When it comes to inventory management, there’s a lot at stake for New Jersey small business owners. An unexpected sales slump, late invoice payments, or equipment malfunctions can leave your business vulnerable, and expose you to critical inventory shortages, and even a significant financial shortfall. Fortunately, there is a viable funding option that helps smaller companies like yours safely plan ahead to help mitigate stock issues known as inventory financing.
Inventory financing is a short-term business lending solution, usually lasting up to a year or more. This type of loan assists businesses in covering their expenses or acquiring additional assets without staking their personal collateral upfront.
To help business owners better understand how this financing type works, the lending consultants at New Bridge Merchant Capital have put together the following guide covering the various benefits of inventory financing and how to apply for it. We’ll also discuss a handful of other popular alternative small business loans in NJ to consider as you search for the best working capital solutions for your organization.
What is Inventory Financing?
Inventory financing plays a vital role in running countless successful small businesses. Companies frequently leverage this financing type when they need to purchase products to sell at the peak of their seasonal fluctuations. In contrast to other familiar NJ business loans, inventory financing offers an attractive lending structure that requires no personal collateral. Instead, creditors use your existing inventory to secure the loan in the case of a default.
Inventory financing enables businesses to purchase merchandise to satisfy their large seasonal orders and capitalize on other time-sensitive opportunities. The secured loan basis for inventory financing makes it a relatively low-risk option for lenders since there is no need for additional collateral, and the inventory itself is sufficient enough to make the loan.
You can access this type of financing from several lending entities, including traditional banks, commercial finance companies, and alternative business lenders. Before creating the loan, these creditors will ascribe a value to your existing inventory used to secure the proposed funding.
During this process, they’ll also establish a basis for assessing your creditworthiness and the maximum loan disbursement amount. It is, therefore, crucial that you work closely with your preferred lender to gather all the pertinent financial documents that can demonstrate the fiscal strength of your business, the value of your inventory, and your company’s ability to repay the loan.
The terms of inventory financing vary from institution to institution and come with different processing fees, repayment periods, and interest rates. Closely examining borrowing costs and comparing multiple products and terms will give you a more comprehensive view of which loan structure is right for your specific application.
How Inventory Financing Works
Inventory financing for small businesses is a popular form of asset-based financing that gives retailers and wholesalers, especially those with a large amount of available stock, fast access to working capital. Small to medium-sized companies often lack the financial history and dispensable assets to secure the institutional-sized financing options that larger retailers can. For this reason, many smaller companies opt for inventory financing to ensure sufficient stock levels.
Smaller companies are generally private. Thus, they can’t raise money by issuing bonds or new rounds of stock. Without access to traditional financing solutions like these, businesses have increasingly turned to inventory financing as an alternative for funding their general operating expenses.
While inventory financing is an effective way to generate working capital quickly, it’s also critical for ensuring uninterrupted operations and protecting your business from experiencing an unexpected loss. Inventory financing allows companies to purchase the necessary materials to manufacture products they intend to sell at a later date and improve their cash flow management.
Inventory financing also provides both short- and long-term benefits. It allows companies to purchase enough materials to avoid losing potential sales due to shortages or limited stock. Moreover, it helps protect against overstocking. This problem can lead to a decrease in cash flow due to carrying excess inventory, which is especially important during seasonal fluctuations when overstocking becomes a burden.
Which Types of Businesses Benefit From Inventory Financing?
Whether you need to order a new line of products or boost your stock levels to support an increase in demand, inventory financing is often vital to running countless successful small businesses.
The financing solution lets smaller companies attain the funds they need to cover the cost of ordering and stocking their inventory while protecting them against the rising expenses associated with raw materials. Inventory financing can provide substantial relief for any business that faces a sudden spike in demand or needs to cover the steep costs of procuring seasonal inventory.
Retailers
Retail is a good example of one business type that frequently benefits from inventory financing. Department stores cover a range of product categories, from shoes and clothing to jewelry and housewares. Specialty retailers, on the other hand, emphasize a specific class of products such as toys, sports equipment, or greenhouse supplies. In either case, inventory financing can provide the financial flexibility needed to replenish stock during periods of peak demand.
Wholesalers
Wholesalers are warehouse retailers who sell their products in bulk at reduced prices. As a result, their inventory needs are much larger than those of other businesses. Inventory financing can provide the extra financial support required to stock up on products at scale.
Seasonal businesses
Seasonal businesses also rely heavily on inventory financing. Taking out an inventory loan lets them manage their stock levels while keeping up with the increased demand. Many seasonal companies experience a substantial spike in customers or clients during specific occasions like holidays, summer vacation, winter months, or sporting events. Moreover, by utilizing the funding, they can manage these changes without taking on too much debt at once.
Inventory Financing vs Business Loans
Understanding the differences between the various business loan types is a vital part of the decision-making process for any company seeking extra working capital. By comparing and contrasting the advantages and disadvantages of each loan, you’ll be able to make an informed decision about which financing option meets the needs of your unique business.
