What Is Inventory Loan?
Inventory loan is a type of short-term loan granted to companies or businesses to buy products or inventories for sale. This type of loan is different from the other conventional loans. Inventory loan is a type of loan that does not require that you use any of your personal properties as collateral. For this type of loan, your inventory will be the collateral.
How does Inventory Loan Work?
Like other conventional loans, the one who is seeking for this financial support for her business will need a good credit record. In addition to this, she has to present a list of the inventory she wants to finance.
Furthermore, you will need a business plan which will contain some important details. This will clearly state your plans on how you want to use the proceeds of the loan.
The Advantages and Disadvantages of Inventory Loan
Advantages of Inventory loan
- Provides an opportunity to meet clients’ demands: During the period when there is an increase in demand for your commodities, you are most likely to run out of stock. When you have access to capital set aside for purchasing inventory, you will be able to cope with customers’ demands.
- Personal collaterals aren’t necessary. Unlike other conventional loans, collecting an inventory loan does not require you to pledge your personal assets as collateral.
Disadvantages of Inventory Loan
- Approval is not easy. Since the inventory purchased is what is considered as the collateral, lenders will evaluate your business. The evaluation will be based on the risks involved in your business. If their estimation says it will be difficult for you to sell your products, therefore means it will be difficult paying back the loan.
- The interest rate is higher. The interest rate for inventory loaning is usually higher than some other forms of loans.
Who Qualifies for an Inventory Loan?
To be eligible to obtain an inventory loan, you will need to meet the following requirements:
- In existence for at least one year. The longer you have stayed in business, the higher your chances of securing the loan. The reason is that you will have a more comprehensive sale history than a start-up.
- History of sales. The lender will have to look into your past financial and inventory records as well as your sales history. The aim is to ascertain that your business is indeed profitable and has what it takes to pay back the loan.
- A detailed inventory system. They’ll expect you to have a detailed inventory system. They want reports that will show your business’ returns on product, sale order receipts and other documents.
Types of Inventory Loan
- The first type is based on the value of your inventory. The fund from this loan can only be used once.
- The second type is different from the first. It provides you with continuous funds, as the need arises. With these, you see that as a business owner, you can apply for inventory loan to help keep your business running.