If you’re investigating ways to boost your operating capital, you may have stumbled across the idea of inventory loans. This is a unique type of loan secured by a dynamic asset, your inventory, and it can be a very effective way to access funding. Wondering if it’s right for you? Here are six times when inventory loans are the right option:
1. You are in a Retail or Product-Based Industry
In order to access an inventory loan, you have to have inventory. If you are not in a retail or product-focused industry, this type of loan does not make as much sense for you. If you do not fall into these industries, then you may want to consider a loan that is guaranteed by another type of collateral like a factoring loan, which is secured by your accounts receivables or a line of credit or business credit card, which are unsecured financing options.
2. You Anticipate Revenues Increasing
In short, you need a revenue stream to repay an inventory loan. Unfortunately, if your revenue flow is relatively static and you currently don’t have enough funds to support your existing operations, there is a risk that you won’t be able to make your inventory loan repayments either. Conversely, if your revenue flow is seasonally-dependent or if it has recently stalled for another reason but you anticipate an increase, an inventory loan may be ideal for your situation.
In particular, many people in seasonal retail sectors use inventory loans to restock after a period of low sales. For example, imagine you own a website that sells patio furniture. During the winter your revenue wanes as fewer people buy patio furniture. However, as spring rolls around and you anticipate revenue increasing, you want to be sure that you are prepared with warehouses full of inventory, money to hire additional help during the busy season or cash for other expenses. In cases like these, an inventory loan makes perfect sense, as it helps you get through a slow season so that you can prepare to make the most of a busy season.
3. You Don’t Want to Use Personal Assets as Collateral
In some cases, business owners take loans against their personal assets to finance their business activities. For example, they may take out a home equity line of credit (HELOC). These are lines of credit that can be accessed as needed by transferring the funds to a bank account and, in some cases, you can even get checks linked to a HELOC. However, they are secured by the equity in your home, which means that if you default on the debt, your home is at risk. Inventory loans eliminate this risk and indirectly help safeguard your personal assets.
4. You Have Well-Ordered Inventory Records
In order to be approved for an inventory loan, you must be able to show the lender the value of the underlying asset (your inventory). Although lenders have different means of evaluating your inventory, companies tend to look at your inventory tracking and organization system and they also want to know how you store your inventory. If your inventory is not in a well-maintained facility, it may hamper your chances of getting approved for small business funding.
5. You Have to Maintain High Levels of Inventory
The volume of inventory that businesses carry can vary drastically. If you examine your business practices and determine that you can get by with a smaller amount of inventory, you may want to sell off your existing inventory, reduce your storage costs and maintain a smaller section of inventory. If you can afford to drop your inventory levels, you can save money on restocking as you will reduce your inventory stores, which may provide the boost to working capital that you need.
However, if you have to maintain high levels of inventory because of demand, production considerations or any other reason, you may not want to let that asset just sit there. Instead, you may prefer to leverage it with an inventory loan.
6. You are Struggling to Get Traditional Funding
If you cannot qualify for a traditional loan or an unsecured business loan, you may want to consider an inventory loan. When granted by online lenders, these loans aren’t tied as closely to your credit rating as with many other types of loans. Instead, these lenders use data that ranges from sales numbers to inventory tracking methods to online reputations to create a complete picture of a client. This strategy can often help business owners sidestep lackluster credit scores.
For retailers or those in product-based industries, an inventory loan can serve as a useful and efficient way to access working capital. In particular, if you have a lot of inventory on-hand and have a solid system in place for organizing it, you may be an ideal candidate for this type of loan. Considering all of the six factors mentioned above, you can determine whether an inventory loan is the key to helping you advance your small business now and into the future.