, the lender will provide the borrower with the requested amount. For this service, the lender also applies an interest rate to the balance in the borrower’s account. In turn, the debtor agrees that the lender will receive payments on all inventory items sold until the amount owed is paid in full.
For lenders, inventory financing helps minimize the degree of risk associated with making the loan. In the event the debtor must default, the lender has the right to take control of the remaining inventory and sell it to satisfy the debt. In exchange for this reduced degree of risk, lenders are generally willing to provide competitive interest rates to borrowers.
Along with the lower interest rate, borrowers also benefit from the fast processing common with inventory financing. This means that the borrower can receive the loan funds or move forward almost immediately, and begin using those funds for various projects, operating expenses or any pending needs. The rapid availability of funds makes it possible to move forward without having to wait for customers to sell and pay for inventory, which in turn allows the company to take advantage of opportunities that might not be available at a later date.
Depending on the nature and size of the inventory, a lender may require additional collateral before inventory financing is approved. Assets that are not currently used as collateral for other loans or financial obligations are generally acceptable, provided they have verifiable value on the open market. For example, the lender may also require the borrower to pledge a section of real estate as collateral, along with current inventory, before the loan is processed.
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