A quick guide to understanding inventory financing
November 26, 2021
As a founder, you have so many things on your plate—making sure your product is perfect before launch, managing team members and finances, juggling marketing campaigns… the list goes on. There are lots of things to consider when scaling a business, and oftentimes inventory financing is overlooked.
Inventory financing is a great way for brands to increase their cash flow and shuffle money around to focus on different initiatives. But why do some founders choose inventory financing while others don’t even consider it? It’s often because these founders don’t qualify for traditional loans or lack the collateral required to be approved by private lenders.
If you don’t have enough stock on hand, you run the risk of tarnishing your reputation and even losing customers, who might be quick to look elsewhere if you’re out of stock or slow to ship. Conversely, having too much inventory is expensive, which is why it’s really important to avoid overstocking or understocking.
It goes without saying that the more you know about your financial situation, the better. Inventory financing is a way to free up cash flow to spend on other areas of your business. We’ve highlighted some tips on getting started with inventory financing.
What is inventory financing?
Inventory financing is typically a short-term loan or revolving line of credit (LOC) a business can access to purchase inventory. It’s commonly used by businesses with large inventory needs such as restaurants, retailers, and wholesalers.
Businesses can consider how much inventory they need by looking at their inventory turnover rates. This is the rate at which your business purchases and replenishes inventory during a given period. By understanding the numbers behind the turnover rate, you can stay ahead of your inventory demands.
Inventory financing can be used to help purchase stock in advance of high-volume sales periods like the holidays or BFCM. While it won’t help predict your inventory needs, it will help you prepare for these busier periods of the year to ensure stock is arriving to the warehouse on time so your customers don’t experience delays.
Inventory Turnover Equation
Cost of goods ÷ value of inventory = inventory turnover
What types of inventory financing are available?
The two most common types of financing are an inventory line of credit and an inventory loan:
- Is short-term funding provided on an ongoing basis until the LOC term ends
- Is designed to help businesses purchase needed inventory
- Is determined by the business’ sales history
An inventory loan:
- Is based on the value of your inventory.
- Is paid back in monthly payments over a fixed term or in full once all the inventory has been sold.
- Can be supplemented with an additional loan once the initial loan has been paid in full.
Pros and cons of inventory financing
Like anything, inventory financing comes with its fair share of advantages and disadvantages. Consider the following when deciding if it’s right for your business.
- You get a large capital infusion to help buy inventory.
- You can use your inventory as collateral instead of your personal or business assets.
- You can get inventory discounts with vendors by purchasing in higher volumes.
- You might pay higher interest rates, depending on the financer.
- You’re adding debt to your company, which may be an issue depending on the existing debt you carry.
- You might not get the full amount you ask for, potentially causing inventory delays.
Other ways to finance inventory
- Clearco: We provide inventory advances to help e-commerce companies grow. Instead of charging interest like a loan or LOC, we use a unique revenue-sharing model where you pay-as-you-grow.
- Vendor financing: The vendor—who provides the inventory—lends money to the borrower so the borrower can purchase inventory. The borrower can purchase items on credit without having to offer collateral, while vendors collect interest over deferred payments through an agreed amount of time.
- Purchase order financing: PO financing is designed for accessibility to fast short-term funding. The customer pays the lender directly after the goods are delivered. The lender can deduct their fees and send you the remaining sum of the order.
- Crowdfunding: A “crowd” of supporters support and contribute to the funding of a product, service, or business.
How can Clearco help with inventory financing?
It’s no secret that inventory costs can take up a huge chunk of capital when it comes to sustaining your business. At Clearco, we understand that the last thing you want to worry about is the high cost of restocking inventory, which is why we can fund your next inventory order!
Using your marketing and sales data, our algorithm generates potential revenue-share offers for inventory funding. Closeout your advance via a percentage of your daily revenue and a flat fee.
We’re passionate about helping founders like you scale your business without giving up equity. We provide the capital, you retain full ownership and decision-making power of your business.
What are you waiting for?
Thinking about taking equity-free funding for your business?
See how much you qualify for with no commitment.GET FUNDED TODAY