Inventory financing uses inventory as collateral for loans. Inventory financing is used by manufacturers of consumer products and by dealers (including automobile, truck, RV, motorcycle), because they have significant amounts of money tied up in their inventory.
How Does Inventory Financing work?
Let's say a car dealer wants to increase inventory. The dealer must purchase the inventory from the car manufacturer, but vehicles are expensive. The dealer gets a loan from a financing company like GMAC, based on the value of the cars. When the a car is sold, the dealer can pay off the portion of the loan related to that car, or purchase more inventory to sell. As you can see, inventory financing is part of the production cycle of buying, making, and selling. inventory is less liquid than accounts receivable, so you will not be able to get full value on your financing.
When to Consider (and Not Consider) Inventory Financing
If your inventory selling well and you are in need of more money to keep selling, you may want to consider inventory financing. I:f your is out of date or not selling (you have slow turnover), it may not be wise to attempt inventory financing, because you may not find a willing lender.
What Else Is Needed for Inventory Financing
As with other forms of financing, you will need a good credit record, a compelling business plan, and a list of the inventory you want to finance, along with values. The lender will give you an estimate of how much you can borrow on the inventory.
During Financing
While your inventory is waiting to be sold, you will need to keep track of it and make sure it is in good repair and in shape. Your lender has the right to inspect the inventory to make sure it has retained its value.
