An inventory loan provides working capital for a business, secured by its stock in inventory. The terms of the loan can depend on policies at a financial institution and typically require some owner equity along with a set interest rate. Businesses in need of working capital could consider this among other options for financing. It can help to meet with a loan officer to learn about the products and services available to find the right one for a given situation.
Businesses need inventory to be able to remain operational. Investing in products to meet customer needs can tie up a substantial amount of working capital, however, which can put companies in a fragile position. They may not, for example, be able to cover some expenses, or could have trouble meeting them. In the event of a catastrophe, the company might be poorly prepared because all its money is tied up in assets that cannot be liquidated in a hurry.
Taking out an inventory loan provides access to that capital. This is a form of asset-based lending, where lenders agree to extend funds for a set period of time after valuing the inventory to determine how much it is worth. They typically offer a percentage of the value to ensure that the owner still has some money invested, which decreases the risk of default and makes it easier to repay the inventory loan. Owners can make monthly payments as they sell off the inventory.
Businesses commonly utilize the inventory loan for short term financing. It can help them get through a season by providing funds up front for operations so they can keep running. Such loans can also potentially create a problem, because the company has spent the money it expects to earn from inventory sales. Monthly payments, including interest, must be accurately accounted for in budgeting and financial declarations so a company can make decisions about how to allocate funds appropriately. A failure to do so can result in a situation where a company has more liabilities than assets.
Assistance with an inventory loan may be available for a small business if it meets certain criteria. Regional development agencies may have an interest in promoting small businesses, particularly those owned by minorities. These groups might offer grants or assistance with funding to help businesses get established, and this could include help with loans. Financial institutions may have information about these programs to help their customers get the best products for their needs.
