Blog
06/13/2022
Inventory Financing: Pros, Cons, and Alternatives
If you’re a product-based small business, you know that having the right inventory at the right time is mission critical. Could leveraging your inventory be a smart funding strategy to ensure that your supply never falls out of sync with customer demand?
In this post, we’ll cover the basics of inventory financing, some benefits and drawbacks of this particular form of borrowing, and a few alternatives to consider.
What Is Inventory Financing?
Simply put, inventory financing is a kind of short-term business loan that enables you to buy more inventory.
Much like a mortgage or auto loan – and unlike many other forms of commercial lending – an inventory loan can be used only for one purpose, and it is secured by the asset that it finances. So, if you’re unable to make payments on time, your lender can repossess your unsold stock and liquidate it to recoup their losses.
The two main types of inventory financing are term loans and lines of credit.
With a term loan, you get a lump sum upfront and repay the amount in set monthly payments over a specified term. This can be a good option if you need a large infusion of capital to buy in bulk, prepare for the holiday shopping season, or add a new product line.
With a line of credit (or LOC) you can withdraw smaller amounts as and when needed over a fixed draw period. As with a credit card, repaid funds are available for withdrawal again during the draw period. When the draw period ends, an LOC shifts into a repayment period in which all repayments are fully amortizing.
Pros and Cons of Inventory Financing
Like everything in business, there’s no one-size-fits-all solution to financing. Consider the following advantages and disadvantages of inventory financing:
Alternatives to Inventory Financing
Even if your primary funding need is for purchasing inventory, inventory loans and lines of credit aren’t your only options. Here are a few more to explore:
1. Secured or Unsecured Term Loans may have stricter application requirements but can give you more freedom if you qualify.
2. Merchant Cash Advances can be advantageous if you have consistent credit card sales but don’t qualify for other commercial lending products.
3. Vendor Financing can be a convenient way to purchase inventory on credit and build your business credit score with timely repayments.
4. Purchase Order (or PO) Financing means that your customers pay a third-party PO firm that then pays your suppliers.
5. Accounts Receivable (or A/R) Financing enables you to leverage your outstanding invoices to get funding with no additional collateral requirements.
Talk to Us
If you’re looking for fast, fair, reliable, and transparent financing for your business, consider Nu Direction. We’re owned by not-for-profit credit unions, which means that our commitment is to Main Street, not Wall Street. It also means that our partners can grow with you on a variety of other banking and lending services in addition to your Nu Direction loan. Learn more and reach out today.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
Brought to you by Nu Direction Lending, a digital-first business lender that was formed and is funded by credit unions. To learn more about term loans for your business, visit nudirectionlending.com or contact us by email at info@nudirectionlending.com or by phone at 866-354-7151.
© 2022 Nu Direction Lending. All rights reserved.
In this post, we’ll cover the basics of inventory financing, some benefits and drawbacks of this particular form of borrowing, and a few alternatives to consider.
What Is Inventory Financing?
Simply put, inventory financing is a kind of short-term business loan that enables you to buy more inventory.
Much like a mortgage or auto loan – and unlike many other forms of commercial lending – an inventory loan can be used only for one purpose, and it is secured by the asset that it finances. So, if you’re unable to make payments on time, your lender can repossess your unsold stock and liquidate it to recoup their losses.
The two main types of inventory financing are term loans and lines of credit.
With a term loan, you get a lump sum upfront and repay the amount in set monthly payments over a specified term. This can be a good option if you need a large infusion of capital to buy in bulk, prepare for the holiday shopping season, or add a new product line.
With a line of credit (or LOC) you can withdraw smaller amounts as and when needed over a fixed draw period. As with a credit card, repaid funds are available for withdrawal again during the draw period. When the draw period ends, an LOC shifts into a repayment period in which all repayments are fully amortizing.
Pros and Cons of Inventory Financing
Like everything in business, there’s no one-size-fits-all solution to financing. Consider the following advantages and disadvantages of inventory financing:
| Pros | Cons |
| You can replenish your stock as well as expand your product offerings without depleting your working capital. You don’t need to put up other business or personal assets as collateral. You can often secure funding fairly quickly, allowing you to move rapidly to take advantage of discounts or meet seasonal demand. You may be eligible if you’re a newer business – enterprises with one year or even six months of profitable operation may qualify. You may be able to secure a workable loan even with less-than-perfect personal credit. You can explore a range of online and bricks-and-mortar lenders, making it easy to comparison-shop and find the best rate and terms. |
You can use inventory loans only to purchase inventory or inventory management systems, while other options may give you the flexibility to cover payroll and other needs. You may not be able to borrow the full amount you require. You may spend time and money determining your inventory’s liquidation value. You may discover that interest rates are higher than other business borrowing options. You may have to pay back your inventory loan over a shorter term than other options, which could put a strain on your monthly cashflow. You need to be confident in your ability to sell the inventory at the needed pace and be comfortable having the lender monitor your operations. |
Alternatives to Inventory Financing
Even if your primary funding need is for purchasing inventory, inventory loans and lines of credit aren’t your only options. Here are a few more to explore:
1. Secured or Unsecured Term Loans may have stricter application requirements but can give you more freedom if you qualify.
2. Merchant Cash Advances can be advantageous if you have consistent credit card sales but don’t qualify for other commercial lending products.
3. Vendor Financing can be a convenient way to purchase inventory on credit and build your business credit score with timely repayments.
4. Purchase Order (or PO) Financing means that your customers pay a third-party PO firm that then pays your suppliers.
5. Accounts Receivable (or A/R) Financing enables you to leverage your outstanding invoices to get funding with no additional collateral requirements.
Talk to Us
If you’re looking for fast, fair, reliable, and transparent financing for your business, consider Nu Direction. We’re owned by not-for-profit credit unions, which means that our commitment is to Main Street, not Wall Street. It also means that our partners can grow with you on a variety of other banking and lending services in addition to your Nu Direction loan. Learn more and reach out today.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
Brought to you by Nu Direction Lending, a digital-first business lender that was formed and is funded by credit unions. To learn more about term loans for your business, visit nudirectionlending.com or contact us by email at info@nudirectionlending.com or by phone at 866-354-7151.
© 2022 Nu Direction Lending. All rights reserved.
Lending Expert
Nu Direction LendingNu Direction Lending is a digital-first business lender that was formed and is funded by credit unions. We combine the speed and convenience of online lenders with the personalized touch of the local credit unions who help fuel our local economies.