Finding a stable source of funding is one of the toughest aspects of running a company. Business owners often apply for bank loans and business credit cards to fund daily operations. However, this can badly affect your credit score, especially if your company deals with seasonal fluctuations in sales.
According to the Electronic Transactions Association, 51% of small businesses borrow money to purchase inventory. If you’re looking to borrow money for inventory, you might want to check out inventory financing. As the name suggests, inventory financing lets you borrow money so you can purchase much-needed products or supplies for your business.
Deciding to apply for inventory financing is a big decision. Before you get on with it, make sure to weigh the pros and cons.
Advantages of Inventory Financing
Here are some of the advantages of inventory financing:
1. Add New Product Lines
With the funds you get from an inventory loan, not only will you replenish your inventory but you can also add new product lines. Adding new yet relevant products can potentially increase your sales revenue. Inventory financing gives you the means to expand your business without using up your working capital.
2. Prepare for Peak Seasons
Seasonal businesses need to prepare for peak seasons. However, purchasing the necessary inventory can put a dent on your cash flow, especially after a period of low sales. Companies may not have enough funds to purchase a large amount of inventory. An inventory business loan can bridge cash flow gaps for seasonal businesses by providing funds to purchase inventory to prepare for busy seasons.
3. Short-Term Loans Allow More Flexibility
Inventory financing is generally structured as short-term loans, which makes them more flexible compared to long-term loans. Sometimes, longer repayment periods can cause problems for small businesses because you need to make monthly loan payments over a span of months or years. On the other hand, short-term loans can be paid off within weeks or a few months. You can pay off the loan quickly after selling out your inventory.
Disadvantages of Inventory Financing
On the contrary, here are some of the cons of inventory financing:
1. Short-Term Funding
While some companies prefer short-term loans, other businesses would benefit from long-term loans. Since inventory financing is usually short-term, the monthly payments tend to be higher than long-term loans. It can put a strain on your cash flow if you can’t afford to make monthly payments. If you’re worried about the repayment terms, it’s better to go for a loan with a smaller loan balance.
2. Higher Interest Rates
With invoice financing, the inventory you’re looking to purchase serves as collateral for the loan. This means you won’t have to pledge personal or business assets. For this reason, inventory loans are often considered less secure than traditional loans. Lenders make up for the added risk by charging higher interest rates. As you search for inventory loans, make sure to compare the interest rates to ensure that borrowing money for inventory is still worthwhile.
3. Funds Can’t be Used for Other Purposes
Inventory loans have strict restrictions when it comes to the use of funds. This means that inventory financing is not as flexible compared to other funding solutions like business lines of credit or business term loans. You can’t use the money from an inventory loan to refinance debt, meet payroll, or pay for utilities. If you need a loan solely for business inventory, then this con won’t be an issue for you.
Inventory Financing Can Help Your Business
Product-based companies can greatly benefit from inventory financing. But as mentioned, applying for a loan can be a huge undertaking for a small business. It’s important to assess your business before committing.
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