What Is Inventory Financing And How Do You Apply For It?
Businesses built around selling products know the struggle of maintaining decent cash flow through and through. The availability of funds to meet these short-term financial crises can make or break a company, especially a small or new one. Inventory financing is an excellent way for companies to meet the demands of suppliers while helping their businesses grow.
What Is Inventory Financing?
Inventory financing is a debt-based mode of advance that lending institutions offer against the value of business inventory. Borrowers can use these funds to purchase new inventory with the aim to sell them. The return from the final sale or the resale value, can help them repay their debts as well as gradually accumulate profit.
The resale value is also a significant factor that helps lending institutions decide on the percentage of loan to be sanctioned. Businesses can simultaneously make use of their pledged inventory to build returns while availing this financial product as long as all repayment conditions are met. However, to successfully avail funds through this mode, borrowers need to know the detailed application procedure.
How To Apply For Inventory Funding?
Here is a step-by-step guide on the detailed application procedure for inventory financing.
Step 1: Meet The Eligibility Requirements
The eligibility parameters to qualify for inventory funding may vary across financial institutions. However, the essential ones remain standard.
- Applying company must have a sound credit profile with no record of any type of credit violation.
- The company should be located in India and must have been operational for at least a year.
- Borrower must be able to provide a complete and accurate sales record of stock for at least 6 months.
- Applying business must meet the minimum turnover limit specified by their lending institution.
- Business inventory must have a high resale value.
Note that low sales coupled with high debt might not be a good idea when applying since it may lead to rejection.
Step 2: Organise All Required Documents
Here is a list of documents that applicants may need to submit in order to qualify. Therefore, keeping them ready in advance can save any delay in loan processing.
- Audited company balance sheet
- Audited company P/L statements
- Business tax returns
- KYC documents of applicant/co-applicant/partners
- Company registration certificate
- Documents related to inventory details and management
- Copy of inventory sale invoices
- Cancelled business cheque
Step 3: Apply Online Or Offline
After checking with the above two processes, businesses can proceed to fill in the application form. For this, they can either walk into a physical branch of their chosen lender or complete the process online. After filling in the form accurately, applicants must attach all mandatory documents accordingly.
Upon completing the above process, a representative of the lending institution will conduct stock evaluation and loan appraisal. Thereafter, they will ascertain the terms and conditions and forward the same to the borrowing party. Funds will be sanctioned once the latter agrees to these rules and pledges the required inventory.
Things To Consider Before Availing Inventory Financing:
The application approval of such financial products relies heavily on the appraised value of inventory. Therefore, borrowers must ensure a high value of their stock in the following ways.
- Adopting measures to increase inventory’s shelf-life.
- Efficient inventory management ensures minimal resource wastage.
- Providing accurate inventory details and sales records to reflect a well-organised stock.
Borrowers must keep in mind that they might expect surprise visits by lenders for inventory inspection. Opting for the above practices can only help them be adequately prepared.
Types Of Inventory Funding
Borrowers can proceed with the mentioned application process and fulfil all requirements to avail any of the following types of inventory funding.
- Inventory Loan: This is a one-time loan offered to businesses facing emergency financial crises. They can acquire this type of inventory funding on the basis of their pledged inventory’s resale value, which they can then utilise for their immediate cash crunches.
- Inventory Line of Credit: Unlike the one-time applicability of inventory loans, the inventory line of credit is a continuous process. This financial product is used to meet the possible financial crises after a loan is availed. Here, lending institutions generally sanction a credit limit, from which borrowers can withdraw money as and when required. This mode of finance can act as a supporting source of cash.
Companies struggling to get a traditional business loan can benefit highly from short-term inventory financing. That being said, this mode of funding may not be ideal for all types of businesses. Mostly, retail businesses dealing with substantial inventory that need to meet supplier demands can avail inventory funding to generate higher sales volumes.