Top 4 benefits of inventory financing for startups
April 25, 2022
If you’re a business Founder, you’re no stranger to the challenges of securing funding. Nearly every entrepreneur we sat down with—from Tushy’s Miki Agrawal to Matchaful’s Hannah Habes—has cited funding as the number one barrier during their early days as a Founder. So many great businesses have stagnated, failed to scale, or even gone under as a result of struggling with funding—not necessarily because they don’t qualify (although that can certainly be the case) but because they simply weren’t aware of all the options.
What is inventory financing?
If you’ve done some research into funding options, you may have already noticed that business financing comes in all shapes and sizes. Inventory financing is one such option. Also known as accounts receivable financing, this type of funding involves credit obtained by a business to pay for future inventory, which then serves as collateral. Inventory financing is often used by small businesses in an effort to keep cash flow steady, bring in more inventory, and respond to an increase in demand. It’s a viable option for Founders who may not want to offer up personal collateral or don’t have the stellar credit history needed to secure bank loans, although there are all sorts of reasons why you may want to turn to inventory financing. Here are a few:
Benefit #1: Stay on top of supply chain issues
Global supply chain issues can sink even the most successful of businesses. One of the most obvious benefits of inventory financing is that you’re able to secure additional working capital. This is especially relevant during peak selling seasons, such as during the months leading up to BFCM and the holidays. Even during slower months, supply chain issues can throw a wrench into operations, leaving customers frustrated and brands feeling helpless. Stay ahead of these issues by securing the additional inventory and working capital needed to keep operations in motion.
Benefit #2: You don’t need good credit
Inventory financing is a great option for Founders and businesses that have previously been turned down by traditional financial institutions. While banks rely on credit standing to make loan decisions, you can secure inventory financing without having to rely on your business’ credit score.
Benefit #3: You won’t have to offer up a personal guarantee
Many loans require Founders to pledge personal assets as collateral to the funding. With inventory financing, however, your purchased inventory becomes the collateral, meaning you don’t have to worry about losing your home or car. In the event that your business fails, you won’t have any personal assets on the line.
Benefit #4: It’s quick and (relatively) easy to secure
Getting funding from traditional financial institutions can be a lengthy process that takes weeks, if not months. With inventory financing, you’re looking at a much quicker process. There’s less paperwork, meaning the funds can be approved within a few days’ time. When you’re an agile startup, securing that all-too-crucial financing at the right time could be the difference between staying in business and going under.
What kind of businesses should apply for inventory financing?
While inventory financing is a great option for many types of businesses, it isn’t for everyone. You may want to consider this kind of funding if:
- You have high inventory turnover rates
- You need to access to more working capital
- You have been turned down by banks in the past
- You are looking for a flexible form of funding
Like all funding options, newer businesses may not be able to secure this type of financing due to a lack of sufficient sales history. Other reasons for being denied inventory financing include having a high debt-to-income ratio and inventory that’s not moving fast enough—both are circumstances funding institutions may deem as too high-risk.
Inventory financing with Clearco
Inventory funding can become an essential part of a business’ financial toolkit. It’s a means of unlocking extra cash flow, thus keeping customers happy and the business running smoothly. Clearco offers inventory financing for startups so that they can stay on top of their operations during peak selling periods, without sacrificing the customer experience. Connect your accounts today to find out whether you qualify for equity-free, no-strings-attached funding.
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