The Inventory Financing Solution for Businesses
Is Inventory Financing Right For Your Business?
Your inventory constitutes an asset against which it’s possible to borrow money to help improve cash flow, cope with various business expenses, or purchase more inventory. However, inventory financing is more expensive than other kinds of funding options, so you should first look at financing your accounts receivable or obtaining an asset based loan. If these routes don’t work for you or don’t provide sufficient funds, then consider using your inventory to obtain financing.
How Inventory Financing Works
After you have purchased inventory, you submit a draw request to the lending company who will advance you up to 80% of the inventory’s appraised value. Lenders use the Net Orderly Liquidation Value (OLD) or the Forced Sale Liquidation Value (FLV). These valuations are always lower than your inventory’s market value and can make it difficult to obtain sufficient funding.
Inventory Financing is Expensive
Generally, businesses must apply for a minimum of $500,000. This is because the lending company needs to perform expensive due diligence, including examining your facilities, reviewing your accounting and inventory systems, appraising your inventory and raw materials and regularly monitoring your inventory.
Requirements to Qualify for Inventory Financing:
Your business must have:
- Marketable inventory or raw materials.
- A perpetual inventory management system.
- Reliable financial statements.
- Exhausted other financing options.
Advantages of Inventory Financing
- Your inventory can be leveraged.
- You can accumulate sufficient inventory to meet contractual obligations.
- Easier to obtain than conventional financing.
- The amount of financing can grow with the growth of your business.
Purchase Order Financing
Purchase order financing allows you to finance inventory needed to fulfill a specific purchase order from a customer. However, this type of inventory funding only applies if your inventory consists of finished goods from a third party vendor and your profit margins are above 20%.
Inventory financing is an excellent funding option if your business is a good fit for it. Davis Commercial Finance can provide your business with the most suitable type of financing, so contact us today to discuss your options.