What Is Inventory Financing And How Does It Work?
Getting access to business financing is a critical aspect when running a business. However, you will mostly likely run into times when your business might face cash flow problems, and in turn you fail to achieve your financial goals. This can happen when your customers delay to settle their bills or if unexpected expenses pop up. When you run out of cash to stock the products that your customers need, inventory financing becomes very beneficial.
Inventory financing is a short-term loan or a line of credit that is given to business owners to help them purchase products for sale. The current and future inventories are used as collateral for the acquiring the of loan.
How It Works
In most cases, inventory financing works as a line of credit, but it can also serve as a term loan depending on the lender. This type of loan helps businesses to prepare for busy trading seasons, the launch of new products or settle short-term cash flow problems.
The lender agrees to give you a proportion of the amount that you need to buy the inventory after submitting your request to them. When the application is approved, the lender deposits the funds into your bank account. Once you sell the products, you use the money acquired from the sales to repay the loan.
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Benefits of Inventory Financing
Inventory financing has many advantages when compared to some other funding solutions.
- Inventory financing helps to keep your shelves stocked with products all the time. You are assured that your customers will find the products they want any time they need them.
- Inventory financing makes it easier to manage your inventory even in unfavorable economic conditions.
- Inventory financing helps to facilitate a smooth production process by ensuring your business activities do not stop due to inadequate stock.
- Inventory financing increases the potential of your business to grow by increasing the number of products that you sell.
The Bottom Line
With inventory financing, it becomes easier to negotiate for substantial discounts since you order from your suppliers in bulk. You no longer have to panic when you do not have enough money to restock business products.
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