Editor’s Note: This article originally ran on Independent Thinking, Nationwide Marketing Group’s official blog, and is republished with permission. For more information, visit nationwidegroup.org/independentthinking/.
For independent retailers, cash flow is king. Having enough cash to run your business is often paramount to your ability to grow your business. The last thing you want is to have your finances all tied up in the inventory that you’re trying to sell. You’d rather have the option to reinvest in your business, upgrade that POS system, expand into a new category, add those digital price tags to your shelves, improve the in-store network — all the things that make the in-store experience the best possible for your customers.
That’s where inventory financing can oftentimes provide a lifeline to independent retailers looking to do those very things.
Before diving into the benefits of inventory financing, it first helps to understand what it is — and what it is not. Inventory financing and accounts receivable financing may seem like the same thing at first glance, but they have a major difference: depreciation. With accounts receivable financing, like invoice factoring, the amount of money owed by your clients remains constant, no matter how much time passes. The lender could issue you a loan for the full amount of your accounts receivable, without worrying about a decrease in the value of those outstanding invoices.
Inventory, on the other hand, can depreciate in value over time. If a lender gives you a loan equal to the amount of your inventory, and then your inventory doesn’t sell as fast as you planned, there will be a gap between the loan repayment amount and the value of the collateral. This leaves the lender vulnerable to a loss.
However, despite the risk of depreciation, inventory financing can be easier to get than an unsecured loan because the collateral of your inventory lowers the lender’s risk
Inventory financing is an asset-based loan that’s based on the value of some or all of your inventory. The lender provides a loan for a percentage of your inventory’s value and the inventory itself serves as collateral for the loan. Primarily, business owners use inventory financing to purchase new inventory. Inventory financing can help with two primary issues. Short-term cash flow gaps for businesses that have a lot of their capital tied up in inventory and want to stock up in preparation for a busy season.
Inventory lending is most commonly used by businesses that consistently have very large quantities of inventory—such as retailers, restaurants, and wholesalers. For example, many appliance retailers have to purchase large amounts of very expensive inventory, so much of their capital is often tied up. Even a profitable retailer can have very little cash available to expand their business or hire more salespeople and technicians.
Other benefits of inventory financing include:
- Extended repayment terms are many times subsidized by the manufacturer. Allows for improved cash flow!
- Stocking optimal inventory levels, increasing inventory while allowing for sales growth
- Credit lines sized to meet member needs based off of individual member(s) credit history
- Extended repayment terms are often subsidized by the manufacturer
About the Author
Don Henderson is senior director of financial services for Nationwide Marketing Group
This article originally ran on Independent Thinking, Nationwide Marketing Group’s official blog, and is republished with permission. For more information, visit nationwidegroup.org/independentthinking/.
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