Warehouse financing allows businesses to use assets held in a warehouse as collateral for a loan. Banks offer this service, and borrowers can use their existing inventory as collateral. The value of the assets is determined, and the loan is extended based on this assigned value. If the borrower defaults, the assets can be seized and sold to recover the costs of the loan. The interest rate and terms of the loan are disclosed in the contract, and reviewing it with a lawyer may be advisable.
Warehouse financing is a form of financing made available to businesses that use assets held in a warehouse as collateral. Many commercial banks offer this service or may refer their customers to partner banks with warehouse financing options. This service has a number of advantages for bank customers, as well as their banks, and can be offered or discussed as an option when a company seeks financing for its activities.
In warehouse financing, assets held by the borrower are pledged as collateral. They may be transferred to a facility held by the bank or a third party, or they may be left on site and a third party may have control of the storage area. In all cases, the value of the assets is determined and the bank extends a loan based on this assigned value.
For banks, warehouse financing has the obvious advantage of coming with guarantees. If the borrower defaults on the loan or falls behind on payments, the assets can be seized and sold to recover the costs of the loan, along with any associated fees. When offering this type of loan, banks consider the value of the property along with its potential in the sales market. As the company usually holds the goods for the purpose of selling them, the bank can be sure that there is a market for them and interested buyers will buy them reasonably quickly in the event of a seizure.
Borrowers may find it advantageous to use their existing inventory as collateral. If the assets need to be stored anyway, there are obvious benefits to using them to secure a loan to buy more inventory or cover other business expenses. As the loan is repaid, collateral can be released, allowing people to sell the products in a timely manner as they pay off the loan. This financing option can be useful for a business struggling to expand that lacks other forms of collateral as well as access to capital.
In a warehouse financing contract, the interest rate and other terms of the loan will be clearly disclosed, as will the assigned value of the assets. If there are disputes about aspects of the contract, they should be discussed before the contract is signed and finalized. Once approved, the contract is difficult to change, as it requires the consent of both parties. Reviewing the contract with a lawyer may be advisable to detect surprises or traps structured in the language of the contract.
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