Inventory Financing: Getting Inventory Loans to Grow Your Business
Maintenance of stocks, or inventory, is the core requirement of any business that indulges in the trade. However, a lean sales period can leave a considerable slice of an enterprise’s investment locked up in its inventory. A business faced with a shortage of funds fails to honour its short-term payment obligations, which can hamper its credibility. And, in such a circumstance, inventory financing can be extremely resourceful.
What Is Inventory Financing, And How Does It Work?
Inventory financing is an asset-backed, short-term financial solution. A business can avail funds on the value of some or all of its inventory and pledging the same as collateral. The financial institution or lender determines a percentage based on which the loan is granted. As and when such business repays, the financier lifts the lien on its stock.
The percentage of funding and interest rate offered for these loans vary from one lending institution to another, premised upon the volume of a firm’s inventory.
Inventory financing is especially beneficial to businesses that have to own and manage substantial quantities of inventory. Given its nature, retailers, wholesalers, seasonal businesses, and other product-based enterprises incline towards this financial solution.
What Are The Types Of Inventory Financing?
Based on the nature of a business and that of its products, there are two types of inventory financing:
- Inventory Loan: This financing solution is applicable for a business faced with an immediate cash requirement. It is extended to borrowers as a one-time loan. Here, a firm leverages its inventory’s resale value to receive a loan, which is then employed to plug in its cash crunch.
- Inventory Line of Credit: Contrary to inventory loans, an inventory line of credit is an ongoing financing option. A lender sanctions a credit limit from which the borrower can withdraw cash as many times as required. Businesses can use the funds availed from an inventory line of credit to cope with unforeseen expenses.
Eligibility Criteria For Inventory Financing
Each financial institution or lender levies its own set of criteria for prospective borrowers. Given below are some generic eligibility criteria to avail a loan through inventory financing:
- An applicant should be at least 18 years of age.
- He/she must be a citizen of India.
- Applicants should not have any credit default history with a financial institution.
- The firm should be operational for a minimum of one year and in the same location.
- Considerable annual turnover (its exact figure is subject to vary with each lending institution)
- Enterprises that are applying should have a healthy credit rating.
- Business must be profitable with a steady sales history.
How To Apply For Inventory Financing?
The application process varies with each financial institution, but the gist of it remains similar, which is as below:
Step 1: Compile Financial Records Of The Business
Before applying for a loan, borrowers must possess the following financial records:
- Balance Sheet
- P/L statements
- Business bank statements
- Sales forecast
- Inventory list and management records
- Business tax returns
Step 2: Complete The Initial Application
Borrowers can apply for a loan by visiting the nearest branch of their preferred lending institution or taking the online route. The process begins with filling out an application form, stating particulars, such as their name, business name, loan amount etc. Then, they are required to submit this form and the relevant financial records.
Step 3: Submit Additional Documents
Alongside the application form and financial statements, a borrower must also submit the following:
- Applicant’s passport-sized photographs
- Income proof with financials
- Personal ITRs
- KYC documents of business partners, promoters, or co-applicants
- Company’s registration certificate
- Business PAN card with GST and Sales Tax registration
- Address proof of the business
After successful application, the lending institution sets about credit appraisal and valuation of business inventory. Thereafter, it ascertains the terms of loan and presents the same to a borrowing enterprise. The loan gets sanctioned after the business accepts these terms and pledges its inventory as collateral.
Needless to say, the application process for inventory financing can be taxing and time-taking, especially for smaller enterprises. In that case, borrowers can turn to platforms such as MANDII – an independent technology platform explicitly curated to benefit small businesses. A business can apply for inventory financing on this easy-to-use platform through an online and hassle-free process, with a quick processing time of 0-30 minutes.
Inventory financing offers an ideal financing avenue for small enterprises, which are often ineligible for traditional loans. Borrowers opting for this financial solution must keep in mind that the business’ industry, credit history, financial standing, and market value of its inventory play a key role in ascertaining the terms of loan offered.