Inventory financing can help you immensely during financial crises to unlock the funding tied up in inventory. This way, you can instantly raise the funds required for the growth and expansion of your venture. Read on to learn what inventory management is and how to proceed with inventory financing.
What is Inventory?
For any business, the term inventory is used for goods and products that are sold by the business. Also, the raw material that is used to produce goods is considered inventory. Inventory includes goods, products, items, materials, and products that a business uses for making a profit.
What is Inventory Management?
It can be sometimes challenging to run a business. Entrepreneurs, therefore, always need to be vigilant to align with business demands. Inventory management helps you carefully plan your inventory to ensure that the stock is managed efficiently and there are no shortages or surpluses. Effective inventory management enables you to identify the quantity of stock that needs to be ordered.
What is Inventory Financing?
A loan against inventory is a financial solution where lenders provide a short-term loan by keeping your inventory as collateral. Using this amount, you can purchase raw materials to manufacture the product and sell them at a higher rate to maximise your profits.
How Inventory Financing Works?
The loan amount receivable and the repayment schedule are
dependent on the sales value of your inventory. It is important to
understand that your lenders can sell your inventory if you default
on credit repayment.
Following are the steps for working on
inventory financing:
- Step 1: Research a loan type that best suits your financial requirements.
- Step 2: Choose a financial institution and apply for the loan.
- Step 3: After completing the verification and documentation process with your lender, the loan amount will be directly credited to your bank account.
ALSO READ :- How to Use Your First Business Loan Effectively?
Type of Inventory Financing
The following are the two types of inventory financing:
1. Inventory Loan
An inventory loan is
offered by lenders based on the value of your business inventory.
You can receive cash immediately to finance your out-of-pocket
business expenses.
2. Inventory Line of
Credit
In the inventory line of credit, the lender
provides credit to the borrowers up to a certain sanctioned limit.
Using an inventory line of credit, the borrower can withdraw cash at
any time against the pre-approved limit.
Importance of Inventory Financing
Inventory financing plays a crucial role in streamlining business
operations. The following 4 points outline the significance of
availing inventory financing.
1. The Existing
Inventory
Inventory financing enables businesses to
use the available assets to meet their short-term financial
requirements.
2. Streamlines Cashflow
Availing a loan against inventory allows you to receive a
continuous inflow of cash. This helps to meet all your
business-related expenses so you can easily expand your business.
3. Boosts Company Sales
With additional
capital, companies can use the funds to boost sales by increasing
the manufacturing of their products.
Are There Any Risks Associated with Inventory Financing?
This short-term loan can be fairly risky due to the following reasons:
- Borrowers must repay the loan sooner, or the higher interest charges can overburden them.
- If the borrower defaults on his loan, the lender can sell the assets he kept as collateral.
What are Inventory Financing Costs?
Inventory financing costs include prepayment fees, origination fees, appraisal fees and interest rates. All of these associated charges are payable only if you repay the loan amount before the expected time. In case you miss a payment date, depending on your lender, you will have to pay late payment charges.
ALSO READ :- 5 Must Ask Questions Before You Apply for a Business Loan
Why Do Businesses Use Inventory Financing?
Loan against inventory is a type of short-term borrowing. Businesses use this type of credit for the following three reasons:
- Businesses can pay the suppliers before the sale of their products.
- MSMEs can use this loan type to establish their credit history.
- Availing of this loan avoids the need to keep your personal assets as collateral.
Why Should You Apply for Business Loan with Poonawalla Fincorp?
Having capital at the right time can help you meet short-term
financial requirements. Poonawalla Fincorp understands your business
needs and offers an attractive Business
Loan to supply entrepreneurs with funds as and when needed.
The benefits of applying for a
Business Loan with Poonawalla Fincorp are as follows:
- Get access to loan amounts up to ?50 Lakh to fund your business expenses.
- Enjoy quick loan disbursals and meet your financial requirements instantly.
- Get competitive interest rates on their Business Loan.
- Submit only minimal documents and avoid the need for extensive paperwork.
- Opt for a flexible loan tenure of up to 48 months.
How to Apply for a Loan Against Inventory Online?
You can apply for a business online within 5 minutes, so follow the three simple steps below.
- Step 1: Click on the “Apply Now” button and move on to the application form.
- Step 2: Provide the required details like name, DOB, PAN number, etc on the loan application form.
- Step 3: Attach the necessary documents for the verification process.
Upon successful verification, the loan amount will be instantly credited to your bank account.
To Conclude
Inventory financing helps businesses to ensure a steady inflow of cash without the fear of losing valuable personal assets. However, it would help to be careful while availing loans against inventory because of the associated risks and costs. However, additional capital can help businesses fund their day-to-day operations.
Frequently Asked Questions Abut Inventory Financing
1. What to keep in mind before applying for a
Business Loan?
To maximise the benefits of loan
planning, use an EMI calculator and get a picture of the amounts you
need to pay monthly.
2. What is the CIBIL score required for a loan
against inventory?
It is preferable to have a CIBIL score of 700-750.
However, an excellent CIBIL score of 900 can get you access to
seamless approval of loan applications.
3. What payment modes can I use to repay my
Business Loan?
You can use ECS, post-dated
cheques, or direct credit to repay your Business Loan.