As a company owner, you must understand how financing works. As it relates to your business entity, you need funds for various endeavors, and if you can’t get them, you’re not going to operate for very long. There are financial institutions that can give you the funding you need, or there are other places you might go to get it.
In this article, we’re going to talk about inventory financing, which is a particular financing type in which some businesses engage. We’ll talk about some advantages of using this system, and we’ll also mention some potential drawbacks.
What Exactly is Inventory Financing?
As a business, financing is the monetary acquisition, and inventory is the stock you have that you’re distributing through the channels you have set up. In other words, you can think about inventory financing as the methodology through which you might obtain funds to cover your inventory and maintain your operational flow.
If you decide not to undertake inventory financing, but you don’t have the operational capital you need, that’s one fewer option as you’re looking at how you can stay in business. Some business operators and owners don’t like taking on a loan for any reason, but, as the axiom goes, when you venture nothing, you gain nothing. That’s definitely true in the business world.
How Inventory Financing Works
In essence, when you decide to try inventory financing, you’re approaching a bank, credit union, or some other monetary distribution entity, and you’re getting a parcel of money from them to cover your inventory costs. However, it’s a little more complex than that.
As a company, sustained, long-term success should be your goal. Because of that, you need cash flow, and that includes downtimes. If you’ve been in business for a while, you’ll likely start to determine, through data and analytics, what times of the year you are selling fewer products.
If you use inventory financing correctly, you can maintain the right inventory volume based on prior sales. For example, maybe you’re a summer-oriented business.
You can get a loan heading into your busy season. You know that’s when you’re going to need more inventory, so that’s when you’ll need more money. You won’t find the interest payments too onerous because you know you’re going to more than make up the cost through your bullish sales numbers.
What About Slower Sales Periods?
If you have peak sales seasons, it makes sense that you’ll have lulls as well. If you use analytics, you can determine when those times are likely to be.
You’ll need to use that prior sales data to figure out whether you need to maintain your inventory financing loan during slow times. If you have too much inventory and you’re not able to move it, you’ll probably lose money since you might have to pay for things like maintenance fees, storage, and taxes.
The tricky part can be knowing exactly when to pay back your inventory financing loan. You’ll need to be strategic about the whole endeavor.
If you have too much inventory and you can’t sell enough of it, then you might not be able to pay back the loan’s principal at that point. That’s usually the situation that a business owner fears when they take on a loan of any kind.
What’s the Solution?
We’ve mentioned analytics, and those can help determine when you’ll need more money and how much. However, remember that while analytics are indicative, there are always unexpected situations that arise that no one could have foreseen. Think about the pandemic and how it has wrecked so many industries and caused so many business closures.
You can never predict when a wholesale disaster of that sort might happen. The best thing you can do concerning inventory financing loans is to get one of a size that you think you’ll need, and no bigger. It’s best to err on caution’s side.
It helps if you establish meaningful relationships with individuals at the institution from which you are borrowing money. If they seem cold and impersonal, they’re probably not the best choice.
It’s true that you need money from them, but they need your business as well. It’s a symbiotic relationship, and if they treat you respectfully and seem to sincerely want to help your company grow, that’s the institution with which you’ll want to continue doing business.
Inventory financing can certainly be a useful tool, provided that you use it wisely rather than recklessly.