Inventory financing isn’t secured in the traditional sense, yet it still provides capital for companies to invest in stock purchases and continue meeting customer demand. Inventory loan rates tend to be higher than conventional financing options. The extra borrowing costs could be an expensive funding solution for some businesses. However, due to their collateral-free nature, your company can secure this financing type quickly to ensure you have the funds available when needed.
On the other hand, traditional business loans are secured capital that organizations receive from conventional banks or financial institutions. Companies typically use these loans for capital investments such as equipment and office space.
The terms for traditional business loans can vary depending on the lender, but they often have long-term repayment periods and lower interest rates than inventory loans. Additionally, traditional business loans often come with flexible payment schedules, and the qualification process can be substantially more involved than it is for inventory loans.
Inventory Financing vs Trade Credit
Inventory financing and trade credit are two of the most common small business working capital solutions. Both methods have advantages and drawbacks that we’ll touch on in more detail below.
Small businesses that lack the liquidity to purchase their inventory outright frequently use inventory financing to restock. Creditors provide these loans based on the value of the goods purchased along with any existing inventory, up to a certain percentage. The business will then use the loan to acquire the inventory and leverage it to generate revenue.
Trade credit is also a popular financing option for small businesses. It allows them to purchase inventory from vendors on credit instead of paying for it upfront. The vendor will agree to extend the business credit for a specified term, during which the business is expected to pay for the acquired inventory. In exchange for the proposed terms, vendors usually charge a fee for the privilege of using their services.
Similarities between inventory financing and trade credit include the fact that they both represent a means of financing a business’s inventory purchases. Both can be obtained from either a lender or a vendor, and they each provide a short-term solution to cash flow constraints.
The primary difference between inventory financing and trade credit lies in the source of funds. With inventory financing, the lender provides the entire amount needed to purchase the inventory upfront. Trade credit, conversely, only provides enough funds to cover the cost of the new stock purchased on credit terms. Likewise, with trade credit, there is usually more paperwork involved to establish the agreement. However, the terms and pricing are often more favorable than inventory financing.
Inventory Financing vs Asset-Based Lending
Many small businesses depend on financing to purchase, store, and distribute inventory. Two common types of financing strategies are inventory financing and asset-based lending. Each type of financing has its own unique advantages and disadvantages.
Businesses use inventory financing primarily to purchase inventory from vendors without using their existing cash resources. They deploy this strategy to expand their inventory and meet increased customer demand. When you utilize an inventory financing loan, your business will borrow a set amount to cover the cost of the new stock upfront, repaying the loan later on with future sales proceeds.
While you should consider inventory financing a type of asset-based loan, asset-based lending products typically staking non-inventory collateral to secure the loan. These loans not infrequently often put more emphasis on your personal or business collateral than your creditworthiness.
Businesses that use asset-based loans frequently to fill operational gaps that occur when short-term demands exceed long-term sales projections. With this loan type, the disbursement amount is secured by a percentage of the business’s current assets, such as accounts receivable, or other collateral like personal property and industrial equipment.
As opposed to inventory financing loans, asset-based loans provide businesses with access to larger amounts of money over a longer time. The repayment terms can be more favorable since they’re established by a set percentage of your accounts receivables, as opposed to an obligation to repay with the proceeds from your future sales.
Inventory financing is generally more suitable for businesses with seasonal demands or customers with a high need for product replenishment. Asset-based loans, in contrast, work better for companies that have to cover substantial and ongoing operational costs.
Applying for Inventory Financing
Business owners looking to increase their inventory usually find inventory financing a viable solution. Before taking out a loan like this, you’ll need to familiarize yourself with the necessary steps to apply. To ensure a successful application process, you should have a keen understanding of your liquidity, turnover, and sales history.
When applying for inventory financing, expect the lender to ask for documentation such as sales history, profit and loss statements, sales projections, cash flow statements, and a business plan. These documents will provide insight into your business’ likely liquidation value and its prospects for successful inventory sales. To ensure they find the best fit for borrowing their inventory, business owners should do their due diligence and research all available options.
If you’re planning on applying for inventory financing, here is a reliable list of steps to follow:
- Research all available loan products
- Gather necessary financial documents
- Draft a reliable business plan
- Project future inventory liquidation value and sales
- Compare different offers and select a lender that meets your needs
Where to Apply for Inventory Financing in NJ
With additional inventory, businesses have the ability to produce more goods and purchase costly items while maximizing their profits. By working with a reliable financing partner, you’ll ensure your business is making the most of its available resources.
New Bridge Merchant Capital is among the leading finance companies in New Jersey. We offer best-in-class service, fast loan approvals, competitive rates, and quick turnaround times.
Whether you need to purchase inventory or just want to cover operating expenses, our team of experienced lending professionals is here to help. Contact New Bridge Merchant Capital at 844-228-0593 for current pricing, or fill out our online application to get started today.
