Inventory Financing For Start-Ups: How To Grow With Debt Funding
Fluctuations in cash flow are customary of any business organisation, which makes them seek external funding from time to time. Such funds are way more restricted for start-ups, which also lack adequate assets, credibility, and turnover to secure a regular business loan in its early stages. Start-ups can opt for inventory financing instead to scale up operations and accumulate significant profits. Given its short-term nature and upfront loan availability, inventory financing can be an ingenious solution to help new businesses grow from scratch.
How Does Inventory Financing Work?
Inventory financing is a type of short-term debt funding offered against the value of inventory. Businesses can pledge some or the entire of their inventory as collateral to get funds for meeting a temporary cash crunch. Financial institutions offer specific percentages of the loan based on the resale value of inventory. Borrowers can utilise the pledged inventory as per their requirement, as long as they meet all loan terms.
Start-ups lacking sufficient tangible assets can benefit from this mode of funding when acquiring a term business loan seems difficult. They can use this funding solution to manage a substantial quantity of inventory, expand operations, and gradually build profit.
Benefits Of Inventory Financing For Start-Ups
Here are some of the ways in which start-ups can benefit from inventory funding:
Substitute For Traditional Business Loans
As already mentioned, inadequate turnover, weak credit profile, and insufficient fixed assets are all common for new businesses. These are the exact conditions under which lenders are unwilling to offer regular business financing. Here, inventory financing can be the easiest means for start-ups to raise the costs of business operations.
Enhances Cash Flow
Opting for such financing options releases the otherwise locked-in cash due to inventory. This, in turn, improves cash flow and aids in day-to-day operations seamlessly.
Facilitates Up-front Cash
Inventory funding comes with an easy application procedure and speedy approval against the value of inventory purchased. Such fast loan availability is especially beneficial during an emergency financial crisis.
Helps Expand Business
Businesses can use the acquired funds to invest in more inventory and improve sales, which, in turn, aids in increasing profits and accelerates business growth.
Convenient Repayment Options
As start-ups gain financial stability with the help of this advance, they can use their substantial returns to repay the accumulated debt. This financial product also offers borrowers more time for comfortable loan repayment.
On selling an inventory of lump-sum resale value, businesses might be eligible for substantial discounts from the lending institution. Borrowers can enjoy more of such savings as their business gradually prospers.
In order to avail these beneficial offers of inventory financing, borrowers must know how to apply for one.
How To Avail Inventory Funding For Your Start-Up?
Different lenders might prescribe a variety of application procedures. However, the basic requirement remains as follows.
Step 1: Borrowers can visit a physical branch of their chosen financial institution or visit their online website to fill in the application form.
Step 2: Next, they will need to submit all mandatory documents, including financial records of their business. These include the following standard documents –
- KYC of business owner/partners/co-applicants
- Business registration certificate
- Company address proof
- Inventory list and management records
- Sales forecast
- IT return copies
- Bank statements
- Audited balance sheet and P/L statements
Step 3: Upon successful application, the lending institution will evaluate the stock and proceed towards loan appraisal. They will also determine the loan terms, including the rate offered.
Step 4: Once the start-up or borrowing enterprise agrees to these terms & conditions and pledges business inventory, the ascertained funds will be sanctioned and disbursed shortly.
However, before proceeding with the application process, borrowers must also be aware of the eligibility parameters they should meet to qualify for inventory funding.
Inventory Funding – Eligibility
Here is a list of parameters businesses need to meet to avail inventory financing:
- The business must have been operational for at least 1 year.
- The organisation must not have any default history along with other credit violations like repossession, bankruptcy, or tax lien, etc.
- Specific lending institutions fix a minimum turnover threshold that businesses need to meet to qualify.
- Borrowers must also have a commendable credit profile.
Several start-ups might deem the described application procedure and eligibility requirements to be hectic. Under such circumstances, businesses can apply for inventory financing on an online platform specially curated for small business financing solutions. Here, they can avail a quick and seamless loan processing and choose from multiple financial institutions with one simple application procedure.
Inventory financing can be a great funding solution for start-ups when other types of business loans seem difficult or impossible to acquire. However, an important point to be considered here is that this financial product can only be of significant advantage if applying businesses deal in extensive inventory and their stock has a remarkable resale value.