Business Loans for Inventory Management
Inventory management is the process of handling the flow of inventory in and out of your business to maximize sales and minimize exposure. A business maximizes sales both by having enough inventory on-hand to meet demand and also by having the right kind of inventory to sell.
A small business minimizes exposure but not having so much capital invested in inventory that it cannot cover other expenses, or by buying the correct kind of inventory. If yours is a product-based business, you will quickly learn how important inventory management is to your success.
Inventory cycles rarely align with cash flow cycles. You must buy the produce to prepare the salad to sell, or the clothes to hang on the racks before the sale has been made. It is common to have to lay out a significant amount of capital to stock up for an upcoming busy or holiday season. And this is why small business owners go to Shield Funding for business loans for inventory management. The process is fast and easy and it can all be completed online. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are Business Loans for Inventory Management?
Most inventory management loans are short-term in nature. You do not want to be making payments on a loan for product that has already sold or outlived its usefulness. The inventory serves as collateral for the loan, and can be repossessed should you default.
Excellent candidates for business loans meant for inventory management are wholesale, retail, manufacturing, food and distribution businesses.
Can I Get a Loan for Inventory From a Traditional Lender?
Traditional lenders rarely lend to all but the most credit-worthy candidates, but even if you meet their credit requirements there will be other hurdles to obtaining a loan from a bank. When deciding whether or not to grant an asset-backed inventory loan a bank will take into account;
- Economic and industry inventory cycles
- The inventory’s perishability
- Possible theft and loss
- Resell market for the inventory
- Product demand
- Your business
Their prime concern is to make sure that the inventory they are paying for will hold its value should it be necessary for them to repossess it. Certain inventory can expire, or pass a sell-by date, and other types of inventory has low resell value. The bank does not want to be stuck holding inventory that has lost its value or is worthless.
Because the inventory serves as collateral for your loan, the bank could also ask to see the following;
- Inventory turnover calculations
- Loss and damage reports
- Gross profit margin calculations
- Past sales volumes
If the loan represents a significant capital investment they might also send out an independent, third-party auditor to assess your inventory. The underwriting and approval process for an inventory loan from a traditional lender can take months, and involve considerable expense on their part. For this reason, banks typically do not even look at inventory management loans for less than $500,000.
Traditional banks do lend for inventory management purposes, but the majority of small businesses will not meet their lending criteria and simply do not have the time to invest to get approved for a loan.
Types of Business Loans for Inventory Available
While you can take out a loan with the specific purpose of inventory management, it does not necessarily have to be a loan which requires that collateral be pledged as inventory.
Short Term Business Loans from Alternative Lenders
Short term business loans are the perfect lending product when you need to acquire inventory that will be sold within a few months. Generally speaking, your loan’s term should correspond with the useful life of the asset you acquire with that loan. This is why the terms on equipment financing loans typically align with a depreciation schedule.
If your business turns inventory on a quarterly or monthly basis, you do not want to be making payments on a loan for inventory sold months ago. A short-term loan through an alternative lender can be repaid over a period of two months to one and a half years.
Alternative lenders also offer flexible repayment plans which are great if you have yet to start selling that inventory. They will work with your cash flow pattern and accept auto-payments deducted monthly, bi-weekly, weekly, or even daily.
Short term business loans do have higher interest rates than a bank loan, from 9% to 45%, because the lender has a shorter period of time over which to earn their profit. The alternative lender will want to see minimum monthly revenues of $10,000 and a credit score higher than 650.
Payments on a short-term loan will also be higher than those on a term loan because the capital you’re repaying plus fees is amortized over a shorter period. For example, if you take out a $10,000 loan, including fees, for ten years, your monthly payment would be $83. The same loan, repaid over two years, would require $416 as a monthly payment.
This should not be a problem, as you will sell the inventory and be able to make payment. And most short-term loans do not charge prepayment penalties, so if the inventory sells faster than anticipated you can pay off the loan early.
Business Lines of Credit
A business line of credit functions similarly to a credit card. The line is open and you can access the capital at any time. Once you have paid down some of the line of credit, you can draw again the next time you need to purchase more inventory. And, if you have no draws on the line, you do not owe a payment.
A business line of credit, just like a credit card, is an open and unsecured form of credit. It has no collateral and the lender will be last in line to get repaid should you default. For this reason, lines of credit can have extremely high interest rates. You may also pay an annual fee to keep it open or draw fees every time you access the capital.
These are two downsides to using a line of credit for inventory management. The other would be that, due to the risk associated with an unsecured form of lending, a line of credit will likely have a low lending limit. It might not be enough to pay for the inventory you need, or could end up limiting your business’ growth.
Merchant Cash Advances
Merchant cash advances take a little longer to approve borrower than short-term loans because they are granted on the basis of current sales. A merchant cash advance lends you money based on a projection of your future sales, which is calculated off past sales. To make a lending decision, the lender will request that you provide them with bank or credit card statements that prove how much money the business brings in.
It does not take long to apply for a merchant cash advance because all the lender truly cares about are your incoming cash receipts. In addition to proof of income, the lender might only ask for your business name, address, and proof of identity. Your advance can be funded within a short period of time, if approved.
A merchant cash advance is repaid every time you swipe a credit card going forward, and if you are buying too far advance of a busy season when sales are slow it could take longer to repay the lender. That is because merchant cash advance lenders do not get repaid through a monthly lump sum payment but rather by deducting a percentage of sales that includes both their profit and the capital they lent to you.
While rates can start at 15%, which is lower than a credit card, they frequently rise to triple digits if it takes too long for the lender to be repaid. Merchant cash advance lenders often build into their contracts increases in interest rates if the repayment period is dragging out. While they can be great to acquire inventory for an upcoming holiday season, carefully time when you take out the capital and buy inventory compared with when you expect it to sell.
Businesses who do a lot of business through credit card sales, particularly restaurants and retail establishments, often find MCA’s to be a good choice to fill their capital needs when they need to purchase inventory.
Bad Credit Business Loans
The unfortunate reality is that some businesses fail. But this could be good news for you, should a competitor’s inventory become available for purchase at a significant discount. A bad credit loan could give you the quick access to capital that you need to jump on an unexpected business opportunity.
Bad credit business loans exist to meet the needs of borrowers who do not meet traditional lender requirements which, as has already been covered, are quite stringent. Alternative lenders offer these loans to help fill the gap in the marketplace.
Loans can be approved within 24 hours, and you could see the funds in your bank account within a few days. All an alternative lender requires to approve a loan is proof of monthly revenues of $8,000 and above, a time in business of two months or longer, and a credit score of 500.
Unless you are requesting a loan at the top of their $1 million lending limit, lenders will not request tax returns or bank statements. There will be none of the inventory valuation, reports, and calculations that a bank demands. A bad credit business loan could allow you to jump on an opportunity that has a time limit.
Due to the short approval time, and requiring less documentation, alternative lenders charge higher interest rates to cover their risk. Interest rates on bad credit business loans range from 12% to 45%, but could be comparable or even lower than a business credit card or line of credit.
Unsecured Business Loans
Just because you are taking out a loan intended to purchase inventory does not mean you must pledge that inventory as collateral. Many lenders prefer to lend based on collateral because it lowers their risk to be able to claim a business’ assets or personal assets in case of default. This is the same reason that a secured loan could be riskier to you.
Pledging assets can also delay the time until funding while assets are appraised and verified, though a secured loan will typically have a lower interest rate. But the paperwork and time involved could simply be more hassle than its worth.
Lenders of unsecured business loans do require collateral. They grant loans based upon your businesses monthly revenues, but you do not have to pledge those revenues or a portion of them to secure the loan. As long as you meet the revenue and credit score requirements, unsecured business loans can be quickly approved and the amount you are borrowing deposited into your bank account shortly thereafter.
While you will pay more in interest to access the funds, you have less risk of losing an asset important in running your business and will be able to purchase the inventory you need.
Business Credit Cards
If all else fails, some business advisors say, you can use a business credit card to buy inventory. They are easier to obtain than a fixed-rate, term loan and online applications are often approved in minutes. But, because a credit card is a form of unsecured borrowing, your credit limit could be lower than the amount of money you need to buy inventory.
A business credit card works best at managing cash flow ups and downs rather than for meeting the purposes of a large capital outlay, partially because of their high interest rates. They help you pay a vendor if a bill comes due at an inconvenient time. Since they are a renewable form of capital you can access that credit again after you have paid down the balance.
Credit card rates start around 14.49% and can reach as high as 26.99%, so if your inventory takes longer to sell than you had planned for you could wipe out all your profits in interest charges. Business owners with poorer credit will pay a higher interest rate.
Interest rates charged on credit cards are based on Prime, and your rate could fluctuate unexpectedly if the Federal Reserve raises the Fed Funds Rate. If cash flow becomes a real issue, you could miss or make a late payment and have to pay fees. Some credit card companies will raise your rate if you miss a payment. Business credit cards often charge annual fees, too, and the company could raise that fee every year.
Using a business credit card to buy inventory is only a good idea if you are absolutely certain it will be paid off in a short time period and you have enough credit to cover the purchase. Keep in mind that if you have to charge up to the card’s maximum to buy inventory this will hurt your debt to income ratio and your leverage ratio and could also prevent you from obtaining other forms of capital.
The Final Word on Business Loans for Inventory Management
Access to all the capital in the world will not help your business succeed if you do not learn how to properly manage inventory and cash flows. Learning when to take on debt as part of this process is a skill that you will master over time. Work with an experienced lender such as Shield Funding who will help put you in the right form of loan to meet your inventory management needs and you will increase your odds of success.