post by:
Michael Goldstein
Managing your business’s inventory finances is no easy task. There is lots of room for miscalculations. Don’t worry, there are ways to keep your cashflow going without cutting back supply. You can choose between two surefire ways to keep your inventory stocked.
Customer demand must be met if you are to stay in business. With trends constantly changing up the products, it can be difficult to manage your current stock and future inventory. Cashflow is dependent on this, though, so it must be done cleverly. It is important to do the work and research not only what your customer wants but how you can get the product in their hands. Money is the answer. But how can you get the money without creating losses or even going bankrupt? The following two options are available to you, depending on your situation and financial needs.
What Is Inventory Financing?
Inventory financing is a type of funding that helps businesses with building their inventory. If you are struggling to meet customer demand and need cash to supply your goods, this would be the route to take. Leveraging your inventory is not always an easy decision, especially if your cashflow is low for reasons other than high demand. So, keep this in mind when considering this option. It is meant to be a short-term solution, but if you take the necessary precautions it can be a beneficial path.
You can apply at traditional banks or online lenders for inventory funding. Often, they will only give fifty to eighty percent of your inventory’s worth. The number depends on your business’s overall worth, credit history, your inventory’s value, and predicted sales. Once you have the inventory financing in place, you pay back the money with the proceeds from your sold goods. It’s the simplest and safest way to get ahead with business growth.
Pros
- You gamble your inventory instead of your other business assets.
- It’s easier to qualify for inventory financing than other loans that ask for more collateral or interest.
- You’re able to get ahead of trends and prepare product launches in advance.
- If it’s your chosen type of inventory loan, easily access your borrowed money via a credit line.
- This works for any size of business, no matter what the sales volume.
- You pay the loan back with your proceeds.
Cons
- It’s strictly meant for inventory purposes, so you can’t use it for other business needs.
- You may have to pay higher interest if you don’t manage to sell your goods by the expected date.
- Depending on the lender or bank, you may have a high loan minimum. This can affect your strategy and require you to either change it or decide against the loan all together.
- Inventory financing has higher interest rates compared to other types of loans.
- There are shorter payment terms. You may have a sizable monthly cost since it’s repaid over a shorter amount of time.
What Is Accounts Receivable Financing?
Accounts receivable financing is where you sell your accounts receivable to a factoring institute known as a “factor.” They will take on the debts owed to you as a business—sold to them at a generous discount. Depending on the value of your assets, it may or may not be worth moving forward with this type of financing. Nonetheless, this is a great route for your business if you need cash fast and want to concentrate on other aspects of your business.
You can apply for this type of financing at factoring institutes, which are subsidiaries of banks or lenders. The process is often quick, but they will do a thorough appraisal of your accounts to determine their value and the discount they require from you. Once the details have been arranged, you will receive a lump sum. The rest of the money will be given to you over time, depending on the success they have with your accounts.
Pros
- You will receive your cash quickly.
- It’s a good alternative if you are having trouble getting approved by traditional banks and lenders.
- Depending on the agreement, the factoring institute will take on your riskier accounts and assume responsibility for them.
- They’re not too picky about your credit history.
- The agreement is tailored to your business and its unique value.
- This type of loan offers great benefits contingent on your accounts receivable value.
- This type of financing requires less maintenance compared to other loans.
Cons
- The discount may be higher than planned, subject to your account’s appraisal.
- Since the agreement is based on your unique business value, it’s a complex set up and can often be time consuming.
- If you don’t do your research, you may end up with a less-than-trustworthy factoring institute.
- It’s harder to qualify for accounts receivable financing than other types of loans.
How Can You Use Them Together?
It can be beneficial to use both types of loans during periods of high growth. While inventory financing covers the goods, the accounts receivable financing can then pay for the inventory loan. With this strategy, you can concentrate on meeting your short-term financial goals that much quicker and efficiently. Business involves creativity and skill. That’s why it’s important to explore all avenues. Your cashflow can be managed more easily with inventory taken care of. With flexible plans for both types of loans, you can tailor it to your individual business needs. You can both meet customer demand and generate revenue.
Why Should You Choose Inventory Financing Over ARF?
You should apply for inventory financing because of its long list of pros and ease of qualification. Every business grows at different rates, depending on your ingenuity and salesmanship. Inventory loans can be great for start-ups who need a boost and for businesses that have grown and need the extra help managing their large number of consumers. If you want your cashflow to go towards other things such as advertising, wages, or expansions then freeing up your inventory costs with this type of loan will benefit you greatly.