How to Obtain an Inventory Loan for a Small Business Accessing small business financing can be a critical part of operating a small business. In some industries, you may receive orders that you cannot fill […]
How to Obtain an Inventory Loan for a Small Business
Accessing small business financing can be a critical part of operating a small business. In some industries, you may receive orders that you cannot fill without first purchasing the inventory you need. In cases where the customer does not pay until they receive the shipment, that can be a challenge. Taking out an inventory loan is just one way to cope with this and other inventory problems.
Every for-profit organization is bound to run into lapses in cash flow – especially when unexpected expenses arise, when clients are hesitant to pay their bills, or when the seasonal nature of a given industry makes proprietors have to stretch their money through the lean season.
A number of options are available to small business owners to access funds. Some of these options will suit your needs, and some may not- depending on the nature of your business and your current situation. Common loan options include bank loans, lines of credit, accounts receivable financing, and credit cards. But for small retail businesses, an inventory loan will frequently be the best choice when filling out those showroom shelves proves to be a challenge.
Here, we will define inventory loans, determine whether or not one is right for you, and discuss how you can obtain one.
What is Inventory Financing?
Inventory financing or an inventory loan is a short-term loan or a line of credit that is specially designed for small business owners who need help buying inventory.
With loans of this type, current and future inventory can be used as collateral. That means small retail businesses that default on an inventory loan may have to surrender current or future inventory in the event that they should default on the loan.
An inventory loan can be a valuable resource to businesses that would ordinarily be successful but have run into an isolated or unusual financial hardship and just need help filling in the gap. Where borrowers can sometimes go wrong is in misjudging the nature of the gap in their cash flow. If you need money to buy inventory due to a problem that is not directly related to a weakness in your business model, then an inventory loan may be the remedy.
Is an Inventory Loan Right for You?
Knowing that there are going to be some risks involved anytime you take on debt, you should ask yourself a few questions before moving forward with an inventory financing loan.
–Does your business have strong sales and a high inventory turnover rate?
–Do you need the loan to restock your inventory in preparation for another sales cycle?
–Does your business have a good credit history, and have you been turned down for a small business loan by a traditional bank lender?
–Are you interested in flexible working capital for your business to free up funds that you would normally use to maintain your inventory?
If you answered ‘yes’ to two or more of these questions, then a small business inventory loan may be right for you.
How to Access an Inventory Loan
1. Select a Small Inventory Lender
Not all traditional lenders provide loans of this type. If you have a longstanding relationship with your bank or lender, you may consider asking them. Otherwise, you will need to shop around with other lenders to find the one that provides these types of loan at the lowest rate of interest.
2. Calculate How Much Inventory You Need
Your lender will need to know exactly how much money you need to fill out your inventory. Whether you only need enough inventory to get through a season or an entire year – you should know ahead of time. Providing exact amounts will increase your chance of being approved.
3. Compile Business Income Statements from the Last Few Fiscal years or Quarters
Your lender will need to see evidence that your retail business has a record of successful sales before they can justify taking on the risk of extending credit to your business. If for example, you need $60,000 for inventory costs, but your statements indicate that you typically only make $50,000 in sales each year – then the bank may lower the amount that they are willing to lend you.
Knowing your sales record and asking for an appropriate amount shows that you understand your business well, can make accurate projections, and will increase your odds of being approved.
4. Draft a Balance Sheet
The balance sheet for your company lists the liabilities, assets, and equity associated with your retail business. Your lender will need to see any and all liabilities your company is currently dealing with before it can approve your inventory loan. Naturally, if you have too many liabilities, you may be turned down. But every business has liabilities that they have to work around- so do not think having a few will hurt your chances of approval. Examples include debt to your employees, to your clients, or capital debt.
5. Get Ready for Your Interview with the Lending Agent
Lending agents have a duty to justify the risk they are taking on anytime they extend credit to anyone, be it an individual or a business. You should be prepared to discuss the health of your retail business. Your lender will want to know whether or not you foresee ongoing profits in the near future, whether your business is growing as expected, and what forms of collateral you have and are willing to offer to support their risk. You should also be conversant on the strength and viability of your competition. Practice your interview skills with a friend, and be prepared to be as professional as possible.
6. Start the Process
Now that you know what an inventory is and what you need to get one, you are ready to move forward. When you set out to obtain such a loan, know that the interview and approval process can take several hours. After you have found the best lender and have scheduled an appointment, you should begin preparing. You may need to be ready to set aside an entire day for the interview and credit check as it takes time for your lender to access all of the pertinent information and to fully examine your credit history.
Accessing your first inventory loan can be stressful. However, inventory financing is a very common way for successful retail businesses to grow and overcome challenges that are common in a given industry. If you need an inventory loan, know that it is not a sign of weakness or poor judgment on your part. Inventory loans are an important way any successful retail business can expand, diversify, and grow